The UK government is introducing a significant overhaul to the taxation of non-UK domiciled individuals, effective from 6 April 2025. These changes will impact income tax, capital gains tax, and inheritance tax rules. Here’s what you need to know and how you can prepare for the transition.
What Is Changing?
The current remittance basis of taxation will be abolished and replaced with a new Foreign Income and Gains (FIG) regime. Additionally, the inheritance tax system will shift to a residence-based approach. These changes will affect both UK-domiciled and non-UK domiciled individuals, with a more profound impact on the latter group.
Key Features of the Reform
1. Domicile No Longer Relevant for Taxation
- Domicile will cease to be a key factor for income tax, capital gains tax, and inheritance tax.
- This marks a shift to a more residence-based tax system.
2. Introduction of the FIG Regime
- A four-year exemption on foreign income and gains will be available to individuals after 10 consecutive years of non-residence.
- Beyond this period, all UK residents will be taxed on their worldwide income and gains.
- The FIG regime is available to both UK and non-UK domiciled individuals, provided they meet the non-residence requirement.
3. New Residence-Based Inheritance Tax System
- Inheritance tax will now be determined by residence rather than domicile.
- Trust assets will be assessed based on the long-term residence status of the settlor at relevant events.
4. Temporary Repatriation Facility (TRF)
- Non-domiciled individuals can bring foreign funds to the UK at a special tax rate.
- Elections made between 6 April 2025 and 5 April 2027 will be taxed at 12%, and those made from 6 April 2027 to 5 April 2028 at 15%.
- This applies to both liquid and non-liquid assets.
5. Capital Gains Tax Rebasing
- Foreign assets held by remittance basis users can be rebased to their market value as of 5 April 2017.
6. Removal of Trust Protections
- Trust protections for settlor-interest trusts will be removed.
- Settlors will be taxed on all income and gains unless eligible for the FIG regime.
Steps to Prepare
Given the wide-ranging implications, affected individuals should act promptly to review their tax positions and consider the following steps:
1. Utilise the Temporary Repatriation Facility
- Plan liquidity needs to maximise the tax savings under the facility.
- Consider creating liquidity by receiving dividends or trust distributions.
2. Review Personal Assets and Offshore Structures
- Reassess investment strategies to prioritise tax-efficient assets.
- Ensure banking arrangements are optimised for the new rules.
- Review non-UK structures for potential tax exposure.
3. Assess Mobility and Residence Status
- Re-evaluate residence status and mobility plans.
- Seek advice to comply with statutory residency rules and manage inheritance tax risks.
4. Seek Professional Advice
- Ensure accurate reporting under the FIG regime.
- Proactively engage with HMRC where affairs are complex.
- Simplify tax affairs by liquidating redundant structures.
Final Thoughts
The upcoming reforms represent a fundamental change to the UK tax landscape for non-UK domiciled individuals. Taking proactive steps now will help mitigate the impact and ensure compliance with the new regime. Seeking professional advice is essential to navigate these changes effectively.
If you need assistance reviewing your tax position or preparing for the transition, please contact our team at Caprica Online Accountancy Firm. Our experts are here to help you make informed decisions and optimise your financial planning.
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