Introduction
The first Budget of the Labour government, as anticipated, brought fundamental changes to the way that internationally mobile individuals will be taxed in the UK from the financial year starting on 6 April 2025.
The financial year 2024/25 is the final year in which remittance basis claims can be made. However, it is essential to understand that the old remittance basis rules will still remain relevant for many years, particularly for HMRC's ongoing enquiries and investigations into tax years before 2025/26, as well as for remittances made after 5 April 2025. Such remittances, if derived from previously unremitted foreign income or gains, will continue to be taxable under either the standard rules or the newly introduced Temporary Repatriation Facility (TRF) provisions.
Overview of the New Foreign Income and Gains (FIG) Regime
From 6 April 2025, all UK residents will be taxed on the arising basis of taxation.
A new regime for FIG will be available to individuals for their first four years of UK tax residence after a period of 10 years non-residence.
The four-year FIG regime will only be available for individuals that are both UK resident and are within their first four years of UK tax residence, following a period of at least ten consecutive years of non-UK residence. This includes UK nationals and UK domiciled individuals who may not have previously had access to, or used, the remittance basis.
It offers three distinct types of relief:
- Foreign Income Relief: Relief for qualifying foreign income.
- Foreign Employment Income Relief: This relief applies to foreign employment income, previously covered under Overseas Workday Relief (OWR).
- Foreign Gains Relief: Relief on capital gains derived from foreign assets.
While the FIG regime provides relief for up to four years, practical issues may arise that limit the effective use of the entire relief period. For example, individuals who move to the UK partway through a tax year might find that their first year is classified as a split year, potentially affecting the availability and duration of FIG relief.
These issues underscore the importance of careful planning, as failure to align residency dates properly could lead to the loss of FIG benefits. Strategic timing of residency status, income generation, and claims can make a substantial difference in the overall tax exposure faced by non-UK domiciled individuals during the transition to the arising basis.
Eligible Foreign Income and Gains for Relief
Under the FIG regime, relief is provided for foreign income and gains that arise or accrue during the qualifying years. This includes foreign income that meets specific criteria and certain capital gains. However, it is important to note that remittances of income or gains from periods before the qualifying years do not qualify for FIG relief. These amounts may still be taxable if remitted to the UK but can potentially benefit from the Temporary Repatriation Facility (TRF).
Foreign Income Relief: Relief is available for qualifying foreign income, such as investment or rental income generated outside the UK. However, not all income qualifies, and certain types of income, including income from offshore life insurance policies and investment bonds, are explicitly excluded from relief. Similarly, profits from the disposal of land deemed to be trading profits, income of entertainers/sports performers and some income of settlements are also excluded.
Foreign Employment Income Relief: This relief provides continued benefits for non-UK sourced employment income, subject to specific limitations. The relief is capped at the lower of 30% of the qualifying foreign employment income or £300,000 per tax year. Duties must be performed entirely outside the UK for the income to qualify, and the determination of whether duties are performed in or out of the UK is made on a just and reasonable basis.
Foreign Gains Relief: Relief is also available on capital gains derived from non-UK assets and even in this case, like for Foreign Income, to benefit from the relief it will be necessary to disclose in the tax return, all gains realised in a year and then claim the relief.
The relief applies to capital gains accruing directly to the individual and to gains attributed under the offshore anti-avoidance provisions while any entity classified as UK land-rich.
Transitional Provisions
There are two key transitional measures that have been introduced:
- Capital Gains Tax (CGT) Rebasing for Assets Directly Held by Qualifying Individuals
- The Temporary Repatriation Facility (TRF)
Capital Gains Tax Rebasing of Assets
Current and past remittance basis users will, for disposals on or after 6 April 2025, be entitled to rebase a personally held foreign asset for CGT purposes to its market value at 5 April 2017.
Eligibility Criteria:
- The individual must be domiciled outside of UK jurisdictions under common law up to the end of the 2024/25 tax year.
- The individual must not have been domiciled (or deemed domiciled) in the UK in any tax year before 2025/26.
- The asset must not have been located in the UK at any time between 6 March 2024 and 5 April 2025.
Temporary Repatriation Facility (TRF)
The Temporary Repatriation Facility (TRF) is a measure designed to provide an incentive for individuals to remit previously unremitted foreign income, employment income, and gains at reduced tax rates.
The TRF is available for a limited period of three tax years, from 2025/26 to 2027/28, and offers tax rates of 12% for the first two years and 15% in the third year.
The TRF applies to foreign income, employment income, and gains that were accrued before 6 April 2025 but remain unremitted. It offers a strategic opportunity to bring funds into the UK while minimizing the tax cost.
To utilize the TRF, individuals must make an election on their self-assessment tax return for the relevant tax year.
Benefits of the TRF: By electing to use the TRF, individuals can remit income and gains at reduced tax rates, providing a significant saving compared to the standard arising basis taxation. Additionally, the TRF includes provisions for mixed funds, allowing individuals to designate specific amounts without needing to trace the origins of the income or gains within the mixed fund.
Strategic Planning for TRF: The timing of elections and the amount designated under the TRF are critical considerations for maximizing the benefits. Given the graduated tax rates of 12% for the first two years and 15% in the third year, electing larger amounts in the earlier years can provide substantial tax savings.
Mixed Fund Rules: The TRF also includes special provisions for mixed funds, which are accounts or portfolios containing different types of income and gains, such as capital gains, dividends, and other earnings. Under the TRF, individuals can designate an entire mixed fund or part of it for the facility without having to distinguish between different income components. This makes it significantly easier to manage complex offshore accounts and simplifies the process of bringing these funds into the UK.
Trust Considerations for TRF: The TRF provisions also apply to settlors and beneficiaries of non-UK resident trusts. This means that benefits or capital payments received from the trust during the TRF period can be matched against foreign income or gains accumulated before 6 April 2025, thereby reducing the tax burden on these remittances.
Compliance and Documentation for TRF: As with the FIG regime, compliance is critical when utilizing the TRF. Taxpayers must ensure that all elections are made accurately and on time, and that the appropriate documentation is maintained. This includes records of the amounts designated under the TRF, proof of foreign income and gains, and any relevant trust documentation. Failure to comply with these requirements can result in the disallowance of the TRF election, leading to additional tax liabilities and penalties.
Interaction with FIG Relief: Individuals who qualify for FIG relief may also be eligible for the TRF, allowing them to benefit from both transitional provisions. However, careful coordination is needed to ensure that the elections for FIG and TRF are aligned and that the individual maximizes the available reliefs while remaining compliant with HMRC requirements.
Conclusion and Strategic Considerations
These changes to the UK tax system represent a significant shift for non-UK domiciled individuals. As the remittance basis comes to an end, there is a need for careful reassessment of existing tax planning strategies to align with the new rules. The FIG regime offers some.