New UK Residence-Based Rules Mean Taxpayers Must Plan Ahead

The latest UK budget finally provided certainty over the new residence-based tax system to be introduced from April 6, 2025. It creates a planning window between now and April 5, 2025 for taxpayers to determine whether to accelerate transactions to shelter foreign income and capital gains from UK tax while they still can.

Alternatively, taxpayers could postpone certain actions to benefit from the new rules and the transitional opportunities that could, for example, facilitate remittances to the UK at a lower tax cost.

The residence-based foreign income and gains, or FIG, system will be introduced from April 6, 2025, and ends the remittance basis that is now available for non-UK domiciled individuals, or non-doms. Starting April 6, individuals will pay tax on UK source income and gains but not on foreign income and gains, regardless of whether a taxpayer remits them.

The FIG system will be available to individuals during their first four years of UK residence after a period of 10 consecutive years of non-UK residence. This isn’t limited to non-doms—it includes UK domiciled individuals who now are unable to benefit from the remittance basis. This opens tax planning opportunities for some UK nationals living abroad and considering returning.

The four-year FIG window includes any tax year where an individual is treated as UK resident under the statutory residence test. A split year will still count as a full year of UK residence. To maximize the benefits, affected taxpayers must think carefully about the timing of their arrival in the UK.

Existing tax residents who have been in the UK less than four years on April 6, 2025 can still benefit from the FIG system until the end of their fourth year of residence. Where there is control over timing, these individuals may prefer to delay realizing foreign income or gains until after April 6. Under the FIG system, taxpayers can remit income and gains to the UK at no tax cost, which isn’t the case under the current remittance basis.

Individuals who don’t qualify for the FIG system should maximize the benefits of the remittance basis while they can. They may want to accelerate transactions before April 5, 2025—such as by taking dividends from non-UK personal companies or disposing of foreign assets—while there’s still time to shelter these from UK tax.

Tax “wrapper” products (that grow tax free) also may be an effective way to minimize exposure to UK tax going forward—for example, an offshore life insurance bond. A family investment company also could create tax savings (subject to corporation tax at a lower rate) and provide more control over a tax event.

Certain individuals who remain neither domiciled nor who are deemed domiciled in the UK on April 5, 2025 will be able to rebase personally-held foreign assets to their market value as of April 5, 2017. This measure could reduce the capital gains tax arising from selling an asset after April 5, 2025.

An individual must have claimed the remittance basis for at least one tax year between April 6, 2017 and April 5, 2025 to qualify. To secure rebasing, non-doms who haven’t made a claim for the remittance basis may want to do so soon.

A three-year temporary repatriation facility will commence on April 6, 2025 to encourage non-doms to bring their wealth to the UK. This will allow such income and/or gains to be designated and remitted at a flat rate of UK tax.

Designations made between April 6, 2025 and April 5, 2027 will be charged a 12% tax rate, while designations for the year ending April 5, 2028 will be subject to a 15% rate.

Individuals should consider their cash requirements in the UK. If they need to remit pre-April 5, 2025 foreign income and gains to the UK, they should postpone this until after April 6 to benefit from the temporary repatriation facility. If they can access the remittance basis for 2024-25, they also may want to sell foreign assets before April 5 to crystallize gains that then can benefit from the temporary repatriation facility if remitted after April 6, 2025.

From April 6, 2025 inheritance tax also will move to a residence-based rather than domicile-based system. Long-term residents—those who have been UK residents for at least 10 out of the last 20 tax years—will be subject to inheritance tax on their worldwide estate. If a long-term resident leaves the UK, they could remain exposed to inheritance tax on their worldwide estate for up to the following 10 tax years.

The government have in part acknowledged the difficulties of this position by allowing for a shortening of the 10-year tail between three and 10 years, depending on the length of the period of UK residence.

The suggestion of a 10-year tail was announced in the spring budget, and some non-doms will have planned to cease being a UK resident before April 5, 2025 in hopes of avoiding it. It’s now clear that, for individuals who are non-UK resident for 2025-26 onward, the tail may be limited to three years or not exist at all.

The long-term residence test is the same regardless of an individual’s domicile. This means “Brits abroad” stand to be the inadvertent winners from the new rules. With careful planning, this could provide significant inheritance tax savings for these individuals.

The new rules for offshore trusts are complex and outside the scope of this article. Taxpayers should identify any interests in offshore trusts and should obtain advice on them before April 2025.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alice Pearson is partner at Mercer & Hole in the UK.

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