UK Residence and Tax : The new rules

UK Residence and Tax : The new rules

Welcome to our latest blog post on the upcoming changes to UK residence and tax rules, authored by Nicola Goldsmith. Nicola is an expert in tax law with years of experience helping individuals navigate the complexities of UK tax regulations. In this article, she breaks down the new non-UK domicile rules set to take effect from 6 April 2025, providing valuable insights and practical advice for those affected.

The non-UK domicile rules are changing from 6 April 2025, and the position will depend on how long the individual has been non-UK resident.  The starting position is that all UK residents are taxable on their worldwide income and gains on an arising basis.  This is all based on draft legislation at present, so may change.

As the non-UK domicile rules are poised to change, it’s crucial to understand how these updates might impact your tax obligations. Whether you’re a UK national returning after a long absence or a new resident, staying informed is key. Don’t wait until the last minute—start planning now to ensure you’re fully prepared. If you have any questions or need personalised advice, reach out to Nicola Goldsmith for expert guidance tailored to your specific situation.

Those who have not been resident in any of the last 10 UK tax years

For those becoming UK resident who have not been UK resident in any of the previous 10 years, their foreign income and gains will not be taxable in the UK for their first four years of UK tax residence.  UK income and gains will be taxable on an arising basis.  If an individual leaves the UK for at least 10 UK tax years, this regime will be reset. These rules apply to all individuals who qualify, including to UK nationals returning after an absence in excess of 10 UK tax years.

This regime will need to be claimed on the UK tax return before 31 January in the second tax year after the relevant year to which the claim relates.  For example, the first year for which a claim is possible is 2025/26, and the claim needs to be made by 31 January 2028.  The amount of income and gains for which relief is being claimed must be quantified and specified in the return. 

Claims for relief can be made on a year-by-year and source-by-source basis, so need not be claimed for all four years or for both income and gains, or for all income or gains. However, if relief is claimed in any year, any foreign losses in the year will not be claimable (whether income or capital losses, as appropriate depending on the relief claimed). 

Both the personal allowance and annual exemption for CGT will be lost if any claim for relief is made (and where Overseas Workday Relief is claimed).

Split years of residence count as a full year for this purpose, so if the first year in which the individual is resident is a split year, this will still count as year 1.  If the individual leaves the UK for a year during the four-year period, they can still claim for the remaining years, up to the fourth year after the initial arrival.  So, they could claim for the year of arrival and the following year, leave the UK for year 3 and claim again for year 4.  However, no claim can be made in year 5, as this would not fall within a period of four years following a 10-year period of non-residence.

As eligibility relies on residence, post-April 2025, if someone is still within their first four years of residence after moving here, and they were non-UK resident for 10 years prior to moving, they can claim this relief.  So, if someone was non-UK resident in the 10 years between 2012/13 and 2021/22 and became resident in the UK in 2022/23, they can still use this regime in 2025/26, as this is still within their first four years in the UK.

If an individual had previously claimed the remittance basis and then been absent for 10 years, this regime only covers the foreign income and gains arising in the initial four years of residence after that absence, not remittances of previously unremitted foreign income and gains from previous periods of residence in the UK.  These are still covered by the remittance basis and are taxed on remittance to the UK.  However, they can use the TRF (see below) if this is available to them, to cover such previously unremitted foreign income and gains.

Not all foreign income qualifies for this – for example, chargeable event gains on offshore life assurance policies remain taxable on the arising basis.

If a UK resident who qualifies for this regime receives a foreign income distribution from a settlement, that distribution may qualify for the regime.  If the distribution is from an offshore discretionary trust, it will be treated as untaxed income, even where the trustees have paid tax on it, so if the individual makes a claim for relief, full relief will be available.

If the distribution is from an interest in possession trust (whether a UK or offshore trust), and the individual is chargeable on their share of the trust income, they can claim this relief in respect of the foreign income.  This also applies where a settlor is taxed under the Transfer of Assets Abroad rules. Where relief is claimed against trust foreign income and gains, these are not treated as ‘matched’ with the foreign income and gains for matching purposes so will not reduce the relevant income or stockpiled gains pools.  Therefore, these can still be taxed in the hands of the beneficiaries.

Those who have been UK resident in any of the previous 10 UK tax years

Those who do not qualify for the new regime will be liable to UK tax on their foreign income and gains on the arising basis from 6 April 2025.  UK income and gains will be taxed on an arising basis.  Unremitted foreign income and gains arising prior to that date will remain taxable in the UK if they are remitted to the UK.

A transitional relief called the Temporary Repatriation Facility (TRF) is being introduced, however.  Under this, such individuals can elect to designate foreign income and gains arising prior to 6 April 2025 for three tax years from 6 April 2025 at a special reduced rate if they are resident in the relevant year.  The rates are 12% in the 2025/26 and 2026/27 tax years and 15% in the 2027/28 tax year.  Whilst the election must be made and the funds designated and the tax paid within the TRF window, the actual remittance of the designated amounts on which the tax has been paid can be remitted at any point (even some years in the future), and does not need to be remitted during the TRF window.  There is no need to split sources where the remittance will be from a mixed fund.

No foreign tax relief will be available on these amounts, as they will be treated as remitted net of tax.  Where a TRF charge is paid with designated funds, no further charge will arise on that income/gain.  If the TRF is paid out of undesignated funds, this will be a chargeable remittance, even if the amount is paid directly to HMRC (unlike the current remittance basis charge regime). 

The TRF will also be available to UK residents who are former remittance basis users who receive a benefit from an offshore trust structure within those same three years.  That benefit must be matched with foreign income and gains of the trust that arose prior to 6 April 2025.

Again, this will need to be claimed in the self-assessment tax return and quantified for the relevant year.  The same deadline applies for this election as for the new regime for foreign income and gains, as above.

In addition, such individuals will be able to rebase their personally-held non-UK assets to the market value as at 6 April 2017 for capital gains tax purposes.  The asset must have not been in the UK between 6 April 2024 and 5 April 2025.

UK inheritance tax

For over two hundred years, remittance has been the connection factor to UK inheritance tax.  However, from 6 April 2025, this will move to a residence-based system.  From that date, when an inheritance tax event occurs (gift or death), non-UK assets will be brought into account for UK inheritance tax if the individual has been resident in the UK for at least 10 out of the last 20 years immediately preceding the tax year in which the event occurs.

UK assets will always remain subject to UK inheritance tax, as at present, regardless of the residence position of the owner.

On any departure from the UK, the worldwide assets remain within the UK tax net for a period, depending on how long the individual was UK resident as follows:

Trusts

Foreign income and gains arising within settlor-interested trusts will be taxed on the settlor from 6 April 2025, although those settlors who qualify for the new regime may claim the relief.  The trust protections will no longer apply. Distributions are taxed as noted above, but where the relief is claimed, this will not reduce the relevant income or stockpiled gains pools. 

Settlors will be able to allocate their basic rate band against gains in any way they choose, so the gains attributable to a settlor will not form the highest part on which they are chargeable to CGT.  Personal losses will be able to be offset against gains attributed to trust beneficiaries.  Where a foreign loss election is in place in 2024 and 2025, the loss can be carried forward as allowable losses if not utilised by 5 April 2025.

In respect of rebasing to 2008 for non-resident trusts, given the introduction of taxation of gains on UK resident settlors on an arising basis, where a valid rebasing claim was made by the trustees, this will continue.

From 6 April 2025, the UK inheritance tax position of a trust will not be determined by the domicile position of the settlor, but by the residence position of the settlor.  So, if the settlor is not a long-term UK resident, foreign trust assets remain excluded.  Once they become a long-term UK resident, the foreign trust assets will fall into the UK inheritance tax net as per the table above. This will apply even if the trust was settled when the settlor was not a long-term resident of the UK. 

If the settlor is not a long-term resident at settlement, no entry charge will apply; if they are long-term resident at the tenth anniversary of the trust, then the periodic charge will apply on worldwide assets, but will reflect the amount of time that the property has been relevant property, so will be time-apportioned.  Where the settlor ceases to be long-term resident, an exit charge applies, but this will depend on when the IHT ‘tail’ expires, not when they leave the UK.  Where the settlor is deceased, foreign assets of the trust will only be subject to UK inheritance tax if the deceased dies after 6 April 2025 and was a long-term UK resident at the date of death (more than 10 out of the 20 years preceding the relevant year, and subject to the IHT tail). 

Qualifying Interest In Possession Trusts will only fall outside the UK inheritance tax net if both the settlor and life tenant are not long-term UK resident.  If the settlement comprised excluded property prior to 30 October, these will not be taxed when the QIIP comes to an end or on the death of the QIIP beneficiary.  UK assets comprised in the settlement will not attract this treatment, even if these are subsequently sold and the funds moved into foreign assets.

Overseas Workday Relief (OWR)

From 6 April 2025, this will depend on residence.  If the individual is entitled to the new four-year regime, they can make an OWR election, so it will now apply for up to four years.  No changes are made to the types of income to which the relief arises.  Employment income can be relieved if it relates to duties performed outside the UK during a qualifying year for which an OWR election has been made and the income arises out of an employment which is wholly or partly performed outside the UK.

The election will need to be made on the self-assessment tax return, and the income being relieved needs to be quantified on the return. OWR will be capped at the lower of £300,000 or 30% of the qualifying employment income per year.

The income can be paid into a UK or overseas bank account, and no charge will apply to remit the income to the UK if it was received in n overseas bank account.

If OWR is claimed, the Personals Allowance and Annual Exemptions will be lost for that tax year, as well as the ability to claim foreign losses for that tax year.  It is possible to claim on a year-by-year basis.  Chargeable general earnings for the year will be taxed on receipt going forwards.

Those straddling the change of regime and who are entitled to use the new regime from 6 April 2025, can have four years of OWR, with the new rules applying to the years after 6 April 2025.

Navigating the complexities of the new UK residence and tax rules can be challenging, but you don’t have to do it alone. Stay ahead of the changes and ensure you’re making the most of the available reliefs and exemptions.

For personalised advice and to discuss your specific circumstances, contact us today. Let our expertise guide you through these transitions smoothly and confidently.  We’re ready to talk tax with you.

Get in touch with Nicola today.