Internationally competitive? The post-April 2025 tax rules for non-doms

It has been a year of seismic upheaval for UK resident foreign domiciliaries and those who advise them. Since the surprise announcements made by the Conservatives in the Spring Budget, regarding an overhaul of the taxation of “non-doms”, there has been a frenzy of speculation about if, when and how the proposals would be taken forward.

Now, following the Autumn Budget and the publication of draft legislation, we have certainty about the timing of the reforms. We also have a clear picture of the post-5 April 2025 tax regime, even though a few aspects of the draft legislation may change between now and its enactment.

In this note, we look at the forthcoming changes, consider how they will affect existing UK resident foreign domiciliaries and structures they have created, and address the new rules which are intended to attract new immigrants to the UK.

How did we get here?

The March 2024 Budget was not expected to contain much of interest to foreign domiciliaries or, as they have become known, “non-doms”. The Conservative government had, after all, previously rejected further changes to the tax regime for foreign domiciliaries, on the grounds that such reform would not raise any money.

It therefore came as a shock when, in the March 2024 Budget, the Conservative Chancellor Jeremy Hunt announced plans for radical changes to the tax rules regarding “non-doms”, including a complete abolition of the remittance basis, but also, as discussed below, sweeping changes to the inheritance tax (IHT) legislation. Even more surprising was the scheduled timetable for such reform, including repeal of the remittance basis with effect from 6 April 2025.

The March 2024 announcements represented a complete overhaul of the taxation of foreign domiciliaries, with the concept of domicile being removed altogether from the UK tax code and replaced with various residence-based tests. It was announced that the remittance basis would be abolished and replaced with a generous, but very brief, special regime for new UK residents, under which the foreign income and gains of qualifying individuals would be completely exempted from UK tax, regardless of whether they are remitted. This special regime would be made available to new UK residents free of charge, but for a period of four tax years only.

Under the March 2024 proposals, whether non-UK assets are within the scope of IHT would also be determined by a residence test, both for personally-held assets and assets held in trust. In addition, the beneficial “trust protections” regime, primarily enjoyed by foreign domiciliaries who have been living in the UK for over 15 years, would be abolished, in most cases rendering trusts settled by such individuals effectively transparent for income tax and CGT purposes.

Since coming to power in July 2024, the Labour government has essentially adopted the Conservative proposals, but as discussed below, some edges have been sharpened. In a sense, this is unsurprising, as it has long been a mantra of the Labour Party that the “non-dom” tax regime is unfair and ought to be reformed.

However, it has been disappointing to see the Labour government adopting the Conservative proposals for reform so hastily and so uncritically – proposals which appear to have been scribbled on the back of a beer mat in the Commons Smoking Room, perhaps with the principal aim of wrongfooting Labour. There is ever-growing evidence that these proposals will do economic harm to the UK, by driving out existing UK resident foreign domiciliaries, by failing to create an attractive regime for would-be immigrants, and by failing to take advantage of the willingness of many existing UK resident foreign domiciliaries to pay significantly more tax than they have been required to pay under the existing rules.

It has been asserted that the reforms will generate revenue for the UK. However, the economic case for the changes is flimsy. It is based on an assumption that only a tiny proportion of “non-doms” will leave the UK in response to the changes – an assumption which is defied by the practical experience of professional advisers, and indeed by common sense.

The government has stated that it wishes to create a tax regime for immigrants to the UK which is “internationally competitive”. However, there is room for doubt about whether the new four-year regime will bring wealth-creators into the country, given the brevity of the period in which new UK residents will be able to use it. There is even greater room for doubt about whether those who accept the offer of this special regime will end up making any meaningful economic or social contribution to the country. Many informed observers fear that the regime will be used as a tax-free “pitstop” for individuals who will briefly become resident, sell a business and realise a large tax-free capital gain, and then leave. It is hard to see the benefit that the UK will derive from these ephemeral residents.

Summary of the changes

The changes may be summarised as follows:

• The remittance basis will be abolished with effect from 6 April 2025. However, for any former remittance basis user (RBU) who remains UK resident after the new rules have been brought in, the remittance code will continue to have relevance. A remittance to the UK of hitherto-unremitted foreign income or gains (FIGs), dating from a tax year in which the remittance basis was used, will still give rise to tax if the individual is UK resident. Moreover, changes will be made to the remittance code, to increase the scope for arrangements to be treated as giving rise to a remittance of pre-6 April 2025 FIGs. This is a surprising and unwelcome development.
• The April 2017 “trust protections” will cease to apply from 6 April 2025. Consequently, post-April 2025 income and gains of non-UK resident trust structures will generally be taxable on the settlor, if UK resident (subject to the QNR regime discussed below). In some cases, there may be scope to prevent settlors from being taxed on income of their structure by removing their ability to benefit from it. However, preventing settlors from being taxed on gains of their structures will generally be much more challenging.
• In place of the remittance basis, a new regime for “qualifying new residents” (QNRs) will be introduced, under which individuals will be fully relieved from UK tax on their FIGs for their first four years of UK residence, regardless of whether such income and gains are remitted to the UK. There will also be a limited exemption for employment income of QNRs, insofar as the income is attributable to duties performed outside the UK. All individuals becoming UK resident after at least ten tax years of non-UK residence will be eligible for this regime, regardless of their domicile, and there will be no charge for its use.
• A transitional relief will be available to current and former RBUs, to encourage them to bring their unremitted FIGs into the UK. This “temporary repatriation facility” (TRF) will allow former RBUs to remit pre-6 April 2025 FIGs into the UK, or to treat them as remitted, at a generous flat tax rate. In the 2025/26 and 2026/27 tax years the rate will be 12%, whereas in the 2027/28 tax year the rate will increase to 15%. The TRF will also extend to certain capital distributions from non-resident trusts, if received within the TRF window.
• From 6 April 2025, domicile will no longer be a connecting factor for IHT purposes. Instead, a new residence-based test will be introduced. Individuals who qualify as “long-term residents” (LTRs) will in principle be exposed to IHT on all assets; whereas non-LTRs will only be exposed to IHT on UK assets (and non-UK assets connected with UK residential property). LTRs will therefore be in the same position, where IHT is concerned, as UK domiciliaries under the current regime. Non-LTRs will have the same exposure to IHT as foreign domiciled, non-deemed domiciled individuals have at present.
• Generally, an individual will be an LTR in any tax year in which it is the case that ten or more of the 20 preceding tax years were years of UK residence. A non-LTR who becomes UK resident will therefore acquire full IHT exposure at the beginning of the 11th tax year of residence. To avoid acquiring LTR status, it will be necessary to limit one’s “stay” in the UK to nine tax years.
• Moreover, the default position will be that if an LTR ceases to be UK resident, the individual will remain an LTR for ten years following a cessation of UK residence. In other words, there will be a “tail” of full exposure to IHT, by default lasting ten years from the date of departure from the UK. However, this “tail” will be reduced in certain circumstances, including where the individual has been UK resident for fewer than 20 tax years prior to departure.
• By default, the IHT treatment of trust assets will, from 6 April 2025, follow the IHT treatment of the trust’s settlor. All trust assets will be within the ambit of IHT at any time at which the settlor is an LTR. In contrast, where the settlor is not an LTR, only UK situated trust assets (and non-UK situated trust assets connected with UK residential property) will be within the ambit of IHT.
• Where trust assets are within the ambit of IHT, there will generally be scope for tax charges under the “relevant property regime” (RPR). This is the special charging regime for trusts, under which there is potential for a charge to IHT at up to 6% on ten-yearly anniversaries of the creation of the trust or when capital is distributed out of the trust.
• By default, there will also be scope for a 40% IHT charge on the death of the settlor, if the settlor is a beneficiary or can revoke the trust, and the trust assets are within the ambit of IHT at the time of the settlor’s death. Such scope arises under the “gift with reservation of benefit” (GWR) rules. Engagement of the GWR rules does not disapply the RPR. Nor does the application of the RPR affect whether the GWR rules are engaged. Tax paid under one of these regimes is not creditable against tax payable under the other. The combined impact of these two IHT regimes can therefore be penal.
• However, where the trust was funded prior to 30 October 2024 with non-UK assets (which were unconnected with UK residential property), and certain further conditions are met, there will be no scope for tax on the death of the settlor under the GWR rules, even if the settlor is an LTR at the time of death.

Some of these rules are very complex. Additional detail is provided below.

The remittance basis is dead; long live the remittance basis!

As indicated above, although the remittance basis will cease to be available with effect from 6 April 2025, a post-5 April 2025 remittance of FIGs dating from a tax year in which the taxpayer was an RBU will still give rise to tax for the former RBU.

In an unexpected and unwelcome move, the remittance code will be amended to expand the circumstances in which a remittance will occur.  This seems to have been partly motivated by a recent defeat for HMRC in the courts in Sehgal v HMRC. The changes will include the following:

• The core definition of “remittance” will be extended to cover use of FIGs outside the UK “for the benefit in the UK of a relevant person”. The intention is clearly to widen the concept of a remittance, although it is not clear which additional circumstances the government hopes will be caught by the expanded meaning.
• A remittance will occur where property derived from FIGs is used to secure a “relevant debt” (essentially a debt incurred to acquire UK assets or to pay for a UK service). Under current law there is a fair argument that the provision of property as security is not “use in respect of” a relevant debt, but HMRC have long argued otherwise. Clearly, the government now wishes to put the matter beyond debate.
• Exercises to “cleanse” FIGs by remitting them to the UK during a period of non-residence (so that they could be used in the UK tax-free in a subsequent period of UK residence) will be negated. This change will in principle affect “cleansing” exercises carried out before the change in law. It could create serious issues for individuals who have carried out such an exercise – their “cleansed” assets will effectively revert to being derived from FIGs from 6 April 2025. This is clearly retrospective, and in some cases may raise human rights arguments.
• Business investment relief (BIR) will cease to be available from 6 April 2028. From that date, a use of FIGs to make a loan to a UK trading company or to acquire shares in such a company will give rise to a taxable remittance even if, under the current rules, it would be possible to make a claim to BIR and thereby cause the investment to be treated as not resulting in a remittance. BIR is a deeply problematic relief, and few advisers will mourn its passing.

Protected settlements are history

The protected settlement rules, also known as the “trust protections”, were introduced in April 2017. Under current law, their broad effect is to shield a UK resident, foreign domiciled settlor of a non-UK resident trust structure from tax which (in the absence of the protections) would be charged on the settlor by reference to foreign income received by the structure, and by reference to chargeable gains realised within the structure. Such shielding operates even where the settlor is deemed domiciled in the UK (and it is in that scenario that the shielding is most valuable).

These rules are to be repealed with effect from 6 April 2025. There will be no “grandfathering” of structures created before that date. From that date, the default position will be that settlors of such structures will be taxed by reference to all income received by them and all gains realised within them. However, settlors qualifying for the new QNR regime will be partially protected (see below). It should also be emphasised that there will be no retrospective taxation – it is not the case that income and gains arising within protected settlements between 6 April 2017 and 5 April 2025 will automatically be brought into charge on their settlors.

Implications

For many long-term resident foreign domiciliaries who have created settlements, the repeal of the protected settlement rules will represent a major blow. Settlors who are prepared to be excluded as beneficiaries of their trusts will, in some cases, be able to eliminate their tax exposure with respect to trust income and underlying company income. However, this will depend on technicalities regarding which limbs of the transfer of assets abroad legislation are engaged, which could catch settlors out where they are not well-advised.

Moreover, exclusions from benefit will generally not protect settlors from tax on gains realised by the trust or by an underlying company. The reason is that where trust gains are concerned, a trust is deemed to be settlor-interested (causing the settlor to be subject to tax on its gains, if UK resident) not only where the settlor or any spouse can benefit, but where a child or grandchild of the settlor or their spouse can benefit (or even where a spouse of such a child or grandchild can benefit). Objectively, this is absurd, but it is a longstanding rule. Sadly, there is no proposal to modify this rule with effect from 6 April 2025.

The "trust protections” were very generous when introduced, and perhaps overly so; but it seems harsh to pull the carpet from beneath those who have undertaken careful planning based on the protected settlements regime. This is particularly the case where trusts have been created for non-tax reasons.

Distributions from (un)protected trusts

Under the income and gains “matching” regimes applicable to offshore trusts, capital distributions and benefits made to UK resident beneficiaries are “matched” with accumulated trust income and trust gains, giving rise to deemed income / gains for the beneficiaries, on which tax is due.

After 5 April 2025, income and gains of a non-UK resident trust which are taxable on the settlor following the loss of the “trust protections” will not be available for “matching” with benefits to UK resident beneficiaries. However, there will still be scope under the post-5 April 2025 tax regime for capital distributions and benefits to UK resident beneficiaries (including the settlor) to be taxed by reference to pre-6 April 2025 income and gains of the trust.

This means that where a UK resident settlor is a beneficiary of a non-UK resident trust, there is likely to be potential for tax not only by reference to post-April 2025 income and gains of the trust, but also (if capital distributions are received) by reference to pre-April 2025 income and gains of the trust.

The QNR regime

In place of the remittance basis, a new four-year regime will be introduced for QNRs with effect from 6 April 2025. It had been promised that the new regime would exempt users from tax on their FIGs for their first four years of residence, regardless of whether such FIGs are remitted. This made the regime sound remarkably simple. However, in reality the QNR regime will be more complex, and the devil will be in the detail.

Who will be eligible?

All individuals becoming UK resident after at least 10 consecutive tax years of non-UK residence will count as QNRs and will thus be eligible for the new regime. The test will operate in an “all or nothing” fashion, in that any tax years of UK residence in the ten-year reference period will disqualify an individual from accessing the regime.

QNR status will last for four tax years, starting with the first tax year of UK residence (after at least 10 consecutive tax years of non-UK residence). This is the case even if the individual is non-UK resident, or does not claim relief under the QNR regime, in one or more of the four tax years. The QNR regime will operate on a “use it or lose it” basis. The benefit of QNR status, if unused in a particular tax year, cannot be carried forward.

The domicile of an individual will no longer be relevant.  This means that individuals who are domiciled within the UK will be able to benefit from the QNR regime, provided that they have the requisite 10-year period of non-residence. The same goes for individuals who, upon becoming UK resident, would be “formerly domiciled residents” under the current rules.

How will it work?

Under the new regime, QNRs will be able to claim relief from tax on their:

• foreign income (by way of a “foreign income claim”);
• foreign gains (by way of a “foreign gain claim”); and
• foreign employment income (by way of a “foreign employment election”).

If such relief is claimed, it will apply regardless of whether the income or gains are remitted. The QNR can decide which claims (if any) to make each tax year.

This is not the same as (or as simple as) a blanket exemption from tax on FIGs, as had been anticipated. When making a claim for relief, QNRs will apparently need to itemise in their tax returns each type of foreign income received and each foreign gain realised, and quantify them.  This will represent a major compliance burden for QNRs (much greater than the current compliance burden for RBUs) and may be off-putting for some.

There will be no annual charge to take advantage of the QNR regime. Although it would have been perfectly possible to require some kind of “flat tax” payment from individuals who choose to utilise the regime, the government has chosen not to do this.

However, as with the remittance basis, making any of the three claims available under the QNR regime in a particular tax year will result in the loss of the income tax personal allowance and capital gains annual exempt amount. It will also prevent the utilisation of foreign losses.

What will and won’t be covered

It was originally stated that the special regime for QNRs would provide a complete exemption from tax on FIGs. However, there are some significant gaps in the relief.

In particular, the following categories of income and gains will be excluded from the relief provided by the QNR regime:

• foreign gains realised on the disposal of interests in so-called “property-rich companies” (i.e. companies whose value is substantially derived from underlying UK land);
• chargeable event gains under the life policy tax code (e.g. triggered by withdrawals from or surrenders of offshore life bonds); and
• “performance income”, meaning income received in connection with performances as a sportsperson or entertainer, anywhere in the world.

The first two of these exclusions are unsurprising: gains realised on the disposal of “property-rich companies” are taxable even on non-UK residents, so exempting users of the QNR regime would be generous; and chargeable event gains are currently excluded from the scope of the remittance basis.

However, the carve-out for “performance income” is unexpected and seems an odd decision. There was initially some excitement about the scope for the QNR regime to attract international footballers to the UK. Clearly, the government has no desire to emulate Spain’s famous “Beckham regime”.

Also unexpected is the limitation on the “foreign employment election”, which will replace the current “overseas workday relief” (OWR). The effect of OWR, which currently applies to RBUs in their first three years of UK residence, is that remuneration (e.g. employment income or director’s fees) is notionally apportioned to duties performed within the UK versus duties performed abroad. The remuneration apportioned to UK duties is immediately taxable, whereas the remuneration apportioned to foreign duties is taxable only if remitted to the UK.

Under the QNR regime, a foreign employment election will similarly relieve from tax earnings relating to duties performed outside the UK (even if those earnings are remitted to the UK). There will be an ability to make such elections for all tax years in which the individual has QNR status. However, the relief will be capped annually at the lower of £300,000 and 30% of the individual’s total employment income for the year. In this respect, the new form of OWR will be less generous than the current one.

What about trusts?

Following the loss of the “trust protections”, described above, the income and gains of a non-UK resident settlor-interested trust structure will typically be attributed to its UK resident settlor.  However, settlors who are QNRs will not be taxable on FIGs arising within their non-UK resident trust structures (provided that the requisite claims are made) – although they will be taxable on UK income and gains of such structures.

Beneficiaries who are QNRs will also enjoy relief in respect of distributions from non-UK trusts. Income distributions from non-UK resident trusts will be tax-free in the hands of QNR beneficiaries, assuming that “foreign income claims” are made. Capital distributions received by QNR beneficiaries may also be tax-free, again assuming the required claims are made, but here there will be greater complexity.

For the purposes of the gains “matching” rules, a capital payment made to a QNR beneficiary will be disregarded altogether, provided that a “foreign gain claim” is made. This means that there will be no “matching” with trust gains at all, which means in turn that there is no requirement for the trust gains to be foreign gains.

By contrast, for the purposes of the income “matching” rules, a benefit to a QNR beneficiary will be tax-free only insofar as the benefit is “matched” with non-UK source income during the QNR window. It follows that there will be scope for a QNR beneficiary to be taxed by reference to a capital distribution from a non-UK resident trust if:

• the distribution is “matched” with UK income of the trust structure; or
• the distribution is not fully “matched” with income while the beneficiary is a QNR and is “matched” with income after the beneficiary has become a regular (non-QNR) UK taxpayer.

There will be a considerable risk of such retrospective “matching”, not least because capital distributions to QNRs will be disregarded for the purposes of the trust gains. This will increase the risk of income being “matched” once the beneficiary has ceased to qualify for the QNR regime.

As the above makes clear, the draft legislation perpetuates certain logically indefensible differences between the trust gains “matching” rules and the transfer of assets abroad “matching” rules which apply to recipients of benefits. This seems particularly perverse in light of the government consultation launched at the Autumn Budget with a view to making offshore anti-avoidance rules, including these “matching” rules, “simpler to apply in practice”.

Onward gifts by QNRs

Finally, the existing “onward gift rules” will be expanded, so that they will apply if a QNR beneficiary receives a capital distribution, and passes the proceeds on to a UK resident donee, who does not qualify for the QNR regime. The broad effect of the onward gift rules will be that any such donee will be taxed as though the onward gift were itself a trust distribution.

Reliefs for former RBUs

Major structural changes to the tax code are typically accompanied by transitional reliefs, which are intended to provide a little cushioning for individuals affected by a dramatic transition from one set of rules to another. Reliefs of this kind were a feature of the reforms to the taxation of foreign domiciliaries which happened in 2008 and 2017. It is therefore no surprise that the legislation making the April 2025 changes will incorporate transitional reliefs. There will be two such reliefs:

• The temporary repatriation facility (TRF): This will enable FIGs of former RBUs to be treated as remitted to the UK, within a three-year window, at a low tax rate. The aim is to encourage former RBUs to bring money into the UK, and of course to generate a short-term boost to tax revenues.
• April 2017 rebasing: In certain cases, this relief will reduce the gain realised on the disposal of an asset by a former RBU. In calculating that gain, the April 2017 market value of the asset will be used instead of the actual acquisition cost / the acquisition cost which would apply under general principles.

These two reliefs may be summarised as follows:

The TRF, in detail

As indicated above, the broad thrust of the TRF is that during the TRF window (i.e. the three tax years commencing 2025/26) former RBUs will be able to treat FIGs as remitted to the UK, paying tax on them at a fixed rate of 12% (in the first two years) or 15% (in the third and final year).

Any former RBU will be eligible for the TRF.  There is no requirement for the individual to have made a formal claim for the remittance basis and there is no bar to the relief where the individual has become deemed UK domiciled or even actually UK domiciled.

There are effectively two limbs of the TRF:

• The first deals with unremitted pre-6 April 2025 FIGs of former RBUs which are represented by existing assets.
• The second deals with amounts derived from post-5 April 2025 trust distributions which may be made to former RBUs within the TRF window.

The first limb: existing assets

The first, main limb of the TRF will allow former RBUs to “designate” amounts of unremitted pre-6 April 2025 FIGs in their tax returns and pay tax at the TRF rate on those FIGs. No further tax will be due on the remittance of the FIGs, whether such remittance occurs within the TRF window or later.

More precisely:

• A former RBU may designate an amount of “qualifying overseas capital” (QOC) in a tax return for 2025/26, 2026/27 or 2027/28.
• The designation of the QOC will cause it to be subject to the “TRF charge”. This will be 12% (if the designation is made in a return for 2025/26 or 2026/27) or 15% (if the designation is made in a return for 2027/28). No credit will be given for any foreign tax borne by the QOC in question.
• Once an amount has been designated as QOC, there will be no scope for the remittance of such amount to the UK to give rise to income tax or CGT for the former RBU.

There is no requirement to remit the QOC during the tax year in which it is designated and charged. In other words, a former RBU can:

• remit FIGs during the TRF window and designate them as QOC in his or her tax return for the tax year of the remittance, paying only the TRF charge on the remittance; or
• designate unremitted FIGs as QOC during the TRF window, paying the TRF charge for the tax year of designation, then remit the QOC at any point in the future, without further tax.

The QOC does not need to be money – it can be any asset which is derived from foreign income and/or gain (or which is believed to be so derived, as discussed below).  If, for example, a taxpayer holds a non-UK situated artwork which is derived from foreign income, the artwork can be designated as QOC and the TRF charge paid, so that the artwork (or its future sale proceeds) can safely be remitted to the UK.  If a future sale of the artwork gives rise to a gain (taking into account the 2017 rebasing described above, where that is relevant), the taxpayer will be subject to CGT on that gain in the normal way. But the foreign income originally used to acquire the artwork will not give rise to any further tax on remittance.

An asset held by a former RBU may, of course, be derived from a mixture of capital (which can be remitted without tax) and foreign income and/or gain. For example, changing the illustration above slightly, the artwork may have been purchased with a mixture of 100 of foreign income and 50 of clean capital, such that on a remittance there would be an income tax charge on 100, not on the full acquisition cost of 150. Moreover, there may be significant latent gain on the artwork. For example, the artwork’s current value may be 300. As noted above, the latent gain may give rise to CGT when it is realised after 5 April 2025, but will not trigger a tax charge on remittance. Under the draft legislation, a QOC designation may be made in respect of “an amount of capital”. The position is not wholly clear, but it appears that the owner of the artwork would be able to treat one-third of its value, i.e. the part which is derived from foreign income, as QOC, and to designate that part. It appears that it will not be necessary to designate and pay the TRF charge on the entire value of the artwork.

The draft legislation is confusing and seemingly somewhat contradictory about QOC. There are three definitions of the term, two of which seem to cover the same ground. Generally, QOC must be an amount which will give rise to tax if it is remitted to the UK - so seemingly, it will generally be necessary for the asset in question to be derived from foreign income and/or gain for it to qualify as QOC. On the other hand, the draft legislation says that an individual can designate an amount “where it has not yet been determined whether the amount is [QOC]”.

The evident intention is that a former RBU should be able to designate an asset as QOC, and to pay the TRF charge on its entire value, regardless of whether and to what extent the asset is in fact derived from foreign income and/or gain. In other words, there will be scope to make precautionary designations in respect of amounts which may, in fact, be capital. The explanatory paper issued on the day of the Autumn Budget spells this out:

• “It will also be possible to designate amounts of an uncertain origin or where the individual no longer has records to confirm the original source of the funds” (para 111);
• “Where an individual is unable to identify the content of a mixed fund, it will still be possible to make use of the TRF without having to identify each source of FIG contained within the fund” (para 117).

This functionality will be useful for those cases where an account or other asset is a “mixed fund” whose constituent elements are uncertain, where the accounting cost of precisely establishing the constituent elements would be disproportionate. However, in many cases incurring such accounting costs may still be desirable, to ensure that tax is not overpaid.

It will also be possible for a former RBU to designate only part of an asset as QOC. For example, it appears that a taxpayer holding a cash account comprising £5m of mixed income and gains will be able to designate £2m as QOC.  The special “ordering” rules that apply to remittances from “mixed funds” will be amended so that, in such a scenario, the designated QOC element (which can be remitted tax-free) will always be treated as remitted in priority to the balance of the fund (i.e. the undesignated unremitted FIGs, which will give rise to tax on a remittance).

The draft legislation refers to QOC “of an individual”, meaning a former RBU. However, seemingly the TRF will be usable in relation to assets even where they are held by some other person. There is no obvious requirement for an asset which is subject to a QOC designation to be owned by the former RBU, provided that the asset in question is derived from foreign income and/or gain of that former RBU. So, for example, it appears that where a former RBU has made a gift to another individual or indeed to a trust, and the subject-matter of the gift was derived from the former RBU’s foreign income and/or gain, the TRF will be usable with respect to the capital held by the other individual or trust. Assuming this is right, it will be a useful feature of the TRF, not only where it would be desirable for the capital to be returned to the former RBU, but also where the current owner of it is a “relevant person” for the purposes of the remittance code.

The second limb: post-April 2025 trust distributions

The second limb of the TRF applies to certain post-5 April 2025 capital distributions from offshore trusts.  This represents a surprising but welcome expansion of the initial Conservative proposals.

Where a former RBU receives a capital distribution during the TRF window, which is “matched” to pre-6 April 2025 trust gains, or to pre-6 April 2025 foreign source income, the individual won’t need to pay tax by reference to the matched income or gains at normal income tax or CGT rates, but will instead be able to designate the distribution under the TRF and pay only the TRF charge, i.e. 12% or 15%. It is worth emphasising that in the case of the income tax matching rules, this ability to use the TRF will be reliant on the matched relevant income being income which arose before 6 April 2025, and being foreign source.

In certain scenarios, pre-6 April 2025 planning will be required to maximise the benefit of this relief. In all cases, expert advice will be needed to avoid falling into potentially expensive bear traps.

This is primarily because the TRF can be utilised where a capital distribution is matched with pre-6 April 2025 income, but it appears that a “latest in, first out” rule will apply when determining which tax years’ income is matched. If a capital distribution is made in a tax year in which there is no post-5 April 2025 income of the trust, and the distribution is fully matched with pre-6 April 2025 foreign source relevant income, or is fully matched with a combination of such income and pre-6 April 2025 trust gains, all should be well. However, there will be scope for significant and unexpected tax for the individual if relevant income arises in the tax year of the distribution, as that will be matched in priority to older relevant income and older trust gains. There will also be scope for significant and unexpected tax for the individual if any part of the distribution is unmatched in the tax year of its receipt, and relevant income arises subsequently. Again, this could give rise to an income tax charge which the individual will not be able to mitigate through use of the TRF. A 45% income tax charge could be very unwelcome where the expectation was tax at 12% or 15%.

The position will seemingly be much more generous under the CGT matching rules, as for the purposes of the TRF relief post-5 April 2025 gains will effectively be ignored.  The simplicity and generosity of this rule stands in bizarre contrast with the traps posed by the income tax matching rules.

It is worth emphasising that the TRF will also be available in relation to pre-6 April 2025 trust distributions, but there the first limb of the TRF will apply. Indeed, in many cases the simplest and best course for a current RBU, where there is a desire to extract value tax-efficiently from a non-resident trust, will be to receive an income distribution in the remaining months of 2024/25, and then to designate the proceeds under the first limb of the TRF in 2025/26.

Potential take-up

The TRF relief is sensible and logical, as it should allow funds that would otherwise be trapped offshore to be invested / spent in the UK, and this should generate meaningful tax revenue for as long as the TRF is in force. The TRF may also help individuals who have become resident in the UK more recently but who have not carried out pre-arrival planning and are struggling to find sufficient clean capital to meet their UK spending needs. The real question will be how many individuals are prepared to remain living in the UK for long enough to use the TRF, in light of the wider changes.

The new IHT regime for individuals

From 6 April 2025, the extent to which an individual is exposed to IHT will be determined by a residence-based test, rather than a domicile-based test. The current distinction between those who are UK domiciled or deemed domiciled, and those who are not, will be replaced by a distinction between those who qualify as long-term residents, and those who do not.

The essence of the new regime

Under current law, the IHT exposure for a non-UK domiciled and non-deemed domiciled individual is restricted to UK situated assets and non-UK situated assets that are connected with UK residential property (often termed “Sch A1 property”). In other words, only individuals who are UK domiciled or deemed domiciled are subject to UK on their worldwide assets.

With effect from 6 April 2025, the position will turn not on an individual’s domicile, but whether or not the individual is a long-term resident. The worldwide assets of an LTR will be within the scope of IHT.  Only the UK assets (and Sch A1 property) of non-LTRs will be within the scope of IHT:

The residence-based test

By default, any individual who has been UK resident for 10 or more out of the preceding 20 tax years will count as an LTR.

An individual’s residence status will be determined by the SRT for those tax years in which the SRT has been in force (i.e. 2013/14 onwards). For earlier tax years the old, nebulous common law rules will apply. It would be sensible to provide an elective right for individuals to assess their status in tax years prior to 2013/14 using the SRT, but this is not a feature of the current draft legislation.

The ”10 out of 20” test means that once LTR status has been acquired, then by default such status will persist for 10 tax years from the date of any cessation of UK residence. In other words, there will by default be a 10 year “tail” for full exposure to IHT. However, 10 years will be the maximum “tail”. Shorter “tails” will apply in certain cases:

The maximum possible “tail” will be 10 years. Even if an individual has been UK resident for 20, 30, 40 or 50 years, he or she will be able to escape exposure to non-UK assets (other than Sch A1 property) by becoming non-UK resident for 10 tax years. Moreover, the 20 year “lookback” will apply immediately when the changes come into effect. Some UK domiciliaries who have been non-UK resident for significant periods will lose their exposure to IHT on non-UK assets (other than Sch A1 property) at midnight on 5 April 2025. At the same time, some UK resident non-UK domiciliaries who are not deemed domiciled will acquire unwelcome exposure to IHT on non-UK assets. For many foreign domiciliaries, this prospect is at least as concerning as (and in some cases much more concerning than) the loss of the remittance basis.

The LTR definition will be modified in relation to individuals who are younger than 20. The broad effect of the modification is that these individuals will be LTRs if they have been UK resident for more than half their lives.

Treaties

An issue of some interest will be the interaction of the new residence-based regime described above with IHT treaties. These can shield an individual’s non-UK assets from IHT on his or her death where the individual is deemed domiciled under the current 15/20 year test, or even where the individual is actually domiciled within the UK but is resident in the other contracting state.

These treaties look at whether an individual is domiciled within the UK under common law, and in some cases whether the individual is deemed domiciled in the UK for IHT purposes, to determine whether protection from IHT is available. The position appears to be that this will continue to be the case, despite the move to a residence-based regime for determining exposure to IHT.

This seems to follow because unless the UK’s IHT treaties are renegotiated and amended, references in those treaties to domicile will continue to stand, and will continue to mean, by default, common law domicile. Moreover, the draft legislation includes a provision to the effect that the repeal of the current 15/20 deemed domicile rule will not have effect in relation to IHT treaties. But if this is right, it will undoubtedly create anomalies. The implications will need to be worked out on a case by case basis.

The new IHT regime for trusts

Under the current rules, non-UK situated assets (other than Sch A1 property) of a trust funded by an individual who was neither actually domiciled within the UK nor deemed domiciled in the UK are “excluded property” and as such outside the scope of IHT. This applies even if the settlor has become deemed domiciled in the UK, or actually domiciled within the UK, since the trust was funded.

With effect from 6 April 2025, the current domicile-based excluded property rules will be replaced by a new regime, focusing on whether the settlor is an LTR (or, where the settlor is dead, whether the settlor was an LTR at the time of death). However, there will be “grandfathering” of the current IHT regime for trusts whose settlors are already dead, or who die between now and 5 April 2025.

The position can be summarised as follows:

Potential occasions of charge

The above tests for whether assets are within the scope of IHT will apply on each potential occasion of charge. In most cases, there will be scope for IHT on the following occasions, but only if the settlor is an LTR at the relevant time, or the assets in question are UK situated / Sch A1 property:

In each case, whether there is an actual charge will depend on whether the assets are excluded property, i.e. whether or not the settlor is an LTR at the time of charge and whether or not the assets are non-UK situated (and not Sch A1 property).

The summary above assumes that the trust is not subject to a “qualifying interest in possession” (QIIP). QIIPs are, very broadly, life interests created under will trusts. Where there is a QIIP, the RPR does not apply. However, there is scope for IHT on the termination of the QIIP, e.g. on the death of the beneficiary with the QIIP.

Where an LTR settlor ceases to be an LTR

Importantly, where an LTR settlor ceases to be an LTR (and there is no QIIP), this will trigger an exit charge of up to 6% under the RPR by reference to any non-UK assets (other than Sch A1 property) of the trust. Thereafter, such assets will be excluded property and outside the scope of IHT for so long as the settlor remains a non-LTR.

This exit charge was unexpected and has not been well-received. It will seemingly apply to generate an IHT charge on 6 April 2025 for certain trusts settled by individuals who were UK domiciled or deemed domiciled but who will be non-LTRs under the new regime. However, it is a deliberate design feature of the draft legislation: the intention is to impose an IHT charge whenever trust assets leave the IHT net due to a change in status of the settlor.

Limited relief for pre-30 October 2024 trusts

The original Conservative proposals in March 2024 promised “grandfathering” of the current IHT regime for all trusts settled prior to 6 April 2025. In other words, it was stated that all such trusts would remain subject to the existing rules on what counts as excluded property, on an indefinite basis. However, Labour rejected this proposal, insisting that all trusts would be moved into the new regime, regardless of when they had been created.

Following significant lobbying, and in recognition of the fact that many trusts have been created in reliance on the current rules, a small concession has been made. From 6 April 2025, there will be no scope for a 40% IHT charge on the settlor’s death under the GWR rules (where there would otherwise have been scope for such a charge) for most trusts funded prior to the date of the Autumn Budget.

The exemption from the GWR rules will apply where:

• property was disposed of by way of gift prior to 30 October 2024,
• the property became settled property as a result of that gift,
• such property was “excluded property” immediately before 30 October 2024, and
• the property has continued to be non-UK situated and non-Sch A1 property.

Where these conditions are met, no IHT will be due on the settlor’s death under the GWR rules with respect to the non-UK situated trust property, even if he or she is an LTR at the time, and even if the settlor is a beneficiary of the trust / has a power of revocation.

However, non-UK situated trust property will be subject to IHT under the relevant property regime if the settlor is an LTR on occasions of potential charge under that regime. In other words, although the exemption from the GWR rules will knock out the possibility of a 40% IHT charge on the settlor’s death (assuming that the conditions for the exemption are met), it won’t eliminate the scope for IHT charges at up to 6% every ten years and when capital leaves the trust.

It is hoped that HMRC will publish guidance on the situations in which it will accept that property was disposed of by way of gift, causing such property to become settled property. The wording of the exemption should, it is suggested, not be construed too narrowly, so that proper effect is given to the legislative intention.

For example, where a settlor has sold assets to the trust for debt, and then waived the debt before the Autumn Budget, the combined effect of those steps should (in the authors’ view) satisfy the first two conditions of the exemption. It is hoped that HMRC will be prepared to confirm this.

Finally, it is worth noting that a similar relief will apply to prevent an IHT charge on the death of the holder of a QIIP, where (1) the trust property in which the QIIP is held was excluded property immediately before 30 October 2024, and (2) the trust property has remained non-UK situated and non-Sch A1 property.

Planning points

The changes discussed above are far-reaching and will come into effect sooner than most practitioners thought likely. Some affected individuals have already responded to the changes, taking steps to ensure that they will cease to be UK resident at midnight on 5 April 2025. However, many have refrained from taking precipitous action, waiting to see what final form the proposals would take. For those individuals, there are now various planning points to consider.

Delaying remittances

Any current or former RBU who has been considering making a remittance of FIGs should generally wait until after 5 April 2025 before doing so. The obvious benefit of delaying is that a reduced tax rate should apply under the TRF.

Where there is a pressing need for money within the UK, perhaps to fund a house purchase, and the only personally-held money available to the individual is non-clean capital (i.e. money which is to some extent derived from FIGs), consideration should be given to taking an unsecured loan from a bank and, after 5 April 2025, repaying the loan using the non-clean capital. Again, there should be scope to secure a lower rate of tax on the remittance, by virtue of the TRF. However, care will be needed with this approach, to ensure that the remittance is triggered at the right time.

Accelerating income and gains

Current RBUs who will not qualify for the QNR regime should consider realising latent gains on foreign assets, prior to 6 April 2025. This might be achieved by means of a sale or gift to a trust (as discussed below). Consideration should also be given to accelerating receipts of foreign income, where possible. FIGs received or realised by an RBU in 2024/25 can be designated under the TRF in 2025/26, where it would be attractive to use the money in the UK.

Equally, the trustees of non-UK resident trusts with UK resident but foreign domiciled settlors, which are about to lose the benefit of the current trust protections, should consider whether there is scope to realise latent gains or to accelerate receipts of foreign income, so that such events occur under the current regime. These events should be tax-free now, whereas the same will not be the case after 5 April 2025.

Such trustees should also consider whether there is scope to make distributions to current RBUs before 6 April 2025 (while the remittance basis remains available), or during the TRF window (in which the effective rate of tax on such distributions may be reduced to 12%). The analysis here will be very fact-specific and will need to be considered on a case-by-case basis.

Settlors of existing non-resident trusts

UK resident, foreign domiciled settlors of existing non-UK resident trusts will generally be the hardest hit by the proposed changes. If no mitigation steps are taken, these trusts will effectively become transparent with respect to their settlors from an income tax and CGT perspective. In addition, there will still be scope for tax on distributions, and IHT charges of up to 6% every ten years under the RPR. However, insofar as trusts have been funded prior to 30 October 2024, there should be no scope for IHT on the death of the settlor with respect to non-UK assets (other than Sch A1 property).

In some cases, the settlor and any spouse may be willing to be excluded as beneficiaries, to eliminate income tax exposure for the settlor. However, such exclusion will not always work to eliminate the income tax exposure; this depends on the arcane issue of whether the transfer of assets “capital sum” provisions are engaged. Moreover, it will in practice be virtually impossible to eliminate CGT exposure for a UK resident settlor of a non-UK resident trust, under the post-5 April 2025 regime.

Settlors will need expert advice to understand the implications of exclusion and to decide if this is a price they would be willing to pay.

In some cases, the best (or least bad) option may be to wind up the trust altogether, by means of a distribution to the settlor or a family member. Where the recipient is a UK resident, an outright appointment of all trust assets will result in the attribution to the recipient of accumulated income and gains of the trust. The attributed income and gains will be taxable on the recipient, subject to the remittance basis if the distribution is made before 6 April 2025 and the recipient is an RBU, and subject to the QNR regime if the distribution is made after 5 April 2025 and the recipient is eligible for it.

Some affected individuals may simply choose to accept the tax exposure imposed under the new rules. There may be scope to mitigate their income tax and CGT exposure by changing the investment policy of the trust or the nature of the trust fund (perhaps with the use of an offshore life bond), and where this is not feasible it may still be possible for the settlor to receive funds from the trust to settle tax liabilities, without incurring a further tax charge on the distribution.

New trusts

In light of Labour’s crackdown on trusts, there are now fairly limited circumstances in which creating a trust before 6 April 2025 will be attractive.

However, the creation of a trust may be attractive to any current RBU who is holding an illiquid non-UK situated asset which is pregnant with latent gain. Selling or giving the asset to a trust before 6 April 2025 will realise the latent gain in the current tax year, while the taxpayer is still an RBU.

Individuals who are not yet deemed domiciled but will become LTRs on 6 April 2025 (i.e. those who are in their 10th to 15th tax year of UK residence) should also consider the creation of a trust. For these individuals, the current tax year will be the last in which they can fund a trust without triggering an upfront IHT charge. Where the individual is willing to be excluded from benefit, this could represent a valuable opportunity to give assets away to the next generation, without the need to make outright gifts and survive seven years. The trust will be subject to the RPR, but a 6% charge every ten years may be considered a price worth paying for the asset protection secured by a trust, which is particularly important where minor / young beneficiaries are involved.

It is worth bearing in mind that, for those RBUs who have been UK resident for fewer than 10 years and so will not become LTRs on 6 April 2025, there is more time to settle a trust without an upfront IHT charge. These individuals will have until the end of their tenth year of UK residence to do so. However, CGT considerations may still point to such individuals settling trusts in the current tax year. From 6 April 2025, it will not be possible for such individuals to give away assets that are standing at a gain, without CGT liabilities being triggered.

Insurance solutions

Where affected individuals do decide to remain UK resident for a period (perhaps long enough for children to complete their schooling in the UK), insurance products may offer an effective solution to manage their increased tax exposure.

Offshore life bonds are investment products available to all UK residents, which enjoy a favourable tax regime allowing the deferral of tax on investment income and gains. The products carry certain investment restrictions, but these are often worth accepting in exchange for the tax deferral benefit they provide.

Conventional life insurance should also be considered as a means of covering possible IHT liabilities. Although it does not mitigate IHT exposure, life insurance provides a means for heirs to settle IHT liabilities without the requirement to use their newly-inherited assets to do so. Term life insurance (i.e. insurance covering the event of death within a fixed window, e.g. ten years) is often remarkably good value and can provide significant peace of mind.

Becoming non-UK resident

Despite the availability of the UK tax mitigation approaches outlined above, some UK resident foreign domiciliaries will feel that the changes are too much to stomach, and will wish to leave the UK. Some individuals in this category will feel that it is impractical to aim for a cessation of UK residence at the end of the current tax year, and will instead aim to “leave” the UK at the end of 2025/26, accepting that being resident in the UK in 2025/26 will entail some tax inefficiency.

Nonetheless, there are some scenarios in which a cessation of UK residence at the end of the current tax year will make sense.

The group most likely to benefit from becoming non-UK resident at the end of 2024/25 comprises foreign domiciliaries who have been living in the UK for over 20 years. By default, if these individuals cease to be UK resident, their IHT “tail” will be ten years, i.e. they will remain within the scope of IHT until they have been non-UK resident for ten whole years. However, if they become non-UK resident at the end of the current tax year, the “tail” will be a mere three years under transitional provisions. This significant limitation on future IHT exposure may be enough to encourage such individuals to leave the UK promptly.

Individuals currently in their ninth year of UK residence may also wish to consider becoming non-UK resident in 2025/26, such that they do not become an LTR at all.  But it is worth bearing in mind that the IHT “tail” will be limited to three years provided that no more than 13 years of residence are clocked up.

An important consideration in both cases described above is where the individual intends to become residence on departure from the UK.  There are some jurisdictions (including Italy and Switzerland) where the relevant IHT treaty with the UK has the effect of eliminating the IHT “tail” with respect to personally-held assets as soon as the taxpayer becomes resident in that other jurisdiction.

The end of the road?

Many practitioners support the proposition that the remittance basis ought to be replaced by a simpler tax regime for “incomers”, which does not create a perverse incentive to leave wealth outside the UK.  Many also support the stripping of the concept of domicile from the UK tax code.

However, in the eyes of many advisers, the impending changes discussed above represent a serious failure of judgment, and there is ever-growing evidence that over the longer term, they will damage the UK economically.

The QNR regime lacks lustre, not only compared to the current UK tax regime for foreign domiciliaries but also compared to the special tax regimes for “incomers” that are available in many other countries. A four-year special regime is far too short-lived to be attractive to most internationally mobile investors and entrepreneurs.

The regime will also be unavailable to most current RBUs. These individuals will have very little fiscal incentive to hang around in the UK, and a significant proportion of them are likely to move out as soon as practicable. There are many other countries which are actively competing for these individuals’ presence and economic contributions.

The IHT changes are another driver, and indeed, are commonly cited as the most significant single factor affecting whether foreign domiciliaries are willing to remain UK resident or feel compelled to leave. Many “non-doms” come from countries where there is no IHT, or where the rate of such tax is low. The 40% rate of IHT in the UK is regarded as shocking, and exposure to IHT on foreign wealth is felt to be unacceptable. For many such individuals, such exposure is a “red line”.

In a recent survey, 67% of “non-doms” who are currently UK resident said that they would not have moved to the UK if they had known of the 6 April 2025 tax changes; and 63% of RBUs surveyed stated that they are planning on leaving the UK within two years. Even if these statistics are taken with a pinch of salt, they are alarming.

The departure of the UK’s “non-doms” may not happen immediately. However, it is reasonable to expect that over the next five years or so, the number of foreign domiciliaries living in the UK will dwindle. Going forward, the UK is unlikely to be successful in attracting and retaining internationally mobile entrepreneurs and investors, unless there is a major change of tack. This lack of success will be a significant but invisible cost for the UK – represented by the loss of tax revenues that could have been generated from “non-doms” if a more intelligent fiscal policy had been adopted, and by the loss of economic growth that these successful entrepreneurial individuals could have helped to kickstart.

In the Autumn Budget, the Chancellor Rachel Reeves insisted that the new tax regime discussed in this note would be “internationally competitive”. Unfortunately, the UK’s “non-doms” disagree, and some are already voting with their feet.