Destination UK: Tax regime for new residents from 6 April 2025

In the Budget on the 30 October 2024, the UK government announced a new tax regime for people moving to the UK, one based exclusively on residence, rather than the historic concept of 'domicile'.  

Currently, individuals who are resident but not domiciled in the UK can claim the 'remittance basis' of taxation, which exempts them from tax on foreign income and gains that are kept outside of the country.  In addition, so-called 'non-doms' are not subject to inheritance tax on assets outside the UK.

From 6 April 2025, the concept of 'domicile' will largely cease to be relevant for tax purposes.  Instead of being taxed based on where they intend to live on a permanent or indefinite basis (domicile), people will be taxed based on where they actually live (residence).  This objective test will bring much-needed clarity to an individual's tax status. There will be two residence-based regimes for new residents, one for income tax and capital gains tax purposes and one for inheritance tax purposes. 

Becoming a UK resident

The Statutory Residence Test

Residence for UK tax purposes is determined by the Statutory Residence Test. This test looks at the number of days an individual spends in the UK in conjunction with several specific connecting factors.  Residence is assessed for each UK tax year.  The tax year runs from 6 April in one year to 5 April the following year. Tax residence generally begins on 6 April of the year in which an individual satisfies the test for being resident, although in some cases it is possible to 'split' a tax year into non-resident and resident periods. It is important for anyone considering a move to the UK to take advice well in advance, so that they are aware of and can plan when they will become tax resident.

Immigration

In the UK, the immigration regime is separate to taxation. Non-UK nationals moving to the UK generally need to apply for a visa, with various options available depending on individual circumstances.  This is something our immigration team regularly advises on.

The new FIG regime for income tax and capital gains tax

How does the UK tax income and gains?

The UK taxes income and capital gains separately:

• Income tax is charged at graduated rates.  Most forms of income are taxed at up to 45%.  There is a tax-free personal allowance of £12,570.
• Most capital gains are taxed at a rate of 24%.  There is a tax-free annual exemption of £3,000.

A person who is tax resident in the UK is generally subject to income tax on their worldwide income and capital gains tax on their worldwide gains. However, from 6 April 2025, individuals who are eligible can claim relief for a wide range of foreign (i.e. non-UK) income and gains (‘FIG’).  This is commonly referred to as the ‘FIG regime’.  

Who qualifies for the FIG regime?

Individuals who have lived outside the UK for at least 10 tax years before becoming UK resident.  It doesn't matter if they were born in the UK and are a British citizen.

What are the tax benefits of the FIG regime?

For the first four tax years of UK residence, individuals can elect not to pay UK tax on some or all their FIG.  Unlike the remittance basis, there is no tax if FIG are brought into the UK.  Furthermore, during the four-year period, there is relief on earnings for employment duties performed outside the UK, regardless of whether these earnings are brought to the UK.  This is subject to a cap of the lower of 30% of the employment income or £300,000 per tax year. The FIG on which relief is claimed need to be quantified and reported in the taxpayer's tax return for the year.  Relief does not need to be claimed every year or for all FIG. Claiming the relief will cause an individual to lose their income tax allowance and capital gains tax annual exemption for the year.  

What if I temporarily leave the UK within my first four years – can I come back and make use of the FIG regime?

If an individual leaves the UK temporarily during their first four years of residence, on returning to the UK they will only be able to claim relief for any years that remain, counting from their first year of UK residence. For example, after being UK resident in year 1, if someone becomes non-UK resident in years 2 and 3 and returns to the UK in year 4, they will be eligible to claim relief in year 4.

Individuals who have a period of non-UK residence need to be wary of the temporary non-residence rules, which can tax certain capital gains and income arising during the period of absence following a return to the UK.

What about existing UK residents, can they claim the FIG regime?

Individuals who became UK tax resident between 6 April 2022 and 6 April 2025 may be able to use the FIG regime, counting from their first tax year of UK residence.  However, individuals who became UK tax resident before 6 April 2022 or who do not satisfy the 10 years of non-UK residence test will not qualify for the FIG regime.  They will be subject to UK tax on their worldwide income and gains from 6 April 2025. 

What happens after four years of UK residence? 

Once the four-year period ends - or if the relief is not claimed - individuals who are UK resident will be taxed on their worldwide income and gains.  If they pay tax in other countries, they will need to rely on tax treaties to avoid double taxation.  The UK has anti-avoidance rules that can tax UK residents on the income and gains arising in offshore structures, such as companies and trusts.  The FIG regime can protect against these charges, but it is important for individuals to plan for when the relief is no longer available.

Beneficiaries of Trusts

Beneficiaries of trusts are not materially affected by the changes announced in the Budget.  However, UK resident beneficiaries who are eligible for the FIG regime can claim relief from any income tax or capital gains tax resulting from a distribution.

Transitional Provisions

Transitional rules apply to individuals who became UK resident before 6 April 2025 and claimed the remittance basis of taxation.  

These rules will allow former remittance basis taxpayers to:

• rebase foreign assets that will be subject to capital gains tax once the new regime comes into effect; and
• bring pre-6 April 2025 FIG to the UK at a significantly reduced rate of tax.  With planning, this can also be used for trust distributions. 

Any former remittance basis taxpayers should take advice on how to make optimal use of the transitional provisions.  We discuss this in our article 'UK Autumn Budget 2024 - What should you be thinking about now?'.

The new regime for inheritance tax

What is inheritance tax?

Inheritance tax is an 'estate tax' that is payable on an individual's death at a rate of 40%.  Inheritance tax can also apply as a 'gift tax' payable during an individual's lifetime at 20%.  However, most lifetime gifts are initially free from inheritance tax and only become taxable if the donor dies within seven years. Inheritance tax is generally paid by the donor (or the donor’s estate) as opposed to the recipient. The tax applies to most assets situated in the UK, regardless of the status of the owner. Under the current rules, liability to inheritance tax on assets outside of the UK is determined by the owner’s domicile status.  However, this will change to a residence-based system from 6 April 2025. There are several reliefs from inheritance tax, for example on business and agricultural property. In most cases transfers between spouses are exempt, although there are important exceptions.

10-year regime applicable to foreign assets held personally

From 6 April 2025, individuals who have been resident in the UK for at least 10 out of the previous 20 tax years will become 'long-term residents’ and become subject to UK inheritance tax on assets situated both in the UK and abroad.  Everyone is subject to inheritance tax on UK assets, regardless of residence status. This effectively means that an individual moving to the UK has a 10-year period during which foreign assets remain outside the scope of inheritance tax. 

*NR = non-UK resident

UKR = UK resident

IHT = inheritance tax

If an individual becomes a long-term resident and subsequently leaves the UK, it will take between 3 and 10 years for them to fall outside the scope of inheritance tax on worldwide assets, depending on how long the individual has been UK resident:

An individual who leaves the UK before becoming a long-term resident will not become subject to inheritance tax on non-UK assets.

Foreign assets held in a trust

Once an individual becomes a long-term resident, any trusts settled by that individual will become subject to a specific inheritance tax regime entailing 10-yearly and exit charges at up to 6%.  In some cases, a trust can also be subject to tax at 40% when the settlor dies. 

If the settlor ceases to be subject to inheritance tax, the foreign property in any trust he settled will also fall outside of the scope of inheritance tax.  This will trigger an exit charge. The long-term residence status of the settlor on death will determine whether the trust remains subject to inheritance tax going forward. 

Trust-like arrangements

The inheritance tax regime applicable to trusts will also apply to entities or arrangements which are not recognised in the UK but are characterised as trusts for tax purposes, for example certain foundations.  Therefore, it is important for anyone who has settled a trust or has a trust-like arrangement to take advice before becoming tax resident.