Understanding the UK’s new tax rules for Non-Domiciled Individuals

Further to the Budget in October 2024, we will see the removal of the remittance basis of taxation from 6 April 2025.

To ease this rule change, the Government have applied two of the transitional measures originally proposed by our former government. These measures are available to any individual taxpayer who has claimed the remittance basis of taxation at some point prior to its abolition.

Importantly, the new Foreign Income and Gains (FIG) regime is beneficial for taxpayers in one of their first four years of UK residency, however for taxpayers who are established in the UK, the transitional measures available may secure a more favourable tax outcome in the short term.

Rebasing

The first transitional measure applies for Capital Gains Tax (CGT) purposes and allows former remittance basis users to rebase assets which they held prior to 5 April 2017 to the asset’s value on that date when they dispose of them.

In practice, this will be valuable to individuals who have held assets for extended periods and incurred a lot of growth, but perhaps slower growth in since 2017. As the growth from acquisition to 5 April 2017 will be effectively wiped out without tax under the rebasing.

Temporary Repartiation Facility (TRF)

From 6 April 2025, individuals who have previously paid tax on the remittance basis will have the opportunity to designate income and/or gains to be brought to the UK at a reduced tax rate. For designations in the 2025/26 and 2026/27 tax years, a UK tax rate of 12% will apply when the designation is made. For designations in 2027/28, UK tax will be levied at 15%.

The designation is made as part of the self-assessment tax filings for the relevant years, such that the deadline for designating income in 2025/26 is 31 January 2028, being the end of the amendment window for tax return submissions for that year.

There is no requirement for all funds designated under the TRF to be remitted to the UK in the year to support the designation. Instead funds can be designated and remain held or invested overseas. The designation tax (12% of 15%) will become payable as part of the self-assessment tax bill for the relevant year.

Designation of non-liquid accounts is possible, such that where unremitted income or gains can be clearly evidenced as having been reinvested, it is possible to designate the value of the unremitted balance without this needing to be readily available in cash.

What can be designated?

An individual can make a designation for any amount, including of amounts of uncertain origin or where the individual no longer has records to confirm the original source of the funds. This could include clean capital amounts.

Where foreign tax has been paid on overseas income or gains that were not previously taxed in the UK due to a claim for the remittance basis, the amounts designated will be treated as being net of foreign tax.

Where taxpayers do not have sufficient records to support the designation made, great care should be given to ensure designations are not excessive as this would incur UK tax which may not otherwise be due, if, for example, the designated amount held some clean capital.

Designation process

To make a designation under the TRF, an election must be made in a Self-Assessment return for the relevant tax year. As the TRF will operate for 3 tax years, the relevant deadlines will be 31 January 2027, 2028, 2029 respectively. An election under the TRF must be made no later than 31 January in the second tax year after the relevant tax year to which the election relates. This is the usual deadline for amendments to self-assessment tax returns.

After a designation has been made, individuals will not be required to declare remittances of designated funds in subsequent years.

Individuals can choose the amount they would like to designate and there is no obligation for an individual to designate the total of their unremitted FIG, meaning that partial designations can be made.

A designation under the TRF must be made by the individual that would be chargeable were the amounts to be remitted. It will not be possible to make a designation on behalf of a third party.

Foreign Tax Credits

An election to make a designation under the TRF is on an amount net of any foreign tax that may have been paid on the FIG from which the funds arose. It will not be possible to claim credit in the UK for that foreign tax.

If an individual does not make an election to designate an amount under the TRF, they will still be able to claim a credit for foreign tax paid against the tax due on remittance of that amount, subject to various treaty provisions as apply now.

Interaction with mixed fund ordering rules & Designated Accounts

The offshore transfer rules will remain unaffected by a designation for TRF purposes, with an exception for new “designate accounts”. Where the transfer is made into a “designated account” the payment will be treated as if it were a remittance to a UK bank account. Amounts paid into this account can be considered on an annualised basis and the designated amounts will be treated as transferred in priority to non-designated FIG. Any remittance from the designated account will be free of any additional tax.

Actions

These transitional measures may secure a significant tax saving if deployed successfully by taxpayers. To take advantage of the measures we expect that a large number of taxpayers will need to undertake unmixing exercises to identify what unremitted income and gains they have which could benefit under FIG. Carpenter Box’s international team are well placed to discuss this with you and to help with unmixing your accounts. Please contact us if this is of interest to you.