UK Tax Reform 2025: The End of the Domicile Era and Introduction of the FIG Regime

The new regime applying from 6 April 2025

Domicile is a common-law concept and will not be abolished. From 6 April 2025 it will no longer apply in determining liability to UK tax. Instead, a new residence-based regime will apply for income tax, capital gains tax (CGT) and inheritance tax (IHT).

The new Foreign Income & Gains (FIG) regime 

• The default position from 6 April 2025 will be that individuals will be chargeable to tax on their worldwide income and capital gains as they arise.
• The remittance basis will continue to apply only to tax FIG that arose in years prior to 2025/26 in which the remittance basis was claimed and is remitted to the UK after 5 April 2025.
• Individuals (including those who are UK domiciled) who have not been UK resident for at least 10 years prior to their arrival will not be chargeable to UK tax on their FIG arising during their first four years of UK tax residence, regardless of whether or not any of the FIGs are remitted to the UK.
• Individuals who have already become UK resident before 6 April 2025 will qualify for the FIG regime for any year after 5 April 2025 that falls within their first four years of residence, e.g. somebody who first becomes UK resident in 2023/24 would qualify for the FIG regime for 2025/26 and 2026/27, being their third and fourth year of residence.
• A claim for the FIG regime to apply for a year must be made via the tax return for that year, and the return must also quantify the FIG to which the claim applies.
• A claim can be made for either income or gains, or both, on a source-by-source basis. It is not necessary to claim relief for all foreign income and/or all foreign gains. A claim can also be made independently for overseas workday relief purposes.
• A claim will result in the loss of the income tax personal allowance and CGT annual exemption for the year of claim. Foreign income losses and foreign capital losses of the year of claim will also not be allowable.

The requirement to identify and report in annual tax returns the FIGs not chargeable to tax is an unwelcome administrative burden. It will also provide HMRC with significantly more detail of individuals’ offshore assets and investments than what is currently available under the remittance basis regime.

Temporary Repatriation Facility (TRF) 

• The new TRF is aimed at encouraging individuals to remit to the UK FIGs that arose in years prior to 2025/26 where the remittance basis was claimed.
• Individuals can ‘designate’ and pay tax on FIGs of earlier years in their tax returns for 2025/26, 2026/27 and 2027/28. Those FIGs can then be remitted to the UK in the year of designation or at a later time with no further charge to tax.
• The reduced rates of tax applying to designated income and gains are 12% for both 2025/26 and 2026/27, and 15% for 2027/28.
• It will be possible to designate and pay tax at these reduced rates on all or a proportion of a source of mixed funds including FIGs, even where it is not possible to accurately analyse the source of the funds.
• It will also be possible to designate and pay tax on illiquid assets (for example an investment purchased with FIGs).
• Special mixed fund matching rules will apply to ensure that any designated amount in a mixed fund will be treated as being remitted first in preference to other amounts in the fund.

The TRF represents a welcome transitional relief for those non-doms who have previously claimed the remittance basis and do not qualify for the FIG regime, particularly those who may be running low on clean capital.

It will work differently than most advisers had originally anticipated. Instead of just remitting pre-6 April 2025 FIGs in one of the three years to 2027/28 and paying the reduced amount of tax for that year, it is instead necessary to designate and pay tax at the reduced rate on amounts to remit, which can then be remitted at any time as required. This offers a certain amount of flexibility, both in terms of spreading the tax cost over the three TRF years and the ability to take advantage of the lower rates of tax on sums intended to be remitted after 5 April 2028.

IHT

• From 6 April 2025, exposure to IHT on non-UK assets will be determined by whether individuals are 'long-term resident' at the time of the chargeable event (including death).
• The new regime looks at the 20 tax years immediately prior to the year of the chargeable event, and if individuals have been UK resident for at least 10 of those 20 years they will be treated as long term resident.
• When individuals leave the UK, the IHT tail (the period for which IHT will continue to apply to non-UK assets) will depend on how many of the 20 years prior to the year of departure have been years of UK residence. For 10 to 13 years of residence, the tail will be 3 years, increasing by one year for each additional year of residence to a maximum tail of 10 years for a full 20 years of residence.
• For example, somebody who has been resident for 15 of the previous 20 years will have a five-year tail.
• For individuals who are 20 years old or younger, the test for long term residence is whether they have been UK resident for at least 50% of the tax years since their birth.

Individuals who have left the UK permanently will have certainty that their non-UK assets will be outside the scope of IHT on expiry of the tail, which is often not the case under the current domicile test.

 

Special thanks to Pete Fairchild and the team at Crowe for authoring this article.