Effective April 6, 2025, the UK tax landscape is set to undergo a significant transformation with the abolition of the remittance basis of taxation. This change marks a shift towards a more streamlined and structured approach to taxation (significant increase of tax burden in the UK), particularly for UK resident individuals who are not domiciled or deemed domiciled in the UK.
Understanding the Changes
Under the new regime, known as the ‘foreign income and gains’ regime (FIG), UK residents will no longer have the option to pay tax on the remittance basis. Instead, taxation will be linked to the number of years of UK residency, with a grace period of four tax years granted for foreign income and gains. Here’s a breakdown of the key changes:
- FIG Regime: Individuals will not be taxed in the UK on their foreign income and gains for the first four tax years of UK residency. This allows flexibility for newcomers to the UK to manage their financial affairs without immediate UK tax implications.
- Transition Period: Years of UK tax residency under the statutory residence test prior to April 6, 2025, will be considered when determining eligibility for the FIG regime. However, split tax years and years of treaty residence will be disregarded for this purpose.
- Post-Transition Taxation: From the fifth year onwards, individuals will be subject to full taxation on their worldwide income and gains. Overseas workday relief will be retained but with modifications.
Special Provisions and Transitional Rules
To facilitate the transition to the new regime, several transitional rules and provisions have been outlined:
- Temporary Repatriation Facility (TRF): Individuals taxed on the remittance basis can opt for a reduced tax rate of 12% on remittances of pre-April 6, 2025, foreign income and gains for the 2025/26 and 2026/27 tax years only.
- Rebasing of Assets: Those previously taxed on the remittance basis can choose to rebase chargeable assets held on April 5, 2019. This allows for a recalculated cost figure for capital gains tax purposes, minimizing tax liabilities.
- Business Investment Relief: Available for qualifying investments of pre-April 6, 2025, foreign income and gains made on or after April 6, 2025.
Implications for Trusts and Distributions
The new regime also impacts trusts and distributions:
- Taxation of Trusts: Income and gains arising in a trust from April 6, 2025, will be taxed in the normal way unless beneficiaries qualify for the FIG regime.
- Trust Distributions: Pre-April 6, 2025, foreign income and gains matched to trust distributions will continue to be taxed. Beneficiaries within the FIG regime can receive benefits free from UK tax charges.
Legislative Updates and Beyond
These changes will be introduced through a future Finance Bill, with amendments to the transfer of assets abroad rules. Close company participators will be deemed as individuals making relevant transfers, subjecting them to more punitive provisions.
Conclusion
The abolition of the remittance basis of taxation and the introduction of the FIG regime represent a significant overhaul of the UK tax system. While these changes aim to simplify tax matters for UK residents, individuals and trustees alike should carefully navigate the transitional rules and provisions to optimize their tax planning strategies.
How can we assist:
- We can calculate the updated tax burden;
- Explore alternative tax residency jurisdictions and compare their taxation regimes;
- Assist in terms of obtaining tax residency in another jurisdiction (local tax identification number, residence permit, relevant tax rulings);
- Support further compliance procedures (tax returns, reports).
Contact us for a consultation