Techzone

Since 6 April 2025 domicile is no longer a factor in how someone is taxed in the UK. The new residence only based tax regime may have consequences for certain clients.

Many advice firms will have clients who have moved to the UK from overseas and will now require help understanding how these changes affect them and their existing financial plans.

What's changed?

The domicile rules have been replaced with residence based criteria to determine an individual's liability to UK income tax, capital gains tax and inheritance tax.

The majority of adviser clients will always be subject to UK tax and will not be impacted by the changes. However, for those with clients who have recently arrived in the UK or may be planning to leave the UK in the future, it's important to understand how these changes may affect them.

Income tax and capital gains

UK residents are taxed on the arising basis. This means all worldwide income and gains are taxable in the UK as they arise. From 6 April the remittance basis of taxation, where non-domiciled individuals could elect to only be taxed on UK income and gains plus any overseas income and gains actually remitted to the UK, will cease.

However, a new Foreign Income and Gains (FIG) regime will now apply to those newly arrived in the UK provided they haven't been UK resident at any point in the last 10 years. These individuals can elect not pay any UK tax on overseas income and gains for the first four years of UK residence and are free to bring those income and gains back into the UK. Anyone already UK resident as at the 6 April 2025, but for less than four tax years, may make a claim under the FIG regime for the balance of the four year period.

It is worth noting that chargeable gains arising from offshore bonds are excluded from the definition of foreign income for the purpose of the FIG regime and will remain taxable in the UK, even if gains arise in the first four years of UK residency. However, time apportionment relief will still be available to reduce the gains chargeable to tax based on the number of years of non-residency.

With the remittance basis ending anyone previously on this basis will also be taxed on their worldwide income and gains. A temporary repatriation facility has been introduced to encourage those individuals to bring previously untaxed income and gains back to the UK. This facility will apply for three years from 6 April 2025 and the 'designated' amounts chosen for this treatment will be taxed at 12% for the first two tax years rising to 15% in the third year, irrespective of the year they are actually brought back into the UK.

Inheritance tax

Until the start of this tax year, an individual's domicile status determined whether someone was subject to IHT on their worldwide assets or only on their UK situated assets.

This has now switched to a 'long term residence' test. Long term residence is defined as being resident in the UK at least 10 out of the last 20 tax years.

This means someone coming to the UK will only be subject to IHT on their UK assets for the first 9 years of residency. Thereafter IHT will apply to their overseas assets too.

There is also an IHT 'tail' for those long term residents who leave the UK. They could still be subject to UK IHT on their worldwide assets for up to 10 years even though they are no longer UK resident.

Planning for those coming to the UK

Clients who have recently become UK resident after a long period of time outside the UK may have decisions to make on existing investments held outside the UK. If they've been non-UK resident for more than 10 years they'll pay no UK tax on income and gains on these investments for the first four years of UK residence.

If they bring these investments to the UK they will be start being taxed on income and gains immediately and the investments will also be inside their estate for IHT. If left overseas, in addition to being free from income tax and CGT in the initial four year period they will also remain outside the UK IHT net for the first 10 years of UK residence.

An offshore bond could be a solution for these clients – especially once the FIG exemption ceases to apply. A UK resident, but not long term resident client could purchase an offshore bond with their overseas assets without bringing them back into the UK and as the bond is a non-income producing asset it will only be subject to UK tax when there is a chargeable gain. Unlike onshore bonds an offshore bond is free of UK IHT for someone who isn't yet long term resident. This makes offshore bonds an attractive opportunity to retain assets outside the UK, free of IHT whilst at the same time deferring investment gains.

The bond along with any other overseas assets will be in the estate once they've been resident in the UK for 10 years. But if the bond is assigned before this date this is not a PET or CLT as there is no loss to the estate which can aid estate planning for those clients who expect to become long term residents. Remember that gifts of UK assets, such as onshore bonds, form part of the estate and would therefore be a PET or CLT if gifted.

Excluded property trusts are no longer an effective way of gifting assets while retaining access to them for those expecting to become a long term resident. Under the old domicile rules a UK resident non-domicile could gift non-UK assets, typically an offshore bond, to a trust prior to becoming deemed domicile for IHT. The trust would include the settlor as a possible beneficiary but provided the trust continues to hold excluded, non-UK property, it remained outside the settlor's estate when they became domiciled or deemed domicile in the UK. However, such trusts created after 30 October 2024 will now be subject to the gift with reservation rules bringing the value into a long term residents estate.

Former remittance basis users

The removal of the remittance basis will mean overseas savings and investments becoming subject to income tax and CGT unless they are eligible for the FIG regime. The temporary repatriation facility may be an appealing option for those who more want or need access to their overseas investments. But that will also bring those assets into the estate for anyone who isn't yet long term resident. Again, offshore bonds may be a way to escape income tax and CGT and keep savings outside UK IHT.

Leaving the UK

Long term residents will continue to be subject to IHT on their worldwide assets for up to 10 years after ceasing to be UK resident. Their UK assets will remain subject to IHT even after ceasing to be both UK resident and long term resident. Clients leaving the UK will need to be aware of the possibility of UK IHT long after they have left these shores. With only a handful of double taxation agreements covering inheritance tax there may not be an opportunity to offset UK tax against any overseas liability on death.