The UK's Autumn Budget confirmed that the concept of domicile will be dropped from the UK tax system. Instead, like many other countries, we will look solely at residence (with no changes to the existing Statutory Residence Test).
This means we will also be abolishing the concept of UK resident but non-domiciled (known as being non-dom) and removing the remittance basis of taxation. This allows non-doms to shelter their offshore income and gains from UK tax, for up to 15 years living in the UK, provided they keep those foreign income and gains offshore.
The changes will come into effect from 6 April 2025.
Figuring out the new FIG regime
Instead of the remittance basis, we will have a new system of taxing foreign income and gains, which is being called the FIG regime (with FIG standing for Foreign Income and Gains).
The new FIG regime applies as follows:
- Only available to anyone coming to the UK for the first time, or after being non-resident for 10 consecutive years (including returning British nationals).
- Allows taxpayers to pay no UK tax on their FIG, even if it is brought into the UK.
- Applies only for the first 4 years of UK tax residence.
- Must be claimed in the UK tax return (or the taxpayer will be liable to UK tax on all their worldwide income and gains).
- The deadline for the claim is 31 January in the second year after the relevant tax year e.g. the deadline for 2025/6 will be 31 January 2028.
- Taxpayers can opt in & out of the FIG system in the 4 years but no roll over is allowed (so use it or lose it!).
Existing UK residents
You might already be in the UK when the rules change. If you were non-UK resident for at least 10 consecutive years before your arrival, and you are still within the first 4 years of residence, then you can claim the FIG treatment for the balance of the 4-year period.
Any non-dom who has been in the UK for more than 4 years already will automatically become liable to UK tax on their worldwide income and gains, from 6 April 2025, even if those are kept offshore. This will be a major change for anyone currently using the remittance basis, perhaps paying the annual Remittance Basis Charge for doing so.
What counts as FIG?
Most kinds of offshore income and gains will be classed as FIG, but some major exclusions include:
- Foreign earnings/employment income*.
- Foreign employment income paid through third parties.
- Payments from foreign pensions if these come from UK-tax relieved funds (e.g. from a QROPS that received a transfer from a UK pension).
- Gains made on any entity that owns UK residential land.
* foreign earnings/employment income may be separately exempt from UK tax under the Overseas Workday Relief rules, which are also being extended to 4 years if the employee qualifies for the FIG regime.
What about foreign tax or losses?
You may have paid tax already in another country. The FIG rules assume you are claiming relief for your net of tax income or gains, so no credit is given for the tax you have paid elsewhere.
On the other hand, if you do not claim the FIG treatment, then your offshore income and gains are fully subject to UK tax, and you can then claim credit for any foreign taxes already paid.
Similarly, if you are claiming the FIG treatment, you cannot make use of any foreign losses that arose in the year of the claim. But if you don't make a FIG claim, then your foreign losses will be taken into account when calculating how much tax you owe in the UK on your worldwide income and gains.
FIG and trusts
The FIG regime can also apply to trust distributions. If a UK resident beneficiary receives an income distribution from an offshore discretionary trust, this is classed as FIG and can be sheltered from UK tax by a FIG claim. The source of the income (the trust) would need to be disclosed in the FIG claim.
Similarly, if the UK resident is a life tenant of an offshore settlement, any foreign income they receive can be subject to a FIG claim.
But if the UK beneficiary isn't eligible for the FIG regime, then they will be taxed on the trust distribution/income, from 6 April 2025, even if they leave the funds offshore.
That is a major change for non-doms who are currently able to use the remittance basis to receive trust funds outside the UK without a charge to UK tax arising.
If you are the settlor of an offshore trust, the changes could have an even bigger impact.
During the FIG period, if you qualify, you can claim protection for the foreign income and gains arising within the settlement. But otherwise, anyone who set up an offshore trust and is UK resident is going to find they are taxable, from 6 April 2025, on all the trust income and gains if:
- The settlor/spouse has any interest in the settlement;
- Income is paid to the settlor's minor children;
- For gains, if the settlor's children or grandchildren are beneficiaries; or
- Certain other conditions are met.
Basically, the offshore trust will be entirely tax-transparent for the UK resident settlor, except during the FIG period.
A technical point for trustees: any trust income or gains that are protected from UK tax by a FIG claim will not be 'matched' to the payment out and will continue to be added to the 'pool' of trust gains or relevant income.
What are the downsides of the FIG rules?
There are some big downsides to the FIG rules.
Firstly, they only apply for four years. This compares poorly with many other countries that have special 10-year rules to attract wealthy immigrants.
Secondly, you can currently claim the remittance basis without having to tell HMRC exactly what you had offshore, so HMRC had no idea how much UK tax you were saving by being taxed on the remittance basis.
The FIG rules, on the other hand, require a greater degree of disclosure. Cynics might suggest this is HMRC's way to get more information on your foreign wealth, so it is easier to check you are disclosing everything after the end of the 4-year FIG period.
The FIG claim requires you to specify the exact source and the amount of income or gains for which relief is being claimed. If you make no claim, or if you miss any offshore income or gains from the FIG claim, then the default is paying full UK tax on the arising basis at normal rates.
Finally, claiming the FIG treatment means you lose all your UK personal allowances automatically. So even if you are claiming FIG for your offshore income only, you will still lose your UK CGT allowance (as well as your income tax personal allowance).
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.
