Playing with FYR: planning opportunities offered by the UK’s proposed four-year regime for newcomers to the UK

The proposed abolition of the remittance basis has been met with widespread dismay by foreign domiciliaries living in, or planning to move to, the UK. The four-year regime due to be introduced instead is considered by many to be a poor substitute, and a wasted opportunity to create an attractive, internationally competitive new regime, which could have generated much-needed revenue for the country.

Nonetheless, despite the general gloom surrounding the proposed changes (see further here), there are potential opportunities offered by the new regime, which from the perspective of certain taxpayers undeniably has some advantages in comparison to the remittance basis. It is worth taking a moment to review these possible opportunities, as well as the practicalities from an immigration perspective that will need to be considered by anyone seeking to take advantage of the new regime.

No smoke without FYR

Any consideration of the proposed new four-year regime (FYR) must be accompanied by a significant health warning. No draft legislation has been published yet, and the only details available are those included in a government policy paper issued on the day of the Budget. There is no guarantee that the regime will be introduced on 6 April 2025 in the form currently planned. Indeed, there are already rumours that the FYR may be amended, or even scrapped altogether. However, no official announcements have been made regarding any change of policy, and Labour have indicated their broad agreement with the FYR as proposed by the Conservatives, suggesting that a new government would not make any major alterations. It therefore seems sensible to start planning for the FYR, at least tentatively.

A baptism of FYR

In principle, the FYR is an extremely generous regime, for those who will qualify for it. Qualifying individuals will enjoy a complete exemption from tax on their non-UK income and gains during their first four years of UK residence, regardless of whether brought into the UK or kept offshore. There will be no charge for the FYR (unlike the equivalent regimes in, e.g., Italy and Greece), although users will lose their income tax personal allowance and CGT annual allowance. It should be noted that the absence of an annual charge is perhaps the most obvious element of the FYR that could be altered prior to implementation.

The operation of the FYR will undoubtedly be simpler than the current remittance basis, with no concept of ‘remittance’ and eligibility determined not by domicile but a simple residence-based test. Any individual, regardless of domicile, will be eligible for the FYR if they become UK resident after at least ten years of non-UK residence, residence in each case being determined by the UK’s statutory residence test (SRT).  This means that British ex-pats who have been non-UK resident for a sufficient period should, if they wish to return to the UK, be able to benefit from the FYR (see further here).

From the point of view of a prospective immigrant to the UK, the obvious problem with the FYR is the brevity of the proposed regime, in comparison to equivalent regimes in other jurisdictions (e.g. 15 years in Italy and Greece). However, four years may be more than long enough for certain individuals. Those on short-term secondments may benefit from the FYR, which will also include special provision for earnings related to non-UK work, based on the current overseas workday relief. But the FYR may be particularly attractive to globally mobile entrepreneurs planning an exit from a business: such individuals may be able to move to the UK prior to the exit event and pay no tax on resultant capital gains.  

Into the FYR but still in the frying pan

The FYR will not confer complete protection from tax for all eligible entrepreneurs hoping to enjoy a tax-free business exit. Perhaps most obviously, US persons are subject to worldwide tax regardless of where they are resident. Other jurisdictions have “exit” taxes, i.e. a tax charge on an individual’s latent gains at the time of cessation of residence, or tax “tails”, i.e. periods in which former residents may still be taxed. Some jurisdictions may even tax non-residents on gains, though the UK’s tax treaty network normally prevents this unless there is some connection with local real estate / immoveable property. Careful consideration will be required on a case-by-case basis, assessing the tax rules across the relevant jurisdictions, to determine whether becoming UK resident under the FYR will achieve the desired total tax protection.

Once the FYR has gone out

Where an individual needs to be UK resident for longer than four tax years, there are various planning opportunities available to make the post-FYR years of UK residence acceptable from a tax perspective. Where a large cash sum has just been received on exit from a business, an offshore life bond could be a good solution.

Offshore life bonds may be thought of as an investment wrapper, or type of derivative – the value of the bond tracks an underlying investment portfolio. These bonds are subject to an attractive UK tax regime for all UK residents: income and gains roll-up within the underlying portfolio tax-free, and there is only scope for tax if sums are withdrawn from the life bond or the life bond is completely surrendered. Moreover, there is an annual tax-free withdrawal allowance of up to 5% of the sum initially invested for up to 20 years. Withdrawals in excess of the allowance are subject to income tax so that, in the long term, life bonds effectively convert gains to income. However, in many cases the individual may leave the UK and return to their home jurisdiction prior to making any excessive withdrawals from the bond.

Despite the tax mitigation offered by life bonds and other arrangements, it is unlikely to be attractive for a former FYR-taxpayer to remain UK resident indefinitely. The proposed changes to the inheritance tax (IHT) rules impose a de facto nine-year limit on the period in which an individual can be resident without a significant increase in tax exposure. Under the new proposals, any individual who clocks up ten years of UK residence will be brought within the IHT net with respect to their worldwide assets. This worldwide IHT exposure will persist for the remainder of the period of UK residence and, per the current proposals, for the first ten years of non-UK residence as well. If the rules are implemented as planned, this lengthy IHT “tail” will make it imperative in many cases for individuals to limit their period of stay in the UK to nine tax years. There is a possible qualification to this for individuals moving to a territory which has a suitable IHT treaty with the UK (e.g. France or Italy).

FYRing the starting gun

For those wishing to take advantage of the FYR, consideration will need to be given to the practicalities of becoming UK resident. It can be more difficult than anticipated to become UK resident under the SRT. Depending on an individual’s particular circumstances, they may need to spend over 6 months in the UK during the tax year in which they wish to become resident. This means that there is limited scope to become UK resident in a hurry. Sometimes, unless the individual is moving to the UK for full-time work, the only real option is to aim to satisfy the so-called “only home” test, which requires the individual to cease to have any non-UK homes at least a month before the end of the tax year (either by selling or renting them out), and ensure that they have UK home by the same deadline.  

The misalignment of tax years can also create complications. The UK’s 6 April – 5 April tax year, combined with most other territories’ calendar tax years, often results in periods of dual residence, i.e. periods in which an individual is resident in more than one territory.  In such cases, there is normally a tax treaty between the UK and the other territory, which will determine which has taxing rights. Depending on the circumstances, it may not be problematic for an individual to remain resident in the territory they are seeking to “leave”, even at the time of a potentially taxable event such as the sale of a business, provided that they are deemed to be UK resident for the purposes of the relevant treaty.

Wherever possible, advice regarding residence should be taken well in advance of the date on which there is a desire to become UK resident – ideally six months, or even more, before the start of the relevant UK tax year.

Immigration considerations

Before the FYR was proposed, it would be unusual from an immigration perspective to advise a client to reside in the UK for four years and then leave. Just one more year of qualifying residence could establish eligibility for Indefinite Leave to Remain (ILR) – the immigration status which entitles an individual to reside in the UK without time limit, and which also creates scope to acquire British nationality.

Entrepreneurs planning an exit from an overseas company may not need or wish to aim for ILR. They can secure UK residence for the FYR period using a work visa for themselves and any dependant partner and children.  Work visas all require someone to fill a genuine role in the UK, with sponsorship by an entity with a UK sponsor licence, and payment of a minimum salary.  Options include:

• Skilled Worker visa sponsorship by an existing UK entity that is capable of employing someone in the UK.  This visa can last up to 5 years at a time and be renewed or converted into ILR;
• Expansion Worker visa sponsorship if there is no existing UK presence, but 3 years of trading history overseas and a business plan to expand into the UK.  This allows a 1-year visa, extendable by 1 year, during which period a UK company must be set up and the licence converted to a Skilled Worker licence.  Time in the Expansion Worker route does not lead to ILR; or
• Global Business Mobility visa sponsorship to transfer from an overseas company to a UK company linked by common ownership and control.  This visa can be used for 5 years in any 6 year period, or 9 years in any 10 year period for “high earners”.  Time in this route does not lead to ILR.

Internationally mobile clients wishing to secure ILR must carefully plan their affairs to ensure that day-count requirements are met. An application for ILR typically requires five years of continuous residence in the UK, meaning no more than 180 days outside the UK in any 12-month period falling within those five years.  Naturalisation as a British citizen may require a further 12 months of continuous residence in the UK after that, and naturalisation applications are subject to even more stringent day-count requirements. Generally, it will be difficult to satisfy these day-count requirements without being tax resident in the UK. Tax residence in the UK is unlikely to be an issue for as long as the FYR applies, but being resident in the UK for tax purposes could become expensive for an individual who has used up the FYR and, after the expiry of that regime, is subject to UK tax on an arising basis. However, as indicated above, there are potential strategies to mitigate tax exposure for an individual moving from the FYR to the arising basis, and even without such strategies, some may consider a year of worldwide UK tax exposure a price worth paying for ILR.

In principle, ILR may be achievable without a fifth year of tax residence in the UK.  A client with qualifying continuous residence during the FYR period could obtain residence in and spend at least 180 days of the final 12 months of the five-year ILR period in the Channel Islands or the Isle of Man (the Islands).  The continuous residence period for ILR can include time spent in the Islands, as long as the applicant’s most recent visa was granted in the UK before applying for ILR.  This may offer a favourable route to ILR compared to a fifth year of UK residence.