The main features of the non-dom regime currently in place in the UK are summarised below.

Remittance basis

Non-UK domiciliaries (generally someone who is not from the UK and who does not intend to remain in the UK permanently) can elect to be taxed under the favourable “remittance basis” of taxation during their first 15 years of UK tax residence. In broad terms, this means that qualifying individuals are subject to UK tax only on UK source income and gains, and any non-UK source income and gains which they “remit” to the UK.

Following reforms in 2017 (the 2017 Reforms), a non-UK domiciliary is deemed to be domiciled in the UK for all UK tax purposes once they have been UK tax resident for at least 15 of the last 20 tax years. A deemed domiciliary is no longer able to benefit from the remittance basis of taxation, meaning that their worldwide income and gains are subject to UK tax.

Inheritance tax

A non-UK domiciliary is liable to UK inheritance tax only in respect of their UK assets and any assets (including indirect interests) deriving their value from UK residential property. Their non-UK property falls outside the scope of UK inheritance tax, and is known as “excluded property”.

Once a non-UK domiciliary becomes deemed domiciled in the UK (as described above), their worldwide assets fall within the scope of UK inheritance tax and, on death, are chargeable at 40% (to the extent that their value exceeds the available nil rate band, and subject to any applicable exemptions or reliefs).

The inheritance tax treatment of trust assets is determined by reference to (i) the domicile status of the settlor; and (ii) the location of the assets held by the trust. For non-UK domiciliaries who contribute assets to a trust before they become deemed domiciled in the UK, non-UK trust assets remain outside the scope of UK inheritance tax, even after the non-UK domiciliary becomes deemed domiciled in the UK and even if the settlor retains an interest in the trust assets (for example, as a beneficiary under the terms of the trust). 

This means that the non-UK assets held within such trusts do not fall within the “relevant property” regime (under which inheritance tax charges can arise on the creation of a trust (at an immediate rate of up to 20%) as well as every 10-year anniversary of the trust and upon capital distributions (an exit charge) to beneficiaries (at rates of up to 6%)), nor is their value subject to inheritance tax at 40% on the settlor’s death.

Protected settlements

Anti-avoidance provisions apply to the taxation of non-UK trust structures such that, in certain circumstances, where a settlor retains an interest in a trust (for example, if they are also a beneficiary), income and gains arising within the trust structure are attributed to the settlor for UK tax purposes. 

A consequence of the 2017 Reforms (in particular, the introduction of deemed domicile status in respect of income and capital gains tax) could therefore have been that non-UK domiciled settlors of non-UK trusts would have been subject to UK tax on an arising basis on foreign income and gains within their non-UK structures once they became UK deemed domiciled under the new rules. However, in an effort to minimise the migratory response to the 2017 Reforms, the Government introduced specific trust protections. 

The effect of these protections is that, where a non-UK resident trust is established by a non-UK domiciliary (before they become deemed domiciled in the UK):

• the settlor is protected from automatic attribution of (and an immediate tax charge on) non-UK income and gains arising within the trust structure, even if they retain an interest in the trust once they are deemed domiciled in the UK; and
• whilst UK resident, the settlor (and other UK resident beneficiaries) pay tax in respect of trust income and gains only to the extent that they receive a benefit from the trust which is “matched” with income or gains within the trust structure. If the recipient of the benefit is able to claim the remittance basis of taxation, the “matched” benefit is also taxed on the remittance basis.

However, these protections are lost if the trust is “tainted” (for example, by the settlor adding to the trust after the settlor has become deemed domiciled in the UK).

The 2017 Reforms marked an improvement in a number of respects to the prior position of non-UK domicilaries. Whilst the introduction of a comprehensive deemed domicile regime meant that income and gains could be taxed globally, there was in our view what amounted to a statutory invitation to create foreign trusts, which many non-UK domiciliaries accepted. 

The protected settlements regime effectively permits individuals to remain resident in the UK (although retaining an intention to cease residence in the UK consistent with their non-UK domiciled status) whilst benefiting from the gross roll up of non-UK source income and gains in non-UK trust structures until a distribution or benefit is received. Further, the fact that non-UK trust assets could remain permanently outside of the scope of UK inheritance tax was a major attraction. This is in our view the key reason why there was not a significant behavioural response to the 2017 Reforms.

Whilst the 2017 Reforms may have improved the regime, they were made against a backdrop of a regime that had been under pressure for a long period. Changes have been made on a regular basis over the past 15 or so years, and this has created the impression that the regime has been on borrowed time, with a negative perception amongst members of the public and (in our view) a misunderstanding of its advantages and scope. 

The regime has become a political football at regular intervals, starting in 2007/8 (when significant changes were first made), through the 2015 election (when it became one of the foremost issues of the campaign), to the 2017 Reforms, and to the period leading up to the 2024 election (when the taxation of non-doms again became the subject of political controversy). At regular intervals in the intervening period, aspects of the regime were changed and rules were tightened. 

The combination of a focus (most of it negative) on the regime for non-UK domiciliaries from a political perspective, frequent changes, a somewhat aggressive attitude on the part of HMRC towards aspects of the regime (in particular, investigations into the domicile of deemed domiciliaries post-6 April 2017, the scope of what constitutes a remittance and the possibility of tainting protected settlements), and the availability of international alternatives (in Italy, Greece, and Ireland to name but three) has, arguably, meant that the UK has become less attractive. The survival of the regime has therefore been in question for some time. Now, we have confirmation that it will end, drawing to a close what for many non-UK domiciliaries has been an increasingly unsettling chapter. 

The move to a residence-based regime requires an unwinding of much of the current regime and, following initial policy announcements, the question was how radical that unwinding would be. The answer is quite radical, albeit not as radical as was at one stage feared immediately following July’s General Election, and the impact of the reforms is also mitigated by the introduction of the Temporary Repatriation Facility (TRF) (discussed further below).

The existing regime will, however, live on in some slightly surprising aspects and therefore a clean break with the concept of domicile has not been achieved. For example, for non-settlors, if the trustees of a trust make a distribution of gains that arose prior to 6 April 2008, and the recipient is non-UK domiciled, then those gains remain outside of the scope of UK tax. This is a surprisingly common scenario encountered in practice, because of planning that was undertaken in the aftermath of the 6 April 2008 changes to the taxation of non-UK domiciliaries, in effect creating trusts holding only pre-6 April 2008 gains. Aspects of the domicile regime also live on for inheritance tax purposes explained below.

Further, in the dying days of the regime governing remittances, the definition of what constitutes a remittance is to be expanded. In effect, and some 16 years after the current regime was introduced, following litigation which HMRC lost, there is now to be an expanded definition of remittance which includes:

• the use of funds outside of the UK for the benefit of a relevant person who is in the UK (a change which may impact financial provision made on divorce using foreign income and gains where both spouses are resident in the UK);
• clarification of when funds paid to a UK bank account are deemed to be remitted;
• confirmation of HMRC’s view (which is disputed by many advisers) that the use of unremitted overseas income and gains as security for a UK related debt is a remittance; and 
• a new rule providing that a remittance occurs where property which is non-UK situs for general law purposes becomes UK situs for capital gains tax purposes. It is not clear what this provision is targeting (hopefully this will be addressed by HMRC guidance) but it may affect the acquisition of certain tangible personal property such as yachts or the making of loans to a UK resident. The scope of the rules is very wide. 

In addition, where assets have previously been remitted but no tax charge has arisen, there will now be nothing to prevent a tax charge arising if there is a further remittance of the same assets (or assets deriving from them). It is possible that this could affect individuals who have made remittances whilst non-resident and have then resumed UK residence although it is not clear that the change is aimed at this situation.

These changes will make it easy to fall into a trap by inadvertently remitting unremitted foreign income and gains from 6 April 2025 and will also serve as something of an encouragement to make use of the TRF. That may in fact be the purpose of the changes; otherwise, it is difficult to see why legislative time should be devoted to making changes to an obsolete concept.

The new FIG regime is a classic inpatriate regime of a type familiar to many residents of continental European countries. 

Eligibility

Individuals will qualify for the FIG regime if they have been non-UK tax resident for at least 10 consecutive tax years, with the new regime applying for their first four tax years of UK residence (meaning that, unlike the existing non-dom regime, the new regime could apply to UK domiciliaries returning to the UK after a significant period abroad).

However, the regime will not apply automatically to qualifying individuals and must be claimed in a tax return. There is a significant compliance burden (which does not apply to the existing non-dom regime) – individuals will be required to quantify the amount of FIG for which relief is being claimed and include these amounts in their tax returns. If an item of income or gain is not quantified, no relief for that item will be available. 

Many taxpayers are likely to find this requirement unattractive and, in some cases, impractical. The thinking behind it may have been intended to be helpful to taxpayers, specifically attempting to ensure that they are treated as residents of the UK for the purpose of double tax treaties – which customarily exclude from their scope individuals who are taxable only by reference to income or gains arising in the jurisdiction of residence. 

The deadline for claiming relief is 12 months following the 31 January after the end of the relevant tax year. Later claims for relief will not be allowed where the taxpayer has been careless (or deliberate), meaning that, if an item of income/gain has been overlooked, it may not be possible to correct this after the time limit.

It will be possible to make a claim for either income or gains, or both, and to select specific sources of FIG on which relief is claimed. However, if any claim is made, the individual loses their entitlement to both the income tax personal allowance and the capital gains tax annual exempt amount, as well as the ability to claim relief for foreign income or capital losses, for the year of the claim.

Taxation of personal income and gains

From 6 April 2025, individuals who are eligible for the FIG regime will be entitled to 100% relief on certain categories of foreign income and foreign chargeable gains (FIG) that arise within the four-year FIG regime period (provided, of course, that a claim for relief is made for such FIG, as set out above). Such relief will apply irrespective of whether FIG for which relief is claimed is brought to or used in the UK.

The categories of FIG which are eligible for relief generally conform to those that qualify for the remittance basis under the existing non-dom regime. Overseas life policy gains do not therefore qualify. Furthermore, whilst the remittance basis of taxation can currently apply to partnership profits where the trade is carried on wholly or partly outside the UK, the FIG regime will exempt foreign partnership profits only if the trade is carried on wholly outside the UK. Sums falling into the Disguised Investment Management Fee regime are also not protected, a potentially significant issue for investment managers. 

Relief is also available for earnings which relate to work done outside the UK during the first four years of residence. This is however subject to a cap which is the lower of £300,000 and 30% of the individual’s total earnings for the year.

As far as income is concerned, the relief takes the form of a deduction from total income rather than an exemption from tax for the specific items of income which are quantified. As mentioned, this may help with treaty relief claims in other jurisdictions if there is any question as to whether the individual is subject to tax on the foreign income in the UK.

Once an individual has been resident in the UK for four years, that individual becomes liable to capital gains tax and income tax on a global basis.

Taxation of trust FIG 

The trust protections regime is abolished with effect from 6 April 2025. However, the four-year FIG regime will be available to protect against liabilities in respect of overseas income and gains of a trust which might otherwise be attributed to the individual. 

Note, however, that if a trust distribution is not fully “matched” during the four-year FIG period, it can potentially still be matched to income within the trust structure under the “transfer of assets abroad” anti-avoidance rules after that period expires (and so give rise to a tax charge). Care will therefore need to be taken if trust distributions are to be made in the first four years of residence unless the rules are changed to remove this risk.

Revised onward gift rules will also apply to trust distributions received by individuals who take advantage of the four-year FIG regime. If such an individual makes an onward gift to a UK resident who is not within the four-year FIG regime, the recipient will, broadly speaking, be treated as if they had received the relevant distribution.

After the initial four-year period, a UK resident settlor of a non-UK trust will in principle be liable to tax on all of the income and gains of the trust structure. Income is however only taxable if the settlor or their spouse retains an interest in the settlement or has received a capital sum. In addition, it may be that the income and gains of underlying companies benefit from one of the several “motive defences” which apply to income and gains arising to non-UK corporate structures in some circumstances. 

These motive defences may themselves be impacted by a wider review of the rules for taxing such overseas structures which is due to recommend changes with effect from 6 April 2026. That is not ideal for individuals who choose to stay in the UK and are the settlors of non-UK trust structures with income and gains arising in underlying companies (a common scenario). Such individuals are faced with the uncertainty as to whether their liability to capital gains tax and income tax extends only to income and gains at trust level or right the way through the structure. 

Logistically, it was probably impossible for the Government to undertake a wholesale review of the offshore tax rules at the same time as the abolition of the trust protections regime but nonetheless the impact will create uncertainty. Given that a key aim of the new residence-based regime is to ensure certainty (eliminating debate concerning domicile, tainting, remittances etc.), this is perhaps a disappointment. We would also anticipate that one consequence of the introduction of the new regime will be an increase in the number of motive defence claims, many of which would in our view be justified in light of the statutory invitation to use foreign trust structures implicit in the 2017 Reforms. 

In our initial interactions with clients, the introduction of a residence-based regime for capital gains tax and income tax purposes and the removal of the trust protections regime has not been the most controversial aspect of the reforms. While some clients find it negative, there are others who would be prepared to live with it, in order to remain UK resident. However, the proposed changes to inheritance tax (described in detail below) fall into an altogether different category and have resulted in many people making plans to leave the UK before 6 April 2025 or earlier than they were originally planning.

Long-term residents

Liability to inheritance tax on non-UK assets will no longer be based on domicile but will instead depend on whether the individual in question is a “long-term resident” of the UK.

An individual becomes a long-term resident if they have been UK resident for 10 years out of the 20 years preceding the tax year in which the relevant inheritance tax event takes place. The length of time before becoming subject to worldwide inheritance tax is therefore being reduced from the current 15 years to 10 years.

However, as with the current regime, an individual cannot spend a full 10 years in the UK if they want to avoid worldwide exposure to inheritance tax. This is because, if they remain in the UK for 10 years and then cease to be resident in year 11, they will still satisfy the 10 out of 20 years residence criteria and will be a long-term resident in year 11. 

In order to avoid exposure to worldwide inheritance tax, they will need to make sure that they are not UK resident in year 10. In effect, they can therefore only spend nine years in the UK if they do not want to become subject to worldwide inheritance tax. 

Thus, an individual arriving in the UK having been non-UK resident for at least 10 complete tax years has a progressive exposure to UK tax; for the first four years benefiting from full relief in respect of most (but not all) categories of foreign income and gains under the FIG regime (described above), and thereafter between years five and ten (albeit year nine if they wish to escape the inheritance tax regime in year eleven), an inheritance tax exposure only with respect to UK property. 

Once an individual has become a long-term resident, they will remain a long-term resident for a period of time after ceasing to be UK resident. The amount of time for which they continue to be a long-term resident depends on how long they have been UK resident. This inheritance tax tail is one year for every year that the individual has been UK resident in excess of 10 years, subject to a minimum of three years and a maximum of 10 years. 

So, for example, if an individual has been UK resident for 12 years in the 20 years before leaving the UK, they will continue to be a long-term resident for the minimum of three years. If they have been UK resident for 15 out of the previous 20 years prior to leaving, they will continue to be a long-term resident for five years after ceasing to be UK resident. If the individual has been UK resident continuously for 20 years or more before leaving, they will continue to be a long-term resident for 10 years after leaving and will be subject to worldwide inheritance tax throughout this period. 

It appears to be the intention that, if an individual who has been a long-term resident returns to the UK after less than 10 consecutive years of non-UK residence, they will once more become a long-term resident. 

However, this does not appear to be the effect of the legislation in every case. For example, if an individual is UK resident for 10 years and then becomes non-resident in year 11 but returns to the UK in year 14, the individual will not be a long-term resident in year 14 as they have had three continuous years of non-residence. They would become a long-term resident again in year 15. This may of course be changed if it does not in fact reflect the Government’s intention.

There are transitional rules for individuals who have left the UK before 6 April 2025. These transitional rules only protect individuals who were not actually domiciled in the UK on 30 October 2024. If the individual was not deemed domiciled under the 15 out of 20 year rule at the time they left, they will not become a long-term resident and will not have worldwide exposure to inheritance tax at any point. On the other hand, if the individual was deemed domiciled under the 15 out of 20 year rule when they left the UK, they will be a long-term resident from 6 April 2025 until the start of their fourth year of non-residence. A deemed domiciliary who leaves the UK today would therefore be a long-term resident from 6 April 2025 to 5 April 2028 and would only be free from worldwide inheritance tax from 6 April 2028 (assuming they remain non-resident). This change is especially controversial because it may impact those who ceased residence in the UK before there was any discussion of a change to the basis of the inheritance tax regime, especially for trusts (as to which see below).

There is a separate rule for individuals who were under the age of 20 immediately before the tax year in which the relevant inheritance tax charge arises. Such individuals will be treated as long-term residents only if they have been resident in the UK for half of the total number of tax years for which they have been alive.

There is also provision for whether or not a company is a long-term resident. This might be relevant if a company is the settlor of a trust (for example, an employee benefit trust). A company is treated as a long-term resident if it is UK incorporated or if it is UK resident for corporation tax purposes in the previous tax year.

Normally, there is a full spouse exemption on death. However, the spouse exemption is limited to £325,000 where a UK domiciliary dies leaving assets to a spouse who is not domiciled (and not deemed domiciled) in the UK. This will continue to be the case where a long term resident leaves assets to a spouse who is not a long-term resident.

However, just as an individual can, at present, elect to be treated as UK domiciled if they have a UK domiciled spouse (in order that the full spouse exemption is available), the spouse of a long-term resident may elect to be treated as a long-term resident. If they do so, they will continue to be a long-term resident until they have been non-resident for 10 consecutive tax years.

Where a spouse has elected under the existing regime to be treated as UK domiciled, they will, after 5 April 2025, be treated as a long-term resident. If the original election was made before 30 October 2024, this status will cease if they have four consecutive years of non-residence. If the election is made between 30 October 2024 and 5 April 2025, they will continue to be a long-term resident until they have been non-resident for 10 years.

Trusts

At present, the question as to whether non-UK assets held in a trust are excluded property depends on the domicile status of the settlor at the date the assets became comprised in the settlement. As mentioned above, this means that the inheritance tax status is fixed and that assets will remain outside the scope of UK inheritance tax even after the settlor becomes deemed domiciled in the UK.

From 6 April 2025, this will no longer be the case as the inheritance tax treatment of trust assets will change depending on the status of the settlor from time to time. It will be necessary to look at whether the settlor is a long-term resident at the date the relevant inheritance tax charge arises. If the settlor is not a long-term resident at the relevant time, the non-UK assets in the trust will be excluded property. On the other hand, if the settlor is a long-term resident when the inheritance tax charge arises, the non-UK assets in the trust will not be excluded property.

If the settlor is no longer alive at the time the inheritance tax charge arises (for example, on a 10-year anniversary of the trust), the position is different depending on when the settlor died. If the settlor died before 6 April 2025, the existing rules apply and so the question is whether the settlor was domiciled (or deemed domiciled) in the UK when the property became comprised in the settlement. On the other hand, if the settlor dies after 5 April 2025, the question is whether the settlor was a long-term resident immediately before their death. If they were, the non-UK assets in the trust will not be excluded property at any subsequent time. Of course, the flip side of this is that, if the settlor was not a long-term resident at the date of their death, the trust assets can remain excluded property indefinitely.

There is an additional condition which must be satisfied if the trust has a “qualifying interest in possession” (this covers some situations where a beneficiary has an entitlement to trust income). In these circumstances, in order for the non-UK assets of the trust to be excluded property, the beneficiary who is entitled to the income must also not be a long-term resident.

The effect of these rules is that, even for an existing settlement where the non-UK assets are excluded property, the trust assets will cease to be excluded property on 6 April 2025 if, at that time, the settlor is a long-term resident.

There is, however, a partial concession for trusts in existence on 30 October 2024. For such trusts, there is no inheritance tax charge on the death of a settlor who has reserved a benefit in the trust assets (normally as a result of being a beneficiary) or on the death of a beneficiary who has a qualifying interest in possession (so that the beneficiary is treated as being beneficially entitled to the trust assets). 

In each case, the exclusion from tax on death only applies to assets which were held in the trust prior to 30 October 2024 and which were excluded property at that time under the existing rules. In addition, the exclusion only continues to apply as long as the property in question remains situated outside the UK at all times. 

Although this exemption is welcome, there is no similar exemption from the relevant property regime for trusts in existence on 30 October 2024. This means that, from 6 April 2025, there will be tax charges on each 10-year anniversary of the trust at a rate of up to 6% and proportionate charges (known as an exit charge) when assets leave the trust if the settlor is a long term resident.

There is an important point in relation to exit charges. There is currently no exit charge where property becomes excluded property as a result of the property ceasing to be situated in the UK. This will continue to be the case. However, if trust assets become excluded property as a result of the settlor ceasing to be a long-term resident, this will give rise to an exit charge. In some circumstances, this may give rise to an immediate exit charge on 6 April 2025. This would be the case, for example, where the settlor of a trust is UK domiciled but the individual has already been non-resident for 10 years or more when the rules come into effect on 6 April 2025.

In addition, if a deemed domiciled settlor leaves the UK during the current tax year (2024/25), the trust assets will (as mentioned above) cease to be excluded property as that individual will become a long-term resident on 6 April 2025 and will remain a long-term resident until 6 April 2028. On 6 April 2028 there will be an exit charge. It follows that a deemed domiciled individual who ceased residence on 6 April 2023 (i.e. well before any initiation of the changes) will become a long-term resident on 6 April 2025, and so could be caught by the exit charge provisions on 6 April 2026 when they lose their long-term resident status. This change is highly controversial because its impact is retrospective.

This ongoing exposure to UK inheritance tax for trust assets is unpalatable for those who do not expect to remain in the UK longer term and is leading some individuals to re-assess their continued UK residence.

It may be possible to mitigate any exit charge (or other relevant property charges) where an individual leaves the UK by terminating the trust as soon as possible after the individual becomes non-resident. Exit charges and/or 10-year charges which would otherwise arise during the remainder of the inheritance tax tail would then be avoided. However, the trust assets will then become part of the settlor’s estate and could be subject to tax if the settlor dies whilst still a long-term resident (unless protected by a double tax treaty).

Double Tax Treaties

Despite the fact that the documents published on 30 October 2024 explicitly state that “the concept of domicile as a relevant connecting factor in the UK tax system will be replaced by a system based on tax residence”, the existing deemed domicile provisions are expressly retained for the purposes of the operation of the UK’s inheritance tax double tax treaties. Deemed domicile is irrelevant to the four older treaties (France, Italy, India and Pakistan). However, for the other six inheritance tax treaties, an individual is treated as domiciled in the UK if they would be deemed domiciled under the existing rules (15 out of 20 years residence).

This gives rise to an odd mismatch. For example, if an individual who is not actually domiciled in the UK lives in the UK for 13 years and then moves to Switzerland and settles there, although they will be a long-term resident (and will remain so for three years), they will only be domiciled in Switzerland under the terms of the treaty (as they will not be deemed domiciled in the UK under section 267 IHTA 1984). This means that there is no need to look at the treaty tie-breaker rules. It also means that the citizenship carve out (under which the UK retains the right to tax for five years if the individual is a UK national) cannot apply as this only applies where the individual has been domiciled in the UK at some point within the previous five years.

It also means that an individual who has been resident in the UK for 10 years and who has therefore become a long-term resident (and so subject to worldwide UK inheritance tax) may not be able to take advantage of a relevant double tax treaty if they are not actually domiciled in the UK as they will not have become deemed domiciled in the UK at that point. 

This could be relevant, for example, if a non-US individual who is living in the UK owns shares in the US (as many people do) as those shares will be subject to US estate tax and will not be protected by the UK/US treaty if the individual has been resident in the UK for less than 15 years. The individual will therefore have to pay tax in both countries and rely on the UK giving relief for any tax paid in the US. 

Double tax treaties dealing with estate and gift tax have been a somewhat esoteric area of interest for most non-UK domiciliaries because the excluded property rules in effect ensured that they were of limited relevance. That will no longer be the case. 

In particular, we anticipate that the US/UK double tax treaty for estate and gift tax purposes will be highly relevant to US domiciliaries who have created trusts, because the provisions of Article 5 of that treaty may in many circumstances take trusts outside of the inheritance tax 10-year charge and exit tax regime. This is important, because the US has no similar event of charge and as a result US domiciliaries who are US citizens who have created such trusts and who have become long-term residents of the UK may find that trusts that they have created are outside of the new rules. In this context, whether or not the relevant individual has acquired UK citizenship is likely to be a critical question because Article 5 of the US/UK treaty denies treaty benefits in most circumstances to US citizens who are also UK citizens. 

We further anticipate that treaties will be used in order to reduce the impact of the shadow period for those who are long-term residents and who leave the UK. Here, the attitude of HMRC to the relevant double tax treaties is likely to be important. In a number of respects, the provisions of the treaty should be clear, and should not give rise to significant argument – for example, if a US citizen who has not acquired UK citizenship (or who surrenders UK citizenship) ceases residence in the UK and ceases to have a permanent home in the UK then that individual may immediately be outside of any shadow period for inheritance tax purposes. 

Where the position will become more complex is with respect to treaties such as that with Italy, and whether HMRC will accept that individuals who cease UK residence and become residents of Italy (and who are non-UK domiciled as a matter of general law) are immediately protected by the UK/Italy double tax treaty even if they themselves benefit from the Italian equivalent of the non-dom regime. In our view, that should be the case (there is nothing in the treaty which blocks such treatment for departing non-UK domiciliaries), but HMRC’s guidance on the UK/France treaty gives some cause for doubt as to how HMRC will operate the Italian treaty in practice. 

Further, there are a series of practical considerations that need to be taken into account. For example, will it be possible in some circumstances and particularly where a special tax regime is taken advantage of to obtain the appropriate certificate from the relevant domestic tax authority which would enable claims under double tax treaties to be made?

It also remains the position that, in many cases, an individual who ceases residence in the UK and becomes resident in a jurisdiction with a suitable estate and gift tax treaty may no longer be subject to a shadow period for personally held assets but it appears unlikely that, in respect of trust assets, the exit charge provisions will be turned off. In some treaties (for example, the US and South Africa treaties) specific wording relating to trusts may offer some protection but in many cases (for example, with respect to Italy and India) no protection from the exit charge will be available.

All in all, we are anticipating that planning use of estate tax treaties will be an increasing area of focus and there will undoubtedly be complexities to work through. 

Reactions to the proposed inheritance tax reforms

It would be fair to say that the changes to the inheritance tax treatment of trusts are controversial. As mentioned above, for many, the 2017 Reforms constituted an invitation to transfer assets into trust which was clearly blessed by the special treatment of trusts under the trust protections regime. A major driver was, however, the inheritance tax treatment of trusts and the fact that an opportunity was taken as part of the 2017 Reforms to confirm that non-UK situs property held by the trustees of a trust is outside the scope of UK inheritance tax even if the settlor subsequently becomes deemed domiciled or actually domiciled in the UK. 

Announcements made by the current Government, both in the run-up to the July 2024 General Election and immediately following their election victory, that they would “end the use of Excluded Property Trusts to keep assets out of the scope of inheritance tax” created an impetus for many individuals to cease residence in the UK as soon as possible in the hope of escaping the impact of the new regime. 

The real risk of a significant migratory response to the proposed inheritance tax reforms was emphasised by advisors as part of the listening sessions which were held with HMRC and the Treasury throughout the summer. It does appear that the message that it was this aspect of the changes which was creating considerable consternation has been received. 

The new regime represents a compromise. Instead of the application of the reservation of benefit regime to existing trust structures (which would result in a tax charge on the death of the settlor), the 10-year charge regime will apply where the settlor is a long-term resident of the UK. Thus, previously excluded property can come back into the charge to inheritance tax but on a partial basis. This is better than it could have been but there remains a sense amongst clients that tax has been imposed retrospectively. 

This is particularly the case for individuals who have ceased residence in the UK and who were previously deemed domiciled. Whilst they may benefit from a shorter (three-year) shadow period to escape the long-term residence regime, when they do so they face an immediate charge to inheritance tax under the 10-year charge regime on trust property. This could be at anywhere between a 0.6% rate (for those who ceased residence with effect from 6 April 2023) to 1.8% (for those who cease residence from 6 April 2025). 

The perceived unfairness of this new regime for individuals who ceased residence in the UK a long time before it was even conceived of is obvious. An individual who falls outside of the three-year shadow period on 6 April 2026 can have had no knowledge of the potential for the introduction of the regime when they left on 6 April 2023 and yet there will be an (albeit small) exit charge. Whilst some mitigation might be possible in some circumstances, it will not be an option in all situations, depending on where the individual is resident.

Therefore, at least from our initial interactions with clients, the mildly positive aspects of the inheritance tax regime for trusts in particular (most notably that the new regime could have been worse) are generally outweighed by the imposition of what is seen by many as the equivalent of a 0.6% per annum wealth tax. In fact, the tax is more than that as the 6% charge is applied to the value of the trust assets in year 10 which will (hopefully) be more than the value of the trust assets in earlier years. For those leaving the UK, it is seen as a form of de facto exit tax.

This is also an issue for settlors who remain resident in the UK. Those individuals are likely to be liable to capital gains tax and income tax on the gains and income of a trust. To the extent that the 10-year charge must be paid, and the settlor remains resident in the UK, the trustees are likely to have to pay the inheritance tax out of previously taxed funds. 

There may be a way of pre-financing the 10-year charge through designations under the TRF but absent doing so, the concern is that the funds required to pay the tax will in effect need to be grossed up, particularly if they have to be extracted from underlying structures at a tax cost (although there is some limited ability to receive funds from a company with no tax charge in order to pay inheritance tax, this is subject to a number of restrictions). Thus, in overall terms, we do not believe that the new regime is viewed particularly positively by those who benefited under the old regime. 

However, for individuals coming to the UK for the first time, and who know that they are likely to have to cease residence in the UK in year nine, the new inheritance tax regime is likely to be viewed favourably. The rules are at least clear, and allow a significant period of freedom from worldwide inheritance tax.

When significant changes have been made to the non-dom regime in the past, they have been accompanied by measures which have softened the impact of the changes. So, for example, in 2008, there was an ability to rebase assets to their value on 6 April 2008, and the treatment of historic income and gains was in effect grandfathered. Rebasing, whilst not common, is also not entirely novel; when capital gains tax was introduced in 1965, there was a general rebasing and again in 1982. 

It should be noted here that a rebasing opportunity has also been announced in the context of the forthcoming reforms, open to those who have claimed the remittance basis between 6 April 2017 and 5 April 2025 and were not UK domiciled or deemed domiciled pre-6 April 2025. However, the rebasing will apply only to personally held non-UK assets (i) owned on 5 April 2017; (ii) that were situated outside of the UK between 6 March 2024 and 5 April 2025 (subject to certain exceptions); and (iii) are disposed of on or after 6 April 2025, with a rebasing date of 5 April 2017. It is expected that the limitations placed on this rebasing opportunity will, in many circumstances, make it of little practical use.

On the other hand, the TRF (described in further detail below) represents something new and, in our view, quite revolutionary. For a two-year period, there will be a flat rate of tax of 12% on designations of income and gains which have benefited from the remittance basis in the past and for one further year the rate will be 15%. 

There has been no equivalent of this type of treatment in the history of UK tax, as effectively the normal rates of income tax and capital gains tax are disapplied and replaced by a flat rate of tax. The rate is also low – only in the (now distant) days of business asset taper relief (prior to 2008) was there a lower rate for significant receipts (an effective rate of 10%) and that rate only applied for capital gains tax purposes. In many respects, the TRF therefore is an extraordinary measure. 

The policy position is clear. The Government wants to draw a line under the historic non-dom regime and to encourage the payment of tax to free up sums to bring to the UK, whether for spending or investment. The collateral benefit is that significant amounts of tax are expected to be paid and, indeed, the fiscal basis for the changes as a whole seems to be largely underpinned by the anticipated receipts under the TRF. The TRF therefore represents something of an incentive for those remaining in the UK to designate sums and to move beyond the non-dom regime. 

As mentioned in the introduction to this note, the Chancellor confirmed on 23 January that an amendment to the Finance Bill would be made to widen the scope of the TRF; however, as at the time of publication of this note, no further details on this change have been made available.

Eligibility under the TRF

Any individual who has been subject to the remittance basis for at least one tax year is able to use the TRF during the three years in which it is available (i.e. the 2025/26, 2026/27 and 2027/28 tax years), provided that they are UK resident for the tax year to which their “Designation Election” (for which, see below) relates.

Making a “Designation Election”

In order to take advantage of the TRF, specific amounts (Qualifying Overseas Capital) are identified by the taxpayer (a process known as “designating”, done via a “Designation Election” in the taxpayer’s tax return which sets out the total amount of the Qualifying Overseas Capital designated), and these amounts are subject to a special tax charge (TRF Charge). 

The draft legislation identifies a number of categories (which, confusingly, can include income) that are Qualifying Overseas Capital. These categories include pre-6 April 2025 FIG that is personally held by the individual (and which has not been remitted to the UK or is so remitted during the three-year TRF period), as well as pre-6 April 2025 trust FIG that is attributed to the individual as a result of a benefit or capital payment from the trust structure which is made in any of the qualifying tax years (2025/26-2027/28). Note that it is possible to make designations in respect of non-cash assets, provided that Qualifying Overseas Capital has been used to purchase such assets.

Once designated, the individual is generally exempt from income tax and capital gains tax charges on remittance of the Qualifying Overseas Capital (although, as the legislation is currently drafted, this may not always be the case where the amounts designated relate to a trust distribution and the trust was originally funded using unremitted non-UK income and gains of the settlor). The mixed fund rules have been rewritten to ensure that Qualifying Overseas Capital is remitted in priority to every other category of income or capital of any tax year within a mixed fund. In addition, it is possible to set up a special offshore account which can hold designated Qualifying Overseas Capital pending remittance to the UK.

In order to ensure that benefits or capital payments from a non-UK trust structure are matched with pre-6 April 2025 FIG, it may be necessary to take steps to realise FIG within the trust structure prior to 6 April 2025. For individuals who are able to access the remittance basis of taxation during the 2024/25 tax year, it may be appropriate to make distributions (outside the UK) from the non-UK structure before 6 April 2025, and then designate such funds under the TRF during the 2025/26 tax year. 

For deemed domiciliaries (who are unable to claim the remittance basis during the 2024/25 tax year), the best option may be to take steps to realise pre-6 April 2025 FIG within the non-UK structure during the 2024/25 tax year, and then to make a capital distribution (which is matched with such FIG) early in the 2025/26 tax year (and which can then be designated under the TRF).

The attitude of HMRC to this type of planning will have a major bearing on its attraction. If HMRC are aggressive in trying to show that deemed domiciliaries are in fact UK domiciled, and that they should be taxed on gains and income of trust structures on the arising basis, in the 2024/25 tax year, the attraction of the TRF will reduce and so will its impact. We deal with this below. 

The TRF Charge

The amount of the TRF Charge varies depending on the tax year of the return in which the Designation Election is made. For tax years 2025-26 and 2026-27 the TRF Charge is at a rate of 12% on the amount of Qualifying Overseas Capital; for tax year 2027-28 the TRF Charge is at a rate of 15%.

Note that the TRF Charge applies to the designated amount net of any foreign tax that may have been paid on the FIG in question, so it will not be possible to claim credit in the UK for that foreign tax.

Further thoughts on the TRF

The drafting of the legislation at present understandably contains some uncertainties and inconsistencies (for example, in relation to the treatment of unremitted personal income and gains transferred to trusts (a common occurrence following the 2017 Reforms and referred to above) – a point we have raised with the Government and hope will be clarified before April 2025).

A lesson of the 2017 Reforms is that these uncertainties and inconsistencies need to be ironed out before the legislation is finalised because HMRC have established a track record of seeking to charge tax in a manner that runs counter to the clear policy objectives of prior changes. 

An example would be the treatment of offshore income gains (i.e. gains from the disposal of non-reporting status funds) arising in non-UK trust structures which HMRC asserted were outside the scope of the trust protections regime. This was clearly not intended (and HMRC implicitly accepted the fact) but HMRC adopted a literalist approach to the legislation and, in effect, dared taxpayers to litigate (which in most cases they were not prepared to do). A similar approach this time round would undermine the policy aims of the changes. 

Second, the TRF could be used to undertake a more ambitious closure of relevant issues relating to prior beneficiaries of the non-dom regime. It is now clear that HMRC reacted to the 2017 Reforms by undertaking enquiries into deemed domiciliaries and trust tainting. HMRC have been criticised by the representative professional bodies for their attitude towards domicile enquiries which, in our experience, has been aggressive and intrusive. HMRC have been prepared to litigate and have effectively challenged taxpayers to litigate in response. 

With the abolition of the trust protections regime, there is very little precedent to be set by continuing these enquiries by litigation. Tainting has also become an irrelevant issue. From a policy perspective, why not use the TRF as a mechanism for drawing many of these enquiries to a close? A compromise which we believe many former non-domiciliaries would accept is for their prior domicile to be confirmed on the basis that tax is paid on an agreed sum under the TRF.

Such a programme would be ambitious but, in our view, merited and worthwhile. In order to make such a programme work, three things would be required: first, HMRC officers would have to be incentivised to close enquiries rather than continue them and this probably requires a change of mindset; second, this would require energetic approaches by HMRC’s management to ensure that such a process was undertaken in an expeditious fashion; and third, there would have to be political licence to do so. One reason why domicile claims have become so common appears to be that it is easier for HMRC to continue an enquiry and litigate it (and potentially lose) than to concede, for fear of scrutiny by the Public Accounts Committee.

It might be said that such a strategy would run counter to HMRC’s Litigation and Settlement Strategy. We query whether this is correct. The strategy itself says that HMRC should only collect tax where they believe it is owed and in many cases the questions of domicile and tainting are very nuanced and there are genuine disagreements between the taxpayers and HMRC. 

In our view, it would be better to use the TRF as an opportunity to procure settlements than to litigate something which is of no continuing value. We do not regard this as being inconsistent with the Litigation and Settlement Strategy and, in any event, there are signs that, given the growth in tax litigation and in the number of tax cases more generally, such an approach should be followed. 

There are clear benefits to such an approach. HMRC resource could be freed up and redeployed into other areas. The work by Dan Neidle and others to highlight retail avoidance (much of which is probably un-investigated or under-investigated because of the relatively low value at stake) shows that resources can be devoted productively to this type of area rather than being deployed into investigating an obsolete concept. And the acceleration in tax receipts would be marked. 

The difficulty with domicile and tainting enquiries is that the outcome is in almost all cases binary. This creates an incentive on both sides to conduct the enquiry until the bitter end. We suggest that it would be better to free up resource and draw a line under the past.

Having said that, there is no doubt that the TRF is an attractive opportunity and will be used by many individuals who plan to remain in the UK. It will be particularly helpful for deemed domiciliaries who have established trusts before becoming deemed domiciled as the cost of receiving assets from those trusts is currently high. It will also enable assets to be taken out of trusts to minimise any ongoing 10-year inheritance charges which would apply if the assets remain in trust.

The ending of the non-dom regime, whilst not a surprise, represents both a major rupture with the past and an interesting development in terms of fiscal policy. One of the documents which was included in the publications which accompanied the Budget on 30 October 2024 was an evaluation of the impact of the 2017 Reforms on the taxation of non-UK domiciliaries. Broadly speaking, this study concluded that the amount raised by those changes exceeded expectations by a significant degree and elicited either no or mildly positive behavioural response in that the number of those coming to the UK and claiming the benefit of the non-domicile regime remained healthy. This line of thinking underpins the changes to the taxation of non-UK domiciliaries which will take effect from 6 April 2025. 

In our experience, taxpayers are not overly concerned about the removal of the trust protections regime (although some will be). Instead, the inheritance tax changes are having the most impact and when these are combined with the proposed changes to the business property relief regime, they have created a sense of unease. 

It is already obvious that the behavioural response to the 2025 changes is very different to the behavioural response to the 2017 Reforms. Specifically, the number of those ceasing residence in the UK as a result of the changes is far greater than in 2017. 

However, there are some incentives to stay. The Budget publications illustrated that the Government is expecting significant fiscal benefits to flow from the TRF. For example, in 2027/28 the Government is anticipating £5.895bn of additional revenue to flow from the changes and the majority of this comes from remittances under the TRF. After the TRF ends, the positive impact is much more muted (at £95m in 2029/30). 

So the position should not be viewed to be wholly negative. The TRF itself is a revolutionary measure and it may encourage taxpayers to stay in the UK. To achieve its true revenue raising potential it might be said that HMRC need to change their approach and fully align themselves with the policy objectives. Clearly, there has been an attempt both to listen to the concerns of the industry and to balance the need for revenue collection, a definite break with the past non-dom regime, and a desire to make the UK an attractive place for former non-UK domiciliaries to continue to be resident.  

The new post 6 April 2025 inpatriate/FIG regime has been the subject of some criticism. In our view, this regime has a series of positive aspects. There is no doubt (and we are seeing in our own practice) that the regime will be attractive to some taxpayers. For example, individuals who wish to realise gains on the disposal of assets may well wish to come to the UK and base themselves here for a period in order to realise those gains. And the regime will be simpler for those coming to the UK for work purposes for a relatively brief period. Therefore, in our view negativity about this regime is misplaced. 

The main downside is the relatively short nature of the period for which FIG treatment will apply. There are many jurisdictions that offer longer periods of tax advantaged status. Nonetheless, given the requirement to draw a definite line under the past, the regime is probably as good as one could expect at this stage in the political cycle.