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Non-domiciled and non-resident individuals
Non-UK domiciled individuals – the last year of planning
2024/25 will be the last year for which you must ask the question, am I non-domiciled? An example of a non-domiciled individual is someone born abroad of foreign parents who comes to the UK but does not intend to remain here forever. The concept is complex and the tax implications even more complex, so if you think that you or your spouse may be non-domiciled, detailed professional advice is essential. The rules of domicile are complex but most individuals take their domicile from their father at birth.
Is your spouse or partner ‘non-domiciled’? Most UK residents pay UK tax on their worldwide income and gains. However, UK tax resident non-domiciled individuals (RNDs) only pay tax on what they earn in the UK and on non-UK income and gains that they remit (bring into) the UK. If you transfer your non-UK assets to your non-domiciled spouse and keep the income and gains arising there from abroad, tax can be mitigated.
Advice should also be sought on the effect that claiming non-domicile status may have on non-tax matters such as the devolution of your assets and family law matters such as the adaption of children.
Non-UK domiciled individuals – remittances to fund a UK business
If you are not domiciled in the UK, review your system of remitting funds to the UK for the 2024/25 tax year to ensure that the most tax efficient source of funds are remitted to the UK in priority. It may be advisable to defer remitting until after 5 April 2025.
A system of designated foreign bank accounts should be established so that you can demonstrate that what you remit to the UK is not taxable.
Individuals who remit otherwise taxable foreign funds to the UK to invest in qualifying trading or property companies are able to do so without incurring UK tax under a special relief called Business Investment Relief. Investments can either be by way of loans to, or acquisition of shares in, a company. Qualifying companies are unlisted, commercially trading and can also qualify for the Enterprise Investment Scheme (EIS) and attract further tax breaks, for example 100% Business Property Relief for Inheritance Tax. Property companies can also qualify provided they are carrying on a ‘business’.
The funds must be invested in a qualifying company within 45 days of entering the UK. When the investments are sold the funds must be sent back abroad or reinvested in another qualifying company within 45 days.
Leave the UK
If you are not tax resident in the UK, you should not normally have to pay UK Income Tax on your income that arises outside the UK or Capital Gains Tax on assets sold. However, to establish yourself as a non-resident in the UK, you will need to meet the various requirements of the UK’s Statutory Residence Test (SRT).
The application of these rules may differ based on your circumstances. You may also need to remain non-UK resident for five full tax years in order to escape the UK’s Temporary Non-Residence (TNR) rules to avoid paying tax on income and gains arising during the first 5 years of tax non-residence as if realised in the year of return.
You should also understand the local tax laws in your country of tax residence.
Stay non-UK resident
If you have been outside the UK for some time and established yourself as a non-resident in the UK, it is vital that you keep a careful watch on the number of days you have stayed here and your ties to the UK.
HMRC counts the number of midnights that a visitor spends in the UK as days in the UK for these purposes. You can be a UK resident because you have visited the UK for as little as 16 days. The rules for those who have recently left the UK are different from than those for individuals who have arrived here for the first time. The rules take into account the number of days you spend in the UK and the number of ‘ties’ you have with the UK in a complex matrix to establish your residence status.
Tax Planning for New UK Residents
Tax planning for new UK residents has undergone its greatest change in 200 years. Domicile will no longer be a connecting factor to the UK’s tax system except in so far as interpreting the UK’s estates tax treaties. Instead, residence on a year-by-year basis will be the only connecting status of any significance, and for Inheritance Tax a new definition of Long-Term Residence (LTR) will be the deciding factor.
Going forwards there will be some winners as well as losers. A British expat who has been abroad for 10 years and returns to the UK will not be subject to UK tax on Foreign Income and Gain (FIG) for the first 4 years of UK residence so long as he or she returns after 5 April 2025. Previously they would have fallen into full UK tax immediately. Likewise an individual who came to the UK and could not demonstrate a desire to leave the UK and not live here “permanently or indefinitely”. Intention will not be relevant to UK tax going forwards. So if you fit into one of these categories you should consider whether to return to the UK before or after 5 April 2025.
One word of warning! To be eligible for 4 years of tax-free Foreign Income and Gains (FIG) you must have not been resident in the UK for the past 10 continuous years. So if you have been non-resident for only 9 consider deferring your return until after 5 April 2025 rather than before. If you return before 5 April you will not be entitled to any tax breaks, including no Overseas Workday Relief (OWR) – a relief for those coming to the UK and spending time working abroad during their first 4 years of UK residence. If you return after 5 April you will have been non-resident for 10 continuous years and will receive four years of tax-free FIG and OWR.
Prime planning techniques for individuals include:
Emigration – best before 5 April 2025 to minimise the period of LTR status
Delaying remitting pre 2025 FIG stored abroad until the 12% rate of the Temporary Repatriation Facility (TRF) becomes available after 5 April 2025
Using the period between now and 5 April to uplift the base cost of assets – for example by a transfer to an offshore company
Using the period between now and 5 April to transfer assets to a company or bond so as to be able to take advantage of a tax-free roll up within the structure post 2025.
Which of these are advisable and which are even available depends on your current domicile and residence status, the nature of the assets, your plans, and where you plan to live in the future. Needless to say, with so many variables, it is advisable to seek detailed professional help before any irrevocable action is taken.
Timing Your Remittances
Foreign Income and Gains that arise before 5 April 2025 will be taxed at the normal rates if remitted before then, 24% for gains and 45% for income. However, if pre 2025 FIG is remitted after 5 April 2025 a reduced tax will apply. This is known as the Temporary Repatriation Facility, or TRF for short. The rates will be:
2025/26
2026/27
2027/28
After that, pre-2025 FIG that has escaped UK tax by not being remitted will be taxed at normal rates if brought into the UK, at the rates that will apply at that time, but there is an exception. A trust distribution made after 5 April 2025 which can be “matched” with pre 2025 trust FIG can benefit from the TRF. This could be a useful mechanism for extracting value from a trust tax-efficiently.
Rebasing of Gains
The October 2024 Budget proposed that when capital gains are realised after 5 April 2025 rebasing to 5 April 2017 will be available. However, there are conditions to be met. The individual must be non-domiciled, have claimed the remittance basis and the asset must have been non-UK sited for a defined period. If you have not claimed the remittance basis in recent years, consider whether to claim it in 2024/25 so as to be eligible for rebasing your non-UK sited assets to their 5th April 2017 values.
Inheritance Tax
Major changes to the UK’s system of taxing gifts and transfers on death are proposed. This is especially true in the area of individuals and trusts with an international connection.
Losing LTR Status
In general, after 5 April 2025, you will remain Long Term Resident (LTR) if you have been resident in the UK for more than 10 out of the last 20 years. However, if you leave the UK before that date your Inheritance Tax (IHT) “tail” may only be 3 years. So, if you are now UK resident and leave before 5 April 2025 you will cease to be LTR on 6 April 2028.
If you are UK LTR you will be liable to UK tax on lifetime gifts and bequests on a global basis. If you are not LTR you will only be liable to IHT on transfers of UK assets. In addition the tax of trusts you may have settled will be significantly affected by your LTR status. If you are currently UK resident then leaving the UK will only be effective in ceasing to be LTR if you can split the UK tax year.
You may decide to move abroad to lessen the burden of IHT on the estate you will leave to your heirs. This is after all 40%, and from 2027 will include your undrawn pension. If so, you may wish to consider leaving before 5 April 2025 rather than after.
Gaining LTR Status
If you are about to gain LTR status but remain non-domiciled, consider making gifts between now and 5 April 2025.
Spouses
In general there is no IHT tax, reporting or implications if assets are transferred between spouses, except on death where the surviving spouse gets a tax-free uplift to market value on death. The current domicile rules limit this freedom where the transfer is from a UK domiciled spouse to a non-domiciled spouse. However if this is relevant for 2024/25 an election can be entered by the non-domiciled spouse to be deemed to UK domiciled. A similar limit is imposed on transfers from a LTR spouse to a non-LTR spouse, and the non-LTR spouse can make a similar election to be treated as LTR, with similar implications.
Double Tax Treaties
The UK has a number of double tax treaties with other countries that cover tax imposed on death. Four of these treaties date back to before the introduction of Capital Transfer Tax in 1974 and are especially beneficial. They are the treaties with India, Pakistan, France and Italy. These four treaties only cover transfers of assets on death. If you think that you may be domiciled in these four countries, or with the other countries with which the UK has concluded an estates treaty, then there may be steps that can be taken to mitigate UK tax on death, or even during your lifetime. For example, strengthening your claim to be domiciled in a country by establishing visible connections there to evince your intention to leave the UK and go there at some point in time.
Changes to Trusts
The October 2024 Budget proposals will have a significant impact on the UK taxation of trusts.
Firstly, Protected Trust status, introduced as recently as 2017, which allowed income and gains to roll up free of UK tax within a trust structure settled by a deemed domiciled settlor, will be abolished with effect from 6 April 2025. After that, trust income and gains will be assessed on a UK-resident settlor irrespective of whether they are distributed.
Before 5 April 2025 settlors and trustees should consider the following steps:
Emigration - in some cases this will need to be for a period of 5 complete tax years to avoid the UK’s Temporary Non-Residence Rules (the TNR Rules)
Exclusion – if the settlor and spouse are excluded that may be sufficient to prevent the trust being transparent for Income Tax purposes. It is unlikely, taken on its own, to be sufficient to prevent a flow-through of capital gains. So maybe the trustees will also need to start investing with a view to realising income, rather than investing in real estate or quoted shares.
Blockers – if the trust assets are transferred, possibly on loan account, to an entity owned by the trust, for example a UK resident company or an Offshore Bond, there will not be a flow through of income and gains.
Receive trust distributions before 5 April 2025 and remit afterwards to claim the 12% tax rate under the TRF.
Appoint the trust to a non-UK resident person before 5 April 2025 – Beware that there are no reciprocal arrangements.
Onshore the trust by appointing UK resident trustees – this may be most relevant to keep a CGT rate of only 24%. The “parking charge” applied to gains kept in an offshore trust increases this rate to an effective 38.4% after 6 years.
Consider whether The Motive Tests could apply – HMRC have said that they are looking at these tests and may alter the tests themselves or the reporting of test-protected trust income and gains.
This is a complex area and requires careful thought as to what the settlor and beneficiaries desire to achieve, the best way to achieve it and the current and future status of the beneficiaries, in particular their residence status.
Exit Charges
The October 2024 Budget has proposed a one-off exit charge when a settlor ceases to be LTR after 5 April 2025. This will be applied at a rate of between 0-6% on the market value of the assets at that time. It will be a liability of the trustees. If there is any flexibility, that is another reason for a settlor to leave the UK before 5 April rather than after.
Bad news for new trusts
A new settlor interested trust , that is a trust from which the settlor can benefit , established after 29th October 2024 , will not only be liable to a charge of 6% of the value of its assets every 10 years (which applies to every discretionary trust) but its assets will also be taxed at 40% on the death of the settlor, as if he or she owned them directly. This IHT liability on death falls on the deceased’s estate.