NewHorizon Trustee - Autumn Budget 2024: Non-UK domiciled individuals and Offshore Trust

Abolition of the “remittance basis” and the new “FIG” regime - Income tax and Capital gains tax (CGT)

Starting from 6 April 2025, the current “Remittance Basis” regime, available for non-doms, will be abolished and replaced by a new “Residence-based” regime, known as the Foreign Income and Gains (FIG) regime. The concept of domicile will no longer be relevant to UK taxation, and as a general rule, any individual moving to the UK will be subject to UK tax on worldwide income and gains.

However, under the new FIG regime, individuals are able to remit foreign income and gains (FIGs) arising from 6 April 2025 (regardless of whether these are remitted to the UK or not) free from UK tax in their first 4 years of UK tax residence, provided non-UK residence in any of the previous 10 consecutive years. Therefore, they will only pay tax on UK source income and gains.

The four-year FIG window embraces any tax year where an individual is treated as UK resident under the Statutory Residence Test. A split year, or a year where an individual is treaty resident elsewhere, will still count as a full year of UK residence.

In order to benefit from the FIG regime, an annual claim must be made on a Self-Assessment tax return, including details of overseas income and gains. As a result of this claim, the individual will lose their entitlement to the income tax personal allowance (currently £12,570) and capital gains tax annual exemption (currently £3,000). They will also not be entitled to relief for any foreign income or capital losses arising in the year of the claim.

UK tax resident individuals who have been in the UK for fewer than 4 years on 6 April 2025, can benefit from the FIG regime until the end of their 4^th year of residence. For example, an individual who became resident in the UK for the first time in the tax year 2022/23 will have been resident in the UK for up to three tax years on 6 April 2025. Therefore, they will be able to benefit from the new regime for 2025/26 (their 4^th year).

Former “remittance basis users” who are not eligible for FIG from 6 April 2025 will then be taxable on their worldwide income on the arising basis.

Starting from 6 April 2025, residence (rather than domicile) will be the primary connecting factor for IHT.

In principle, non-UK assets will become liable to IHT once an individual will become a "long-term UK resident" (which means they have been UK tax resident for 10 out of 20 previous tax years) and their worldwide assets will be within the scope of IHT. Uk assets remain liable to IHT as they always have been.

Therefore, if a long-term UK resident dies, their worldwide assets will potentially be subject to UK IHT at 40%.

If an individual is not a long-term resident (in its first 10 years of UK residence), only their UK assets, including any interests in UK residential property, are within the scope of UK IHT.

If an individual leaves the UK after they have become a long-term UK resident, the worldwide basis for UK IHT will continue to apply for a period of years (the "tail").

The length of the tail will be determined by how long the individual has been UK resident:

In calculating the length of the tail, years of residence before 6 April 2025 will be taken into account.

Where a spouse of a long-term UK resident is not themselves a long-term resident, they can elect to be treated as if they were.

From 6 April 2025 the "protected trust" rules for offshore trusts will no longer apply to both new and pre-existing trusts. It follows that, where an offshore trust is settlor-interested (i.e. where the settlor, their spouse or minor children or grandchildren can benefit), unless the settlor qualifies for the 4-year FIG regime, foreign income and gains arising in the trust or underlying company (whenever established) will be assessed and taxed on the settlor as they arise.

Temporary Repatriation Facility (TRF) is available to UK resident settlors or beneficiaries, who previously benefitted the remittance basis regime, if they receive benefits from offshore trusts that can be matched to pre-6 April 2025 income of the trust.

Where a beneficiary receives an income distribution or has a life interest in a trust, full relief will be available from UK tax on the foreign income arising to them, if they make a claim for the 4-year FIG regime.

Likewise, if a beneficiary receives a capital distribution or benefit from a trust (e.g. an interest free loan) which matches to ‘relevant foreign income’ of the trust this will also not result in a UK tax charge if a FIG claim is made. However, if the benefit is unmatched because there is insufficient relevant income or stockpiled gains within a trust structure, these may match at a later date and result in a UK tax charge for the beneficiary if the 4-year FIG period has ended.

Where the FIG regime is not available, income distributions will continue to be taxed in the normal way. Similarly, capital payments and benefits will match to income and gains in the usual way.

Under the current rules, non-UK assets settled into a trust when the settlor was non-UK domiciled at the time the trust was set up, and at the time of any subsequent additions, are considered “Excluded Property” and therefore they remain outside the scope of UK IHT, even once the settlor becomes deemed domiciled in the UK.

From 6 April 2025 the “Excluded Property status” of non-UK settled assets will no longer be determined by reference of the settlor’s domicile status at the time assets are added to the trust. Instead, the assets will only be excluded if at the time of a charge (at the relevant event) the settlor is not a ‘long-term UK resident’.

If the settlor is deceased or dies before 6 April 2025, the current IHT rules (i.e. domicile test) apply and non-UK assets will continue to be considered “excluded property” provided the settlor was non-domiciled at the time the trust was established.

If the settlor dies after 5 April 2025, the IHT status of the trust will depend on the long-term residence status of the settlor upon death.

Currently, the trustees of an Excluded Property Trust are only subject to UK IHT to the extent that the trust directly holds UK assets or UK residential property (howsoever held).

From 6 April 2025, the IHT status of a trust will depend on whether the settlor is a long-term UK resident or not and, as a result, a trust could move in and out of the scope of UK IHT depending on the changes in the settlor’s circumstances.

This means that trusts with a settlor who is a long-term UK resident will fall into the “Relevant Property Regime” and will be subject to both (i) the 10-year charge and (ii) the exit charge.

It is worth noting that if the settlor ceases to be a long-term UK resident this will result in an ‘exit charge’ for the trustees on the value of the non-UK assets.

Where assets are segregated into a trust, but the settlor is still able to benefit from them, the trust property remain within the settlor’s estate on its death for IHT purposes under the "Gift with a Reservation of Benefit" (GROB) rules.

Currently where non-UK assets have been settled into a trust by a non-UK domiciled settlor who can continue to benefit from the trust, the GROB rules do not apply, regardless of the settlor’s domicile status on death. This is because the GROB rules are overridden in the case of excluded property trust as the excluded property rules take precedence over the GROB rules.

Where non-UK assets settled into a trust were considered excluded property before 30 October 2024 these will continue to fall outside the scope of the GROB rules (even if the settlor remains a beneficiary), while the trustees may be liable to IHT if the settlor is a long-term UK resident (i.e. has been in the UK for more than 10 tax years) this will prevent a double charge to IHT.

However, if additions or new trusts are established on or after 30 October 2024 then the non-UK asset will be subject to the GROB rules, so where a settlor is a long-term UK resident, the non-UK asset will form part of settlor’s estate for IHT purposes (worldwide trust assets will be treated as the settlor’s on their death for IHT purposes). The same trust asset can be caught by both the 10-year charging (on the trustees) and the GROB rules, potentially resulting in double taxation.

The information provided in this article is of a purely general nature and is not a substitute for specific advice that may be requested here.

Autumn Budget 2024: Non-UK domiciled individuals and Offshore Trust

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