Spring Budget 2024: Replacement of the remittance basis from 6 April 2025

Abolition of the Remittance Basis

The remittance basis of taxation will be abolished from 6 April 2025.  By way of summary, the remittance basis currently allows individuals who do not have a UK domicile and have not been resident in the UK for more than 15 of the past 20 tax years to elect to be subject to UK income tax and capital gains tax ('CGT') only on their UK source income and gains as well as those foreign income and gains which they choose to bring (in any form) to the UK.

The new four-year foreign income and gains ('FIG') regime will scrap the concept of domicile for the purposes of determining liability to income tax and CGT.  Instead, taxpayers will be able to elect to limit their exposure to UK income tax and CGT on their non-UK income and gains for four years after becoming UK tax resident, provided they have been non-UK tax resident for the previous 10 years.  The election will need to be made each year, and will be capable of being made for some of those four years but not others.  

Four years after becoming UK tax resident, the option to elect into the regime will be lost.  Access to the regime will therefore not be based on cumulative years of UK tax residence (as the current remittance basis is) – arrival in the UK will start a timer and once four years tax years have elapsed, their option to elect into the FIG regime will be lost.

While the FIG regime will have a much shorter period of availability than the remittance basis, it will operate in a much simpler fashion.  The taxpayer's foreign income and gains will not be subject to tax in the UK even if the taxpayer remits them, by contrast with the current system which has been accused of discouraging inward investment and spending in the UK by wealthy non-domiciliaries by taxing remittances.

It is worth mentioning in passing that the government's use of the term 'FIG' to refer to an individual's foreign income and gains, as well as those of a trust, for the purposes of this new regime appears to differ from how the term 'foreign income and gains' has historically been used by advisors.

Transitional arrangements

Thousands of taxpayers currently opt to be taxed on the remittance basis and the Chancellor has announced three transitional measures intended to soften the impact of the changes:

1. Existing remittance basis users will have the option to rebase the value of capital assets which they hold personally to their values as at 5 April 2019 for disposals which take place on or after 6 April 2025.  This rebasing will not apply to assets held in trust (on which, see further below).
2. Those individuals who have been in the UK for four years, and who will pass from being remittance basis users in the 2024/25 tax year to being taxed on an arising basis in 2025/26, will only pay tax on 50% of their foreign income for the 2025/26 tax year.  This exemption will not apply to chargeable gains.
3. There will be two-year 'Temporary Repatriation Facility' in the 2025/26 and 2026/27 tax years.  This will allow existing remittance basis taxpayers who have accumulated foreign income and gains to remit them to the UK subject to a rate of tax of only 12%.  The UK's additional rate of income tax is 45% and the higher rate of CGT is 20%, and so this facility may present a very attractive route of repatriating funds (and rendering them capable of being spent in the UK without any further charge to income tax or CGT) in the context of the otherwise costly wider changes.

The exact scope and limitations of these transitional arrangements, along with opportunities for pre-regime change planning, should become clearer once draft legislation is published.

Protected trusts

Under the current rules, trusts settled by non-UK domiciled (and non-deemed domiciled) individuals are capable of benefitting from 'protected' trust status.  The effect of this protection, in short, is that income and chargeable gains can roll up in the trust free from UK income tax and CGT, becoming subject to UK tax only once a distribution is made from the trust to a UK tax resident beneficiary.  For deemed domiciled individuals, this was generally acknowledged as the remittance basis 'by the back door'.

The Chancellor's changes will sweep away protected trust status, which will no doubt be a serious concern to the many taxpayers who settled trusts prior to becoming UK deemed domiciled.  Under the new rules, a UK tax resident settlor of a trust who is no longer capable of electing to be taxed under the new FIG regime will apparently be taxed on the trust's income and gains on an arising basis, as is generally the case for settlors of trusts in a purely domestic UK context.  These rules will apply to trusts in which the settlor retains an interest, which includes the ability to benefit themselves, but also the ability for children and grandchildren to benefit in respect of capital gains.

Historic FIG which arose in the trust or its underlying structure before 6 April 2025 will be taxed in line with the current rules, i.e. only when UK tax resident beneficiaries receive a distribution.

For those taxpayers who elect to be taxed under the FIG regime, distributions from offshore trusts will not be subject to UK tax, regardless of where the taxpayer receives them.  A modified 'onward gift rule' will, however, apply (the onward gift rules exist to prevent individuals who are not subject to UK taxation receiving a distribution from offshore trusts and then passing the benefit on within three years to others who would have been subject to UK tax on the distribution had they taken the distribution directly).

Inheritance tax

Closely related to the abolishment of the remittance basis is the government's intention to move to a 'residence-based regime' for inheritance tax ('IHT').

Under the current rules, UK domiciled and deemed domiciled individuals are subject to IHT on their worldwide assets at a rate of 40% when they die.  Non-UK domiciled or deemed domiciled individuals are only subject to IHT on assets which have a UK situs.  Trusts settled by UK domiciled or deemed domiciled individuals or which hold UK situs property are subject to IHT.

The government's intention is to move to a regime under which an individual's assets would be subject to UK tax on the basis of that individual being UK tax resident.  There would be a grace period of 10 years for incoming residents (i.e. seemingly no worldwide IHT exposure if they leave before year 11).  For those leaving, there would be a 10 year 'tail' (i.e. the individual's estate would be subject to IHT if they died within 10 years of ceasing UK tax residence).  The government intends to consult on these changes and no decisions have yet been taken on how the new system would operate.

A point of reassurance for formerly non-domiciled settlors of trusts is that the government has confirmed that the IHT status of property settled on trust before 6 April 2025 will not be affected by any new rules.  There is therefore a window of opportunity for non-domiciled residents to put in place arrangements to shield themselves from the new IHT rules.

Next steps

As noted above, an incoming Labour government may well take a different view on any number of the measures referred to above and the planning landscape remains uncertain.  We await draft legislation implementing today's announcements and Labour's response to it.

If you would like to discuss any of these issues or understand your options to the extent possible at this stage, please do get in touch.