Introduction
On 6 April 2025, the remittance basis of taxation will be abolished. With it will disappear one of the distinctive features of the English tax system: the distinction between residence and domicile.
The abolition of this scheme will mean that its former beneficiaries will be subject to UK income tax under the conditions of ordinary law. However, adjustments have been set up: the possibility of benefiting from a reduced rate of 12% for repatriating assets to the UK for three years and the introduction of a new exemption scheme for foreign-source income and gains for new residents.
Application
In place of the remittance basis of taxation regime, a new favourable regime will be offered to impatriates (Foreign Income and Gains Regime or FIG regime). Individuals who transfer their tax residence to the UK will now benefit from a total exemption on their foreign-source income and gains for four years after taking up residence. However, only individuals who have been resident in the UK for less than four years after a period of non-residence of at least ten consecutive years will be eligible for the scheme. The benefit will not be subject to any condition of non-repatriation. The foreign source income covered by this temporary scheme is similar to that previously covered by the remittance basis of taxation.
Former beneficiaries of the remittance basis of taxation will benefit from a transitional regime designed to encourage them to relocate their assets to the UK (Temporary Repatriation Facility or TRF). For three years, they will be able to elect to have their non-repatriated foreign source income and gains taxed at the special rates of 12% for the tax years 2025-2026 and 2026-2027, then 15% for the tax year 2027-2028. Once taxed, these funds can be repatriated to the UK at no additional tax cost.
From 6 April 2025, UK inheritance tax will also be replaced by a residence-based tax system. Individuals who have been resident in the UK for ten of the last twenty tax years will now be regarded as long term residents and will become liable to inheritance tax on their worldwide assets. If they leave the UK, they will remain liable to inheritance tax for between three and ten years depending on how long they have been resident in the UK.
With regard to the taxation of trusts, the settlors of trusts resident in the UK will become taxable on the foreign-source income and gains of these trusts if they are not eligible for the Temporary Repatriation Facility, provided in particular that they or their spouse have retained an interest in the assets of the trust or that the income in question is distributed or benefits a descendant.
In addition, foreign assets held by a trust will be subject to UK inheritance tax if the settlor of the trust is considered to be a long-term resident at the time of death.
Conclusion
In summary, these changes will have significant repercussions. In particular, they will require a thorough reassessment of the situation of former beneficiaries of the remittance basis of taxation. Those who are considering repatriating some of their overseas assets to the UK are urged to make early arrangements to benefit from the announced transitional regime. In addition, those planning to transfer their tax residence to the UK in the near future should seek advice to ensure that they benefit from the advantageous conditions of the new impatriate regime.
Iron Conseil can help you make the most of this change of regime as a UK resident or consider alternatives to expatriation to the UK.
