Autumn Budget 2024 - Abolition of Non-Domicile Regime

As was widely anticipated, from 6 April 2025, the Government will abolish the remittance basis of taxation for non-UK domiciled individuals and replace it with a residence-based regime for taxing income and gains. The concept of domicile will also be abolished for most UK tax purposes, and extensive changes will be made to the inheritance tax position of non-UK trusts.

We set out below the changes which will be made.

From 6 April 2025, individuals will be able to elect to not pay UK tax on FIG if they are within their first consecutive four years of UK tax residence, provided they have not been UK resident in the preceding ten tax years.

The four-year FIG regime will apply to both individuals originally from the UK and those originally from outside the UK.

The amount of FIG on which relief is claimed must be quantified and reported on the individual’s tax return even though it is not taxed. If a taxpayer does not quantify and claim relief for the FIG, it will remain taxable at rates of up to 45%.

Individuals who qualify and make a claim for relief will be free to remit the FIG to the UK without any tax charge.

Most types of non-UK income and gains qualify for relief under this regime, with the notable exception of gains on life insurance policies.

Special rules apply to FIG arising within non-UK trusts. Effectively, distributions and other benefits from a non-UK trust will be entirely tax-free within the first four years of UK residence, although these “capital payments” will not reduce the trust’s balance of relevant income and stockpiled gains.

Moving to the UK is likely to become particularly attractive to those individuals who are expecting a large income or capital receipt within the first four years of arrival.

The TRF will allow individuals who have previously been subject to UK tax on the remittance basis to “designate” amounts derived from pre-6 April 2025 FIG, and pay a reduced tax rate on designated amounts for a period of three tax years starting from the 2025/26 tax year.

Amounts designated in 2025/26 and 2026/27 will give rise to a 12% effective tax charge, whereas amounts designated in 2027/28 will be taxed at 15%.

Any amounts which are designated do not need to be remitted to the UK in order for the designation to be effective. In addition, if the amount of FIG within a mixed fund is uncertain, the taxpayer will be able to designate the whole of the mixed fund and pay tax at 12% (or 15%) on the entire amount, including clean capital.

The future remittance of previously designated amounts will not give rise to any further tax charge at the point of remittance.

In an important change to the proposals as originally announced, the TRF will apply to pre-6 April 2025 income and gains arising within trust structures. This can apply to distributions and benefits provided to a remittance basis user before 6 April 2025, if the amounts of income and gains are then designated after 6 April 2025, or to distributions and benefits provided to beneficiaries post-6 April 2025 where they match to pre-6 April 2025 trust income and gains.

It will not be possible to set foreign tax paid against the TRF charge as designated amounts are deemed to be net of foreign tax.

Any amounts remitted to the UK after 5 April 2028 by former-remittance basis users will be taxable at the prevailing rates at the time of remittance (currently up to 45%).

BIR, which allows previously untaxed income or gains to be remitted to the UK in order to be invested in UK businesses without giving rise to an immediate tax charge, will continue to be available until 5 April 2028, although only in respect of non-UK income or gains which originally arose pre-5 April 2025.

For CGT purposes, individuals who are neither UK domiciled nor deemed domiciled on 5 April 2025, and have previously elected to pay UK tax on the remittance basis from tax years 2017/18 to 2024/25 (but not those who qualified for the remittance basis automatically), will be able to rebase qualifying personally held foreign assets to their market value as at 5 April 2017.

Taxpayers will be able to elect which assets are rebased on an asset-by-asset basis.

Qualifying assets are those which were owned on 5 April 2017, situated outside the UK from 6 March 2024 to 5 April 2025, and disposed of on or after 6 April 2025.

Individuals who qualify for the four-year FIG regime will be able to claim OWR throughout that period (up from three years currently).

OWR will exempt part of an individual’s employment income from UK tax to the extent that the income relates to non-UK duties up to the lower of 30% of the gross employment income and £300,000 per year.

In another change to current rules, OWR will be available regardless of whether the non-UK related earnings are paid to a UK or overseas bank account.

From 6 April 2025, the protection from tax on most FIG arising within settlor-interested trust structures will no longer be available for UK resident settlors who do not qualify for the four-year FIG regime. Instead, any FIG arising within the structure will be subject to UK income tax or CGT on the settlor as it arises. This will apply where the settlor or other relevant individuals can benefit from the structure.

From 6 April 2025, non-UK assets will fall within the scope of UK IHT if that individual is a “long-term resident” at the date of the chargeable event (e.g. death).

A long-term resident is an individual who has been UK resident for at least ten out of the last 20 tax years immediately preceding the tax year in which the chargeable event arises. This is a reduction to the current 15 years of residence required before an individual becomes deemed domiciled for IHT.

Long-term residents who leave the UK will remain within the scope of IHT on their worldwide assets for a number of years according to how long they were UK resident before leaving.

For those who were resident in the UK between ten and 13 years, they will remain within the scope of IHT for three tax years following departure.

This will then increase by one tax year for each additional year of UK residence. For example, if an individual was UK resident for 17 out of 20 tax years prior to departing the UK, they would remain within the scope of IHT for seven years following departure.

The test will reset where an individual becomes non-UK resident for ten consecutive years.

Again, these rules apply both to individuals who were originally from the UK (i.e. UK domiciled individuals) and individuals from outside the UK (i.e. non-domiciled individuals).

Transitional rules will protect individuals who have left the UK by 5 April 2025 but after acquiring a deemed UK domicile. For those individuals, their liability to IHT on their non-UK assets will continue to be assessed under the current rules, meaning that if they have a non-UK domicile under general law, they will no longer be subject to IHT on non-UK assets once they have been non-UK resident for three complete tax years.

From 6 April 2025, assets held within a trust will be within the scope of UK IHT at all times when the settlor is a long-term resident (as described above). In these cases, the trust assets will be subject to decennial and exit IHT charges at a maximum rate of 6%, where those events take place when the settlor is long-term resident.

If the settlor ceases to be long-term resident, this will generally give rise to an IHT exit charge.

For any new trusts created from 30 October 2024, assets comprised within a settlor-interested trust will fall within the settlor’s IHT death estate if they die whilst long-term resident and whilst they can benefit from the trust assets.

Transitional provisions will in most cases protect pre-30 October trusts from the death-estate charge to IHT. However, decennial and exit charges will still arise if the settlor is long-term UK resident at the relevant date.

A potential trap for settlor-beneficiaries of non-UK trusts who have left the UK after becoming deemed domiciled and after 6 April 2022 is that there will be an IHT exit charge on the value of the trust assets when the settlor loses their deemed domicile (usually three complete tax years after leaving the UK).