This change marks a significant shift for non-domiciled individuals (non-doms) who have traditionally benefitted from more favourable tax treatment. Under the current system, non-doms could elect to be taxed on the “remittance basis,” meaning they would only pay UK tax on their UK income and gains, and on foreign income and gains they brought (or “remitted”) into the UK. Non-doms with significant offshore wealth have found this system beneficial, as it allowed them to grow and retain assets outside the UK without triggering UK tax liabilities.

With the shift to a residence-based system, the emphasis will be on where an individual resides rather than their domicile status. As a result, non-doms who spend the a certain amount of time in the UK and are considered residents will face taxation on their worldwide income and gains, similar to UK-domiciled residents.

Key Implications for Non-Doms

The most notable impact will be that non-doms who qualify as UK residents will be liable to UK tax on all their global income and gains, regardless of whether these are remitted to the UK. This could significantly increase the tax burden on non-doms who hold substantial assets overseas. The valuable remittance basis option, which allowed non-doms to keep foreign income outside of the UK tax net, will be abolished under the new rules. This change could make the UK a less attractive place for wealthy non-doms who have relied on this provision to mitigate their tax liabilities.

The Foreign Income and Gains (FIG) Regime introduces a transitional relief period, designed to replace the remittance basis of taxation and align the UK with international practices. From 6 April 2025, all foreign income and gains will be taxed on an arising basis. However, new arrivals to the UK (or those who have not been UK tax resident for 10 consecutive years) can claim relief on their FIG for the first four years of UK tax residency. This means:

• No UK tax will be payable on eligible FIG during the relief period.
• The relief applies only if the income and gains arise during the first four tax years of residency.

Once the four-year period concludes, any FIG earned thereafter will be subject to normal UK tax rules. Moreover, if individuals remit FIG accrued before 6 April 2025, they will need to use the Temporary Repatriation Facility (TRF) or pay standard UK tax rates.

The FIG regime simplifies the rules by abolishing the complex remittance basis, yet it necessitates careful tax planning, especially for those with extensive overseas financial interests.

From 6 April 2025, the protection from tax on FIG arising within settlor-interested trust structures will no longer be available for non-domiciled and deemed domiciled individuals who do not qualify for and claim the 4-year FIG regime. FIG arising in the trust (whenever established) from 6 April 2025 will be taxed on the settlor on the same basis as UK domiciled settlors, unless the settlor is eligible for and claims the 4-year FIG regime.

From 6 April 2025, the matching of pre-6 April 2025 FIG to trust distributions will continue to apply for individuals who are not eligible for the 4-year FIG regime, or who are eligible for the 4-year FIG regime but do not claim it.

From 6 April 2025, beneficiaries and settlors who are within the 4-year FIG regime will also be able to receive benefits free from any UK tax charges whether or not the benefits are received in the UK However, such benefits will not reduce the pools of unmatched FIG within the overseas entity for matching purposes and will be subject to a modified onwards gift rule and close family member rule.

As part of the UK government’s upcoming reforms to the taxation system for non-UK domiciled individuals, there is a significant shift in how Inheritance Tax (IHT) will be applied. Currently, IHT is heavily dependent on an individual’s domicile status, but the proposed changes introduce a residence-based approach to ensure fairness and consistency.The reforms propose a residence-based IHT system, meaning that an individual’s global estate will be liable to UK IHT if they meet the long-term residence criteria.

Transition from a Domicile-Based to a Residence-Based IHT System

Historically, the UK IHT system has relied on an individual’s domicile status to determine whether their global estate is subject to IHT. This approach allowed non-UK domiciled individuals, even if they were long-term residents of the UK, to limit their IHT exposure to UK assets only, provided they maintained a non-UK domicile. Under the current system, foreign assets owned by non-doms are outside the scope of UK IHT, unless they have been deemed domiciled.

The 10 Out of 20 Year Residency Test

The 10 out of 20 year rule is pivotal for determining a persons tax residency and if f non-UK assets fall under the UK IHT regime. Specifically, if an individual has been UK tax resident for at least 10 of the last 20 tax years immediately before a chargeable event (like death), their global estate may be liable for IHT. Even if a person leaves the UK, they will remain within the IHT scope for a reduced period that depends on how long they were resident before departure:

This test resets if an individual is non-resident for a full 10-year period, providing some relief from continued IHT liability. The overarching aim is to ensure that long-term UK residents cannot avoid IHT by temporarily moving abroad.

From 6 April 2025, the test for whether non-UK assets are in scope for IHT will be whether an individual is a long-term UK resident, meaning they have been resident in the UK for at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event (including death) arises.

If an individual has been UK resident for at least 10 out of 20 years and then becomes non- resident and does not return to the UK before the chargeable event, there will be provision to shorten the length of time they remain a long-term resident if they had been UK resident for between 10 and 19 years out of the last 20.

• For those who are resident between 10 and 13 years, they will remain in scope for 3 tax years.
• This will then increase by one tax year for each additional year of residence. So, if a person was resident for 15 out of 20 tax years on leaving, they would remain in scope for 5 years; if resident for 17 out of 20 tax years on leaving, they would remain in scope for 7 tax years.

An individual will not be treated as long-term resident for IHT purposes in the year following 10 consecutive years of non-residence, even if they return to the UK, and the test is effectively reset. This aligns with the 10 consecutive years of non-residence required to access the 4-year FIG regime.

Impact on Non-UK Domiciled Individuals

The introduction of this residence-based approach will have significant implications for non-UK domiciled individuals:

Extended IHT Liability: Non-UK domiciled individuals who have been long-term UK residents will lose the privilege of excluding foreign assets from UK IHT. Their global estate, including properties, investments, and other assets located outside the UK, will become subject to the standard IHT rate of 40% on the value above the nil-rate band (currently £325,000).

Example Scenarios

To illustrate the impact of the “10 out of 20” rule, consider the following examples:

• Example 1: A non-UK domiciled individual moves to the UK in 2015 and stays until 2025. Assuming they do not leave the UK during this time, they will have accumulated 10 consecutive years of UK residency by 2025. Under the new rules, from 6 April 2025 onwards, their worldwide estate will be subject to UK IHT, as they meet the long-term residence criterion.
• Example 2: Another individual who has lived in the UK intermittently since 2005, with periods spent abroad, will need to review their residency record over the previous 20 years. If they were resident in the UK for 10 or more tax years during this period, they too will be caught by the new IHT rules.

Impact of New Inheritance Tax (IHT) Rules on UK Domiciled Individuals Residing Abroad

These changes transition the IHT framework also greatly affect UK-domiciled individuals who have been long-term non-residents. Under the existing system, an individual’s domicile status determines their IHT liability. UK-domiciled individuals are subject to IHT on their worldwide assets, regardless of their residency statusFor UK-domiciled individuals who have been non-resident for 10 or more of the past 20 tax years, the new rules present notable changes:

Potential Reduction in IHT Liability

If you have been non-resident for 10 or more of the last 20 tax years, you may no longer be classified as a long-term resident. Consequently, your liability for IHT on non-UK assets will be eliminated but any UK situs assets such as property or UK pensions will still be liable for IHT. : It’s essential to review and possibly adjust your estate planning strategies in light of these changes. Assets previously subject to UK IHT may now fall outside its scope, affecting the distribution of your estate.

Consideration of Future Residency:

If you are a long term non-resident and plan to return to the UK or spend significant time there, be aware that accumulating 10 years of residency within a 20-year period will reinstate your liability for IHT on worldwide assets.

As the “10 out of 20 year” rule becomes a critical factor in determining tax residency status, it is essential to accurately record the time you spend in the UK and abroad.

Accurate record-keeping is crucial to ensure compliance and protect your financial interests. This includes keeping detailed records of travel dates, flight tickets, and any documentation that verifies your location throughout the year. Even minor miscalculations or incomplete records can lead to unexpected tax liabilities and complications with HMRC. Additionally, digital tools and calendar apps can be helpful in tracking and summarizing your days in and out of the UK, making it easier to review your residency status annually. May countries will now also be able to provide entry and exit reports helping you to keep track of time spent in other countries.

We are still awaiting clarity from HMRC on how this rule will be reported and administered in practice. The details on how taxpayers will need to declare their time spent in and out of the UK have yet to be finalized. Therefore, staying updated on new guidance is essential to ensure that you remain compliant as the reporting requirements evolve.

Retaining Your QROPS if You Meet the 10 Out of 20 Rule and Live Abroad

If you are a UK expat with a Qualifying Recognised Overseas Pension Scheme (QROPS) and meet the “10 out of 20” rule—where you’ve spent fewer than ten of the past twenty tax years as a UK tax resident—retaining your QROPS can continue to offer tax advantages. This rule protects your pension from UK inheritance taxation from 2027, allowing for more flexibility and potential tax efficiency. Ensuring that you stay compliant with these regulations is crucial, and periodic reviews of your status can help optimize your pension planning.

Gifting Your Tax-Free Cash if You Have a SIPP or QROPS and Live in the UK

For those who have a UK DC scheme, a Self-Invested Personal Pension (SIPP) or a QROPS and live in the UK, gifting your tax-free lump sum can be a strategic way to mitigate future inheritance tax (IHT) liabilities. If you have affordability and the gift will not affect your standard of living in retirement, by making gifts of up to the permitted tax-free cash amount, you can potentially reduce your estate’s exposure to IHT.

Using a Joint Whole of Life Insurance Policy for IHT Mitigation Before Becoming a Long-Term Non-Resident

If you are a long-term UK resident planning to leave the UK, you may want to consider a joint term life insurance policy. This can provide coverage for any inheritance tax (IHT) liabilities that may arise during the transition period before you become a long-term non-resident. Once you achieve long-term non-residence status, your worldwide assets will no longer be subject to UK IHT. Having a policy in place can provide peace of mind and ensure that your beneficiaries are not burdened with a large inheritance tax bill. But reminded that coverage should not include your UK situs assets as regardless of the 10 out of 20 rule these will still be liable to IHT.

Encashing Your Pension if You Are a Long-Term Resident in a Favourable Tax Jurisdiction

If you have no plans to return to the UK and live in a favourable tax jurisdiction with a Double Taxation Agreement (DTA) with the UK, such as the UAE, you might consider encashing your pension and placing the funds offshore. However, be mindful of the temporary non-residence rules and ensure that you are aware of the specific age restrictions that may apply to pension encashment.

Selling Your UK Situs Assets if You Are a Long-Term Non-Resident

If you qualify as a long-term non-resident under the “10 out of 20” rule, selling your UK situs assets, such as property, and moving the funds offshore could be a prudent strategy. Since UK situs assets are subject to IHT regardless but non UK situs assets for long term non-residents are not. Transferring these funds can help you achieve greater tax efficiency for generational wealth transfer.

Proceed with Caution as IHT Pension Rules Are Under Consultation

It is important to remember that the inheritance tax (IHT) rules surrounding pensions are still under consultation until 2027. While there are many planning opportunities available, there is no need to rush into any decisions. Much of the detail is still unfolding, and any changes could impact the effectiveness of certain strategies. Stay informed and seek expert advice to ensure that your financial plans remain robust and adaptable to any new developments.

The change from a domicile-based to a residence-based tax system represents a fundamental shift in how non-doms and UK domiciles who have left the UK long term, will be taxed in the UK. While the new system is designed to increase tax revenues and promote fairness, it may also have unintended consequences, such as prompting an exodus of high-net-worth non-doms from the UK, UK-domiciled individuals residing abroad may benefit from these new rules and those considering moving back to the UK may want to rethink their strategy