Autumn Budget 2024 Series – Part 1: Income Tax & CGT

Overview

From 6 April 2025, domicile will be abolished as a concept for UK tax purposes.  With effect from that date, an individual’s UK tax exposure and the application of UK tax rules to trusts established by them will be assessed according to the individual’s UK tax residence status.

In this first part of our article on ‘Changes to the ‘non-dom’ regime’, we focus on the UK Income Tax (“IT”) and UK Capital Gains Tax (“CGT”) implications of the new rules.

Please see Part 2 for information on how the new rules will apply for UK Inheritance Tax purposes.

The new ‘FIG regime’ for individuals coming to the UK

Under the new residence regime, UK tax residents will be liable to IT and CGT on their worldwide income and gains in the year in which they are realised, i.e. on an arising basis.  This will be regardless of where the income and gains are realised and whether they are ‘remitted’ to the UK (broadly, brought to, received or used in the UK).

The new rules mark a stark change from the current preferential rules for non-UK domiciled individuals, which enable such individuals to avoid IT and CGT on certain foreign income and gains (“FIG”) unless and until they are remitted to the UK – a regime known as the ‘remittance basis’.

The remittance basis will be replaced with a new four-year FIG regime.  The four-year FIG regime will enable an individual coming to the UK to avoid IT and CGT on certain FIG during their first four tax years of UK residence, provided that they have not been UK tax resident in any of the ten tax years preceding their tax year of arrival.

If an individual is eligible for the four-year FIG regime, they will be able to claim 100% relief from CGT and IT on their FIG, whether or not brought into the UK in the tax year of claim or later.

If an individual has recently become UK tax resident, they could still make a claim for the new four-year FIG regime for any remaining period from 6 April 2025.  For example, if an individual has already been UK resident for the two tax years 2023/2024 and 2024/2025, if eligible, they will be able to benefit from the four-year FIG regime for two further tax years (2025/2026 and 2026/2027) (i.e. for the remainder of the four years).

An individual’s residence will be assessed by means of the UK’s Statutory Residence Test only, and not by any double taxation treaties between jurisdictions.  A split year will be counted as a full year of UK tax residence.

FIG that arose on or before 5 April 2025, while an individual was taxed under the remittance basis, will continue to be taxed under current rules if remitted to the UK after 6 April 2025.

The individual will need to claim the four-year FIG regime in their personal Self-Assessment Tax Return (“SATR”).  The claim can be made tax year by tax year, to apply to income, gains or both, and on a source-by-source basis.  The FIG for which the relief is being claimed must be identified and quantified.

If electing to use the four-year FIG regime, the individual will not be able to make use of any foreign losses arising in the year of claim.  They will also lose their IT personal allowance and CGT annual exempt amount in that year.

Trusts

Under current rules, a UK resident settlor who was non-UK domiciled at the time of creating a trust may be protected from rules attributing them FIG arising in an offshore trust.  This will not be the case from 6 April 2025, such that FIG arising within the trust from that date will be attributed to the settlor of a settlor-interested trust, as is currently the case for UK domiciled settlors.

FIG of an offshore trust may also be ‘matched’ to benefits or capital payments received by UK resident beneficiaries, who may therefore become liable to IT or CGT on receipt of any benefit or payment.  The abolition of the remittance basis means that a UK resident beneficiary will no longer be able to avoid IT or CGT on such benefits or payments.

If, however, a UK resident settlor claims the four-year FIG regime, they may be able to avoid IT and CGT on any trust FIG attributed to them during this period.

Similarly, if a UK resident beneficiary claims the four-year FIG regime, they may be able to receive a benefit or capital payment in that period free from IT or CGT.  A UK tax charge may still arise if matching takes place after the four-year period has expired.  Any benefit or distribution made to a four-year FIG regime user will not reduce the trust’s income and gains pool, and such unmatched FIG will remain available for future matching.

The Government is conducting a review of the offshore anti-avoidance legislation which gives rise to attribution of FIG to a UK resident settlor or matching of FIG to a UK resident beneficiary.  Changes in this regard are not expected to be introduced before 6 April 2026.

Temporary Repatriation Facility

The Temporary Repatriation Facility (“TRF”) is a transitional provision under which a UK tax resident and former remittance basis user will be able to nominate unremitted (and therefore untaxed) FIG that arose prior to 6 April 2025 and pay tax on it at a reduced rate.

FIG which have arisen within an offshore trust and are untaxed prior to 6 April 2025 can also be designated under the TRF.  This may apply to trust FIG attributed to or received and kept outside the UK by a remittance basis user prior to 6 April 2025.  The TRF may also be used by a UK resident beneficiary and former remittance basis user in respect of pre-6 April 2025 trust FIG matched to a benefit or capital payment received by them during the three-year TRF period.

FIG taxed under the TRF can then be used freely in the UK as and when needed, with no further charge payable even if brought into the UK in a later tax year.  Where there is a mixed fund, designated FIG will be remitted in priority to other FIG.

The TRF will be available for the three tax years 2025/26, 2026/27 and 2027/28.  The beneficial rates will be 12% for the first two tax years, and 15% for the third and final tax year.  These rates are clearly advantageous when compared with the 45% top rate of IT and general 24% top rate of CGT.

The individual must claim for the TRF in their SATR for the relevant tax year and must designate the FIG (which may include illiquid assets and existing Business Investment Relief investments) to which the TRF will apply.

Rebasing for CGT purposes

For CGT purposes, ‘rebasing’ allows an individual to exclude gains that accrued on an asset before a certain date.  The value of the asset at the rebasing date is taken as the new ‘base cost’ for calculating any future gains.

Individuals who are not UK or deemed domiciled at any time before 6 April 2025 and who claimed the remittance basis in any tax year from 2017/2018 to 2024/2025 will be able to rebase their foreign assets to their value at 5 April 2017 when making a disposal of such assets on or after 6 April 2025.  To qualify, the assets will need to have been personally held by the individual on 5 April 2017 and, in most cases, situated outside the UK since 6 March 2024.

Overseas Workday Relief

Another possible relief for international individuals is Overseas Workday Relief (“OWR”), which can shelter a UK tax resident’s employment income from IT where their duties have been carried out abroad.

From 6 April 2025, the OWR rules will be modified so that an individual will be able to elect for OWR to apply if they are eligible for the new four-year FIG regime.  For individuals who are not eligible for the four-year FIG regime but claimed OWR prior to 6 April 2025, the ‘old’ OWR rules will continue to apply.  Similarly, the ‘old’ OWR rules will continue to apply to pre-6 April 2025 employment income.

OWR must be claimed in the individual’s SATRs, with the amount of relief being claimed quantified and relating to employment income earned in that tax year.

The time period in which OWR will be available will rise to four years to align with the four-year FIG regime. Unlike before, an individual will be able to bring the overseas earnings to the UK and still qualify for the relief.

New OWR claims will be capped so that the amount of relief that can be claimed in each tax year will be the lower of:

  • 30% of the individual’s qualifying employment income; or
  • £300,000.

If electing to use the new OWR, an individual will not be able to use any foreign losses realised in the year of claim.  The individual will also lose their IT personal allowance and CGT annual exempt amount for that tax year.

Planning opportunities

We strongly advise anyone impacted by these changes to consider their circumstances and whether it would be advantageous to put in place any planning – particularly prior to 6 April 2025 before the changes come into effect.

Possible actions include:

  • individuals who will be affected by these changes may wish to consider leaving the UK and becoming non-UK resident prior to 6 April 2025.  If such individuals wish to continue spending some time in the UK, they should take comprehensive UK tax residence advice;
  • non-UK domiciled individuals taking advantage of the final year of the current regime.  For example, if they are due to dispose of any assets pregnant with gain or to receive significant income, they may wish to consider accelerating any such liquidity events to take place before 6 April 2025 and claim the remittance basis to protect this FIG, making sure to keep the FIG outside the UK;
  • similarly, trustees of an offshore trust exercising their powers to benefit a UK resident non-UK domiciled beneficiary (including a settlor-beneficiary) prior to 6 April 2025 and for the beneficiary to claim the remittance basis to protect the FIG received – again, provided that such FIG is kept outside the UK;
  • as of 6 April 2025, individuals who are eligible for the four-year FIG regime or OWR considering how best to make use of these reliefs – for example, triggering FIG during the four-year period while there is no IT or CGT to pay.  In a similar way, trustees of an offshore trust may also want to consider triggering and, if required, distributing FIG if a UK resident settlor or beneficiary is able to claim the four-year FIG regime;
  • qualifying individuals claiming the TRF to take advantage of its beneficial rates for the next three tax years.  This may be of interest should an individual need more funds in the UK or if they wish to simplify their offshore account holdings;
  • individuals who are able to take advantage of rebasing relief considering whether they should dispose of any qualifying assets.  Consideration may also be given to rebasing assets prior to 6 April 2025 and claiming the remittance basis;
  • where possible, trustees of offshore trusts excluding a UK resident settlor (and possibly their spouse) as a beneficiary to avoid attribution of trust income and gains to the settlor;
  • trustees of offshore trusts reviewing their investments to consider whether any changes should be made to minimise the impact of the new rules;
  • individuals and trustees considering whether it may be appropriate to invest in investment products which enable IT and CGT-free roll-up of income and capital – for example, offshore life bonds;
  • changing the terms of, onshoring or winding up an offshore trust;
  • trustees of offshore trusts considering whether there are any defences available to IT or CGT anti-avoidance rules;
  • considering an individual’s IT or CGT exposure under any relevant double tax treaties; and
  • continuing to keep FIG outside the UK if not needed in the UK to limit UK Inheritance Tax exposure if non-UK assets are otherwise out of scope.

This note is for guidance purposes only.  It does not constitute advice and no reliance should be placed upon it.  We do not recommend taking any action without first taking comprehensive advice in all relevant jurisdictions.

Please get in touch with us if you would like any advice on how the changes outlined in this article may affect you and to discuss potential planning strategies.  We should be most pleased to assist.

Caroline Belam & Natalie Spong

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