Year End Tax Planning: Resident Foreigners (and Non-Doms)

In this last in our series of articles about end of year tax planning, we took a look at Resident Foreigners (and Non-Doms) and the new regime that is coming into force in April 2025.

Tax Residence: Statutory Residence Test (SRT)

The SRT determines whether an individual is tax resident in the UK by reference to the number of days spent here and certain other connecting factors.  Whilst many situations will be relatively straight-forward, the rules can be complex and, in some cases, detailed consideration of how these rules apply in practice will be necessary.

From 6 April 2025, the existing rules dealing with individuals domiciled outside of the UK will be replaced by a residence-based test and so the SRT will become an area of increasing focus going forward.

The SRT comprises three main tests, applied in the following order: 

• Automatic overseas tests to establish if the individual is non-UK resident
• Automatic UK tests to establish whether they are UK tax resident
• Sufficient ties tests where neither of the above resolve the question.

Essentially the SRT dictates the number of days an individual can spend in the UK before becoming tax resident.  It is, therefore, important to understand how this applies to your circumstances in order to achieve the desired outcome, be that being non-UK resident or, perhaps, ensuring that you are tax resident here.  Reviewing your day count now potentially allows sufficient time prior to 5 April 2025 to alter your pattern of visits to meet the requirements of the SRT in line with your aims. 

If you are intending to leave the UK on, or before, 5 April 2025 or during the 2025/26 tax year it is important to start planning now in order to ensure the optimum outcome from a UK tax perspective.  This is particularly so for those individuals impacted by the changes to the non-dom regime coming into effect on 6 April 2025.

The same is true for those planning to move to the UK in that you need to ensure that sufficient time is allowed for any tax planning to be undertaken well in advance of acquiring UK tax residence.

Non-Domiciliaries

As announced in the October 2024 Budget, the existing system of taxation based around an individual’s domicile will be abolished with effect from 6 April 2025 and will be replaced by a residence-based system.  This will have far-reaching consequences for non-doms currently in the UK and those planning on moving here.

Income and capital gains

Central to this reform is the ending of the remittance basis of taxation and, whilst this is subject to a number of transitional provisions, the overall effect will be to accelerate the point at which an individual coming to the UK becomes liable to tax on their worldwide income and gains.

In summary, the main changes will be:

• Individuals moving to the UK after a continuous period of non-UK residence of at least 10 years will be exempt from UK tax on foreign income and gains (FIG) for the first 4 years of UK residence
• Those not qualifying for the 4-year FIG regime will be taxed in full on their worldwide income and gains as they arise
• A Temporary Repatriation Facility (TRF) will be available to individuals previously taxed on the remittance basis under which FIG that arose prior to 6 April 2025 can be brought to the UK at a reduced rate of tax – 12% for 2025/26 and 2026/27, rising to 15% in 2027/28.

Given the limited time before these changes take effect and the complexities of the new rules, anyone who may be affected should be seeking specialist advice as to their options. In particular:

• Individuals moving from the remittance basis should be reviewing their non-UK assets in the light of future funding requirements in the UK and associated tax liabilities
• Where the TRF is in point, consideration should be given to the possible acceleration of income receipts or realisation of capital gains prior to 6 April 2025 with a view to benefitting from lower tax rates in the period to 5 April 2028.

Inheritance Tax

Similarly, the imposition of inheritance tax will, from 6 April 2025, be by reference to residence, not domicile.

From that date, an individual will be liable to inheritance tax on their worldwide assets where they have been UK resident in at least 10 of the 20 tax years preceding the year in which the chargeable event occurs.  This exposure to inheritance tax can, therefore, continue to apply for a significant period after leaving the UK.  It is however, important to note that UK assets remain chargeable to inheritance tax in any event. 

Again, those impacted by these changes should be reviewing their position to minimise any potential inheritance tax liability.

Non-UK trusts

In addition, the rules relating to non-UK trusts will be significantly altered, both in relation to income and capital gains, and also inheritance tax.

Consequently, existing non-UK trust structures need to be reviewed as, in many cases, these are likely to require reorganisation to mitigate any future UK tax complications. 

Overseas Workday Relief (OWR)

OWR can, subject to certain conditions, reduce your UK tax liability where at least part of your work is undertaken overseas.

Currently, this is available to UK resident non-doms utilising the remittance basis and, in line with the move to the residence-based system of taxation, to qualify for OWR the conditions from 6 April 2025 will be revised as follows:

• The individual must qualify for the 4-year FIG regime for the tax year in question; i.e. this can apply for a maximum 4 years, an increase from the current 3 years
• The duties of the employment must be carried out either wholly, or partly, outside of the UK
• The maximum relief available for any given year is capped at the lower of 30% of qualifying earnings or £300,000 - currently there is no cap
• There will no longer be a requirement for these earnings to be paid outside the UK.

Those affected by these changes should seek detailed advice to ensure that the rules are applied correctly to their circumstances.

We hope you have found the suggestions above helpful. As always, please contact us to discuss your circumstances with you. You can find out more about year end tax planning here: Year End Tax Planning.

These articles have been written to provide a general guide to potentially highly complex issues. Whilst great care has been taken in the production of these articles, they are intended to provide the clients and friends of Ritchie Phillips LLP with an outline of the issues individuals, families and trustees should consider and you should seek specific advice before taking or refraining from any action.