News and developments
Changes to the UK’S Special Tax Regime for Foreign Income and Gains
With much uncertainty surrounding the end to the non-domicile regime, Helen McGhee and Lynnette Bober provide a helpful summary of the (currently) anticipated changes.
| Topic | Current Regime | Budget March 2024 (Conservatives) | April 2024 Labour | Policy Paper 29 July 2024 (Labour) |
|---|---|---|---|---|
| Who can benefit from the special regime (for income tax and CGT) | UK residents with a common law foreign domicile who are not deemed UK domiciled. | New arrivers - those who have been non-UK resident for a continuous 10-year period - in their first 4 tax years of residence. | Labour supported the changes announced at Spring Budget. | No change. |
| Special regime for foreign income and gains (FIG) | The remittance basis (RB). Foreign domiciled UK residents can claim the RB such that they are only taxable on foreign income and gains when remittances are made.
When claimed, the individual cannot benefit from the personal allowance or CGT annual exemption. A Remittance Basis Charge is payable after specified periods of UK residence. | The 4-year FIG regime. Foreign income and gains are exempt from UK tax regardless of remittance.
No charge payable to benefit from the regime. However, an individual benefiting from the regime cannot also benefit from the personal allowance and CGT annual exemption. After 4 years, the individual is subject to worldwide tax on income and gains. | Labour supported the changes announced at Spring Budget. Considering a specific incentive for UK investment within the 4-year period. | Broadly no change. The government would review reforms to ensure they are "fair and as competitive as possible". |
| Overseas Workday Relief (OWR) | Special regime for the first three years of residence, allowing an individual carrying out employment duties in the UK and overseas to claim the RB on the overseas portion of the income.
Complex rules that are poorly understood in general. | Further consultation promised. Broadly from 2025/26, individuals would also need to qualify for the new 4-year FIG regime.
OWR will only be available for the first three tax years, providing a complete exemption from UK tax for overseas duties. | Silent. | OWR will be retained, with stakeholder engagement and announcement planned for 30 October 2024 Budget. |
| Transitional provision 1: Income tax reduction | - | Specific relief announced for UK resident foreign domiciled individuals who had been eligible for the RB and would be subject to tax on the worldwide basis from 2025/26.
For tax year 2025/26, foreign income tax was to be reduced by 50%. | Labour will not introduce this proposal. | No change from Labour's earlier decision to not introduce this provision. |
| Transitional provision 2: CGT rebasing | - | Rebasing to 5 April 2019 value for assets held personally by individuals who are neither UK domiciled nor UK deemed domiciled by 5 April 2025. | Silent. | Support for rebasing for current and past RB users. The appropriate rebasing date is being considered, with details in the 30 October 2024 Budget. |
| Transitional provision 3: Temporary Repatriation Facility (TRF) | - | Available to individuals where foreign income or gains arose while taxed on RB. A fixed 12% rate would apply in 2025/26 and 2026/27.
No regard for the source of amounts; no credit for foreign tax. TRF excludes pre-6 April 2025 FIG in trusts. | Concerns about the short period of TRF and commitment to explore better incentives for remitting stockpiled FIG. | Commitment to TRF reiterated, with terms to make it attractive.
Considering expanding scope to include income and gains within overseas structures. |
| Non-UK resident trusts – trust protections | UK resident foreign domiciled settlors, benefiting from non-resident trusts, are only taxed when receiving distributions or benefits from the trust.
These are known as "trust protections." | From 5 April 2025, trust protections will not apply. Individuals qualifying for the 4-year FIG regime will be exempt from anti-avoidance provisions during that time. | Labour will follow Conservative plans. | No changes announced. |
| What is the IHT regime for individuals based on? | Domicile-based system. | Move to a residence-based system. | Labour will follow the Conservative government plans. | No change. |
| Special IHT regime for foreign assets owned directly by individuals | Foreign domiciled individuals (not deemed domiciled) are not subject to UK IHT on foreign situs assets. | Subject to UK IHT on foreign situs assets after ten years of UK residence, with a ten-year tail period to leave the UK IHT net. | Labour will follow Conservative plans. | No changes announced. Further engagement with stakeholders planned for August. |
| What is the IHT regime for trusts based on? | Domicile-based system. | Move to a residence-based system. | Labour will follow the Conservative government plans. | No change. |
| Special IHT regime for trusts | The excluded property regime: trust property settled by a non-UK domiciled individual is outside the scope of UK IHT if it is foreign situs. | End of excluded property trusts for trusts settled after 6 April 2025.
IHT position will mirror the settlor: when the settlor is subject to IHT, so is the trust. | Labour supported the plans for trusts created after 5 April 2025. | The policy aims to ensure everyone subject to UK IHT pays their share.
The IHT relevant property regime will apply to most trusts, including applying GROB provisions when the settlor is a beneficiary. |
| IHT and pre-6 April 2025 excluded property trusts | Outside the scope of UK IHT, provided the property is foreign situs. | Trusts set up by foreign domiciled individuals pre-2025 will be grandfathered for IHT purposes if they include only excluded property. | Labour will bring all foreign trust assets within UK IHT. | No grandfathering, but transitional arrangements will be considered. Details to be announced in the 30 October 2024 Budget. |
| Review of anti-avoidance legislation | Not applicable. | Review of offshore anti-avoidance legislation announced. | Not applicable. | Aimed at modernizing rules to reduce ambiguity and simplify application, ensuring anti-avoidance provisions are effective.
Changes expected from 2026/27 onwards. |
Author: Helen McGhee & Lynette Bober