Global Mobility Tax
United Kingdom | Changes to the UK taxation of non-domiciled and inbound individuals from 6 April 2025
Summary
The Labour government has confirmed major changes to the UK taxation of foreign income and gains (“FIG”) from 6 April 2025 for people coming to the UK who have not been tax resident in the UK in any of the previous 10 tax years. The policy was originally announced by the previous government in March 2024.
The key features of the new FIG regime, as previously announced, have been retained, but some of the temporary and grandfathering concessions to ease the transition to the new regime have been scrapped. Consultations on how the new regime should operate have largely been scrapped but there are exceptions on a few specific points where the government wants to engage with stakeholders. The new government will now develop legislation for the next Finance Bill, and we might see some more detail in the new Chancellor’s first Budget, which will be on 30 October 2024.
A new tax regime for inheritance tax, based on whether a person had been a tax resident in the UK for at least 10 years, will also be introduced from 6 April 2025, replacing the existing regime based on domicile. The government is working out the precise details of the new regime.
Brief recap: The current regime
Currently, individuals who are not UK domiciled can choose to be taxed in the UK on the remittance basis. This allows them to be taxed only on UK-sourced investment income and gains providing their non-UK income and gains are paid and kept offshore (i.e. the offshore income and gains are only taxable if remitted to the UK). The remittance basis of taxation is an annual election which is available for up to the first 15 years of tax residence. Overseas workday relief is also available for non-UK domiciled individuals claiming the remittance basis for the first 3 years of tax residence.
New 4 year residence based regime for foreign income and gains (“FIG”)
The new government has confirmed the abolition of the remittance basis of taxation for income and gains arising after 5 April 2025.
Instead, a new 4-year Foreign Income and Gains (“FIG”) regime will be introduced based purely on residence status.
The new regime will only apply to individuals who become a UK tax resident after having been non-resident for 10 consecutive tax years immediately before coming to the UK.
Meeting this test will allow individuals an annual choice as to how they are taxed in the UK for only the first four tax years of tax residence: the arising basis of tax (taxed on worldwide income and gains) or the FIG regime (taxed only on UK source income and gains).
There will no longer be a requirement to keep FIG that arises after 5 April 2025 offshore in order to benefit from relief from UK taxes. However, any foreign income and gains that arose before that date, and was (not) taxed under the old remittance basis regime would continue to be taxed if remitted to the UK after 5 April 2025 (tax rate to be determined by transitional arrangements mentioned below to encourage investment in the UK). The new FIG regime only applies to income and gains that arise after 5 April 2025.
Overseas workday relief
In a possible change to the previous proposals, the government has announced that while some form of overseas workday relief will be retained, it will engage with stakeholders to review the design principles of this tax relief. Further details will be confirmed in the Budget.
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Vialto View A review of the design principles for overseas workday relief is a very welcome announcement. Expatriate tax regimes are often a key consideration for workers and employers in choosing a location base for international moves. The current regime of overseas workday relief is complicated and ultimately encourages individuals to work outside the UK. It will be interesting to understand the eligibility for the new regime; in particular will it be available for returning UK domiciled individuals who have been non-resident for the previous 10 years? |
Transitional arrangements
The previous government had indicated 3 key transitional arrangements.
The first was that only 50% of foreign income would be taxed in 2025/26 for individuals losing access to the remittance basis. The new government has confirmed that there will be no transition. Therefore 100% of foreign income and gains will be taxed from 2025/26 for those resident in the UK and not eligible for the new FIG regime.
The second transitional arrangement was for current and former remittance basis users to be able to rebase foreign assets to 5 April 2019. The government has confirmed that rebasing will be allowed but is considering the appropriate rebasing date.
The final transitional arrangement was to introduce a Temporary Repatriation Facility (“TRF”) to encourage individuals to remit pre-6 April 2025 FIG at a reduced rate of 12% for two years. The government has said it will keep the TRF, but will review the reduced tax rate to be offered and the proposed length of time for the concessional rate, to make the TRF as attractive as possible and encourage people to bring money and investments swiftly into the UK. The government is also considering expanding TRF to include stockpiled income and gains within overseas structures.
Trusts
From 6 April 2025, deemed UK domiciled and non-UK domiciled individuals who do not qualify for the 4 year FIG regime will lose tax protection on income and gains within settlor-interested tax structures.
The government has also indicated that they will review offshore anti avoidance legislation (including Transfer of Assets Abroad and Settlements legislation) to modernise the rules and ensure effectiveness. Details of the review will follow but the Government has indicated that it does not expect this review to result in any changes before the 2026/27 UK tax year.
Inheritance tax
Currently, people who are not domiciled in the UK, and not deemed domiciled, only pay UK inheritance tax (“IHT”) on UK situs assets, i.e. assets located in the UK. UK domiciled or deemed domiciled people (i.e. people who have been tax resident for at least 15 of the previous 20 UK tax years) are subject to IHT on worldwide assets.
The government has announced that the current rules will be replaced from 6 April 2025. The basic test for whether non-UK assets are in scope for IHT from 6 April 2025 will be whether a person has been resident in the UK for 10 years prior to the tax year in which the chargeable event (including death) arises, with provision to keep a person in scope for 10 years after leaving the UK. The government will “engage with stakeholders” on how this test should operate, but there will not be any formal consultation about the policy decision to move to a residence-based test for IHT from April 2025.
Many non-domiciled individuals, particularly those who have become deemed domiciled, have used non-UK trusts set up before becoming deemed domiciled to hold non-UK assets. If correctly structured, these trusts could exclude the offshore assets from IHT even after the person had become deemed domiciled. The government will end the IHT exemption of these Excluded Property Trusts, but is considering how to introduce this change to allow for appropriate adjustments to existing trust arrangements, while ensuring that all long-term residents of the UK have the same IHT treatment of their worldwide assets. More detailed information is expected in the Budget.
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Vialto View On the face of it, replacing the subjective non-domicile IHT regime with an ostensibly more objective IHT regime based on the UK’s statutory residence test ought to be a simplification. However, the new IHT regime will be more complicated than it looks. The design of the 10-years of residence test for IHT is important. Will it be measured over the previous 10 years or on a rolling basis of any 10 years in the past (say) 20 years? Given the current rules about becoming deemed domiciled in the UK after 15 years of residence, a new 10-year rule arguably simply brings forward the existing trigger date for worldwide IHT. However the decision to pierce the current protection from IHT offered by offshore Excluded Property Trusts will seriously affect a number of wealthier non-doms who have remained in the UK for at least 10 years. For global mobility teams, it is not just employees who could be affected. The spouse of an employee might have had a different residence pattern over the previous 10 or 20 years, and could fall into or out of the new IHT regime at different times from the employee. To date, tax equalisation policies have rarely needed to consider IHT because non-domicile status held good, but under a new resident test this could change in the future. |
Recommended actions
What’s coming up
Engagement sessions
We await news from the Government of the timing for engagement sessions on OWR and IHT.
Autumn Budget
The government has announced the Autumn Budget will be held on 30th October 2024. Further tax changes are expected as the Chancellor has warned of “difficult choices”.
In addition, the Government has already announced changes in two further areas which may be of interest to employers:
VAT on private school fees
The government also confirmed two widely expected tax changes that will increase the cost of private school fees.
These changes will affect outbound assignees who use UK boarding schools to maintain a UK education, and inbound assignees who use international schools in the UK to maintain the local curriculum for the children accompanying assignees on a UK secondment, e.g. French or Japanese schools. Where the employer pays for the cost of a child’s school fees, this could increase the cost of the benefit on a grossed-up basis.
Although VAT at 20% will be charged on school fees, including boarding fees, the actual fees might rise by less than this. The schools will now be able to reclaim input VAT charged on bills the school pays to its suppliers and, allowing for this, the government expects schools to be liable for VAT amounting to around 15% of their fee income.
Carried interest
The government has also issued a call for evidence about its proposals to change the way carried interest is taxed. Submissions should be provided by 30 August 2024 and a further announcement is expected at the Budget on 30 October. Carried interest is a form of performance-related reward received by fund managers, primarily within the private equity industry.
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