The New Four Year Rule to impact UK resident individuals domiciled outside the UK

A new tax regime will come into force on 6th April 2025 which will impact UK resident individuals who are domiciled outside the UK. 

The current remittance basis of taxation allows non-UK domiciliaries to shield foreign income and capital gains from UK taxation. This regime will be abolished and replaced with a new four year rule with effect from 6th April 2025, as announced in the 2024 UK Spring Budget on 6 March, read full budget summary here.

The salient points under the proposed new rules are as follows:

• If an individual becomes UK tax resident after a period of 10 years of non-UK residence, foreign income and foreign capital gains will not be charged to UK tax for a period of four tax years of UK residence, if an election is made, and the foreign income and capital gain arising within that four year period can be remitted to the UK free of UK tax charges 
• For those individuals who have used the remittance basis of taxation and held foreign income and the proceeds of capital gains transactions offshore, there will be a temporary repatriation facility which will allow the remittance of these amounts in the tax years 2025/26 and 2026/27 at a special tax rate of 12%
• Transitional rules will apply to those who have claimed the remittance basis and who continue to be neither UK domiciled under general law principles nor deemed domiciled on or after 6th April 2025.  If, on or after 6th April 2025, they dispose of foreign assets that they held on 5th April 2019, there will be the facility to rebase those assets to their 5th April 2019 market value for capital gains tax purposes

In relation to trusts:

• Existing trusts and those settled on or before 5th April 2025 will continue to offer long-term inheritance tax protection, although income and capital gains will be taxable on the settlor if he or she is UK tax resident, can benefit under the trust and meets the criteria for the new four year residence-based test
• New trusts settled after 5th April 2025 may have certain inheritance tax advantages if the settlor is non-UK domiciled and is not caught by the four year test at the date of transfer of assets, although in the longer-term inheritance tax may arise on the trustees and potentially in the estate of the settlor if the settlor meets the four year residence-based test at the relevant time

Consultation is due in relation to inheritance tax, with a view to moving from a domicile-based system to a residence based system.  It is envisaged that non-UK domiciliaries who have been resident in the UK for 10 tax years will be within the scope of inheritance tax on their worldwide assets, with a 10 year tail for leavers.

Frequently Asked Questions

1. I will meet the residence criteria under these new residence-based rules on 6th April 2025, what should I do?

• Consider your residence position from 2025/26 onwards
• Consider the use of the temporary repatriation facility if you have foreign income and capital gains offshore and have been using the remittance basis of taxation
• Consider your position in relation to settled assets (e.g. an exclusion from benefit) or, if you have not already settled a trust, consider the long-term inheritance tax advantages of settling a new trust on or before 5th April 2025 

2. I am a non-UK domiciled settlor of an offshore trust from which I can benefit and I will be caught by these new rules on 6th April 2025, what should I do?

• You could accept the income tax and capital gains tax charges and receive distributions of the income and capital gains, accepting this as a cost of retaining the inheritance tax advantages
• You might consider becoming non-UK resident in order to avoid the income and capital gains tax charges that will arise on you
• You might consider an exclusion from benefiting under the trust if you do not require the funds

3. Is there an onshore structure that can help succession planning and asset protection?

• A UK investment-holding company can help to mitigate UK tax liabilities and allow for the control and the transfer of assets to future generations more efficiently

4. I’m a non-UK resident and non-UK domiciled settlor of a trust, are there any implications?

• No, there are no UK tax issues presented by this proposed new regime

5. I will be caught by the new four year rule and I can benefit from an offshore trust that I settled some time ago. Is it worth transferring the trust onshore?

• The income and capital gains tax position will be broadly neutral and the inheritance position will not change as a result of onshoring, so it may be worth considering, although tax advice should be sought

6. I can benefit from a trust which was settled by a non-domiciliary, who is now deceased, should I be concerned about these new rules?

• The new rules will not impact upon the trust or beneficiaries.

7. I will fall under the new regime on 6th April 2025, what should I do?

• You should seek tax advice from Equiom Tax Services prior to the changes

Equiom Tax Services Limited offers both global insight and local knowledge to advise individuals and businesses facing a diverse range of international tax challenges. Get in touch with Kevin Cowley or Andrew Cardwell if you have any questions regarding any of the above topics, or to discuss how Equiom can support you.

This article has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. This article cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained within this article without obtaining specific professional advice. Please contact Equiom Group to discuss these matters in the context of your particular circumstance. Equiom Group, its partners, employees, and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this article or for any decision based on it.