Foreign income and gains (FIG) regime

The Reformed FIG Regime

As we enter April, reviewing your current estate planning becomes paramount due to the budget changes. One of those being the UK’s new residency-based IHT rules. These changes, set to take effect from 6 April 2025, will significantly alter the landscape for non-doms, introducing the new Foreign Income and Gains (FIG) regime.

The Pre-April 2025 Non-Dom Regime

Currently, non-doms in the UK benefit from the remittance basis of taxation, allowing them to pay UK tax only on income and gains brought into the country. A non-dom is liable to UK inheritance tax only in respect of their UK assets. This regime has provided substantial tax advantages, particularly for those with significant foreign income and assets.

Non-doms who place foreign assets into trust before being deemed UK domiciled can also benefit from protections such as the excluded property trust, which shelters foreign assets from UK inheritance tax.

This regime has provided substantial tax advantages, particularly for those with significant foreign income and assets.

The New FIG Regime

The new FIG regime marks a fundamental shift in how non-doms will be taxed. The remittance basis will be replaced by a residence-based system. Under the FIG regime, non-doms who have been non-resident for 10 consecutive years will enjoy a four-year exemption on foreign income and gains upon becoming UK tax residents.

Key Features of the FIG Regime

Four-Year Exemption: Non-doms who qualify will not pay tax on foreign income and gains for the first four years of UK residence. This exemption is designed to ease the transition for individuals moving to the UK and to encourage the repatriation of funds.

Temporary Repatriation Facility: This facility allows non-doms to bring funds into the UK at a special tax rate during the exemption period.

Transition to Residence-Based Inheritance Tax: The new regime will also transition inheritance tax to a residence-based system, eliminating domicile as a relevant factor. This means that long-term UK residents will be subject to UK inheritance tax on their worldwide assets, regardless of their domicile status.

Trust Distributions: If a trust distribution is not fully matched during the four-year FIG period, it can still be matched to income within the trust under the “transfer of assets abroad” rules after the period ends, potentially leading to a tax charge. Care is needed when making trust distributions in the first four years unless the rules change.

Onward Gift Rules: If an individual benefiting from the FIG regime makes a gift to a UK resident not within the FIG regime, the recipient will be treated as if they received the distribution directly.

Post-FIG Period: After the four-year exemption, UK resident settlors of non-UK trusts will generally be liable for tax on all income and gains of the trust. However, income is only taxable if the settlor or their spouse retains an interest or has received a capital sum. There are also “motive defences” that may apply to income and gains of non-UK corporate structures. The “motive defences” may be affected by a wider review of the rules for taxing overseas structures, with changes expected from 6 April 2026. This creates uncertainty for settlors of non-UK trusts with income and gains in underlying companies

Case Study

John, originally from the US, has been living in the UK for the past 12 years. He moved to the UK for work and has substantial assets both in the UK and abroad. Under the current non-dom regime, John benefits from the remittance basis of taxation, meaning he pays UK tax only on income and gains brought into the UK. Additionally, his foreign assets are protected from UK inheritance tax due to his non-dom status.

Impact of the FIG Regime: Starting from 6 April 2025, the FIG regime will replace the remittance basis with a residence-based system. This means that John will be subject to UK tax on his worldwide income and gains. The FIG regime includes a four-year exemption period for foreign income and gains, which will help John transition to the new system.

Inheritance Tax (IHT) Implications: Under the new FIG regime, John’s liability for IHT will be based on his residence status rather than his domicile. Since John has been a UK resident for more than 10 years, he will be considered a long-term resident and liable for IHT on his worldwide assets.

How We Can Assist in Estate Planning

At Private Client Solicitors, we understand the complexities involved in estate planning, especially with the upcoming changes to the taxation of non-doms. Our team of experienced solicitors can assist you in:

• Reviewing and Updating Wills: Ensuring your Will reflects your current wishes and considers the new tax regime.
• Setting Up Trusts: Establishing trusts to protect your assets and minimize tax liabilities.
• Inheritance Tax Planning: Developing strategies to reduce your inheritance tax exposure under the new residence-based system.
• Cross-Border Estate Planning: Providing advice on managing assets located in multiple jurisdictions to ensure compliance and tax efficiency.

Conclusion

The introduction of the FIG regime represents a significant overhaul of the taxation of non-doms in the UK. If you have any questions or need assistance with planning for the new regime, please do not hesitate to contact us.