Major Change For Non-dom Residents: The End Of The Remittance Basis

GE
Gerald Edelman

Contributor

Gerald Edelman
With the Spring budget bringing many important changes, from reduction in National Insurance (NI) to a reduction in Capital Gains Tax (CGT) on residential property...
UK Tax
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With the Spring budget bringing many important changes, from reduction in National Insurance (NI) to a reduction in Capital Gains Tax (CGT) on residential property, there is one particularly relevant change to focus on. The Chancellor's changes to domicile, a policy thought to have been taken from Labour, is the biggest shake up in International taxation in a long time. Domicile has been attempted to be done away with for a long time, with successive governments having always stopped just short of scrapping this regime.

What are the current rules?

Individuals who are non-domiciled in the UK have the option of being taxed using either the remittance basis of taxation or the arising basis of taxation.

The arising basis of taxation is the default method of taxation for everyone regardless of domicile and means that you are taxed on your worldwide income.

The remittance basis on the other hand means you are only taxed on foreign income and gains to the extent that you remit them into the UK. You also lose several tax allowances and must pay what is known as a remittance basis charge once you have been in the UK for at least seven of the last nine years.

What's new?

Starting 6 April, 2025, the sweeping new changes brought in by the Chancellor will be introduced. This will mean the remittance basis will no longer be applicable, rendering domicile irrelevant. A new residency-based system will be introduced, granting new arrivals in the UK an exemption from UK tax on foreign income and gains for the first four years of residency providing you have not been resident in the UK for the preceding 10 years. The claim for this to apply must be made each year, and similar to the old remittance basis rules you will forfeit your Personal Allowance and Annual Exempt Amount.

One key point to note is that for individuals that are resident in two countries and would normally look at split year treatment and ‘treaty residence,' this is disregarded and counts as a year of residence for the new system.

The above changes do not apply to current remittance basis users who are already in the UK. For people in this situation there are quite generous transitional rules, which will leave many debating whether or not to stay in the UK. Transitional benefits include:

  • Taxation on only 50% of foreign income during the 2025/26 tax year.
  • A two-year window from 6 April 2025, allowing the remittance of pre-April 2025 income and gains to the UK with a reduced tax rate of 12%. The mixed fund ordering rules will also be ‘relaxed' in this period.
  • Non-UK assets can be rebased to their market value as at 5 April, 2019.

Overseas Workday Relief, which is another relief available to non-doms will still be retained and will be available for the first three years of tax residency.

What about Inheritance Tax (IHT)?

Currently, liability to Inheritance Tax also depends on an individual's domicile, with no IHT arising on non-UK assets owned by non-doms. There has been no current confirmation of exactly what will be enacted for IHT as the government will consult on the way forward with a residency based approach. They have, however, confirmed that non-UK assets settled in a trust by a non-dom settlor prior to April 2025 will remain out of the scope of the UK IHT regime.

The position on trusts

It is envisaged that the new rules for chargeability of assets comprised in a settlement will depend upon whether a settlor meets the residence criteria or is within the tail provision at the time the assets are settled and/or when charges such as 10-year anniversary charges or exit charge arises.

The design of the system (including consideration of further criteria such as other connecting factors) will be subject to consultation. UK situs assets will remain in charge on the same basis as at present, regardless of residence.

The treatment of non-UK assets that are settled by a non-UK domiciled settlor and become comprised in a settlement prior to 6 April 2025 will not change. For these settled assets:

  • Provided the assets in the settlement continue to meet the legislative requirements to be excluded property under current legislation, and subject to any future anti-avoidance provisions, there will be no IHT charges; and
  • the interaction between the gift with reservation provisions and excluded property trust rules will also remain, meaning excluded property will not be brought into charge on the settlor's death even if the settlor retains a benefit in the trust assets.

The exception to this is that the treatment of non-UK property comprised in a settlement that currently comes back into scope where the settlor is a formerly domiciled resident (see above) will be subject to consultation.

What to do now?

If you are a non dom UK resident claiming the remittance basis, there are now several things to consider for future tax planning:

  • If able, deferring remitting taxable foreign income until the transitional window, whereby it would be taxed at 12% as opposed to much higher rates than normal.
  • Make plans to properly segregate any income and gains post April 2025 from untaxed pre-April 2025 income as this will be taxed regardless and can't be brought to the UK without further taxation.
  • Declare dividends and realise gains on non-UK assets before April 2025 whilst claiming the remittance basis if the money can be kept outside of the UK.
  • Consider settling a trust before April 2025 for your non-UK assets.
  • Engage a professional tax adviser, here at GE we have a team ready and able to assist you with the upcoming changes. All you need to do is get in touch!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Major Change For Non-dom Residents: The End Of The Remittance Basis

UK Tax

Contributor

Gerald Edelman
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