On 30 October 2024, the UK government announced sweeping changes to the tax system, which will come into effect from 6 April 2025. The main reforms will affect:
- The abolition of the remittance tax regime and the introduction of a new tax regime for qualified new residents (QNR).
- The introduction of a Temporary Repatriation Fund (TRF) for beneficiaries of trusts.
- Changes to Inheritance Tax (IHT), where the principle of "domicile" will be replaced by "long-term resident" status.
- Changes to the structure of Excluded Property Trusts (EPTs), which will affect the tax planning of non-residents.
REMITTANCE ABOLITION AND NEW REGIME FOR QNRS
From 6 April 2025, the remittance tax regime, which allowed non-residents to avoid tax on income earned abroad if it was not remitted to the UK, will be abolished. Instead, a new regime for qualified new residents (QNRs) will be introduced.
Who is eligible for QNR status?
A Qualifying New Resident (QNR) is an individual who is a UK resident in the current tax year but has not been a resident for the previous 10 years. This means that individuals who were not UK residents between 6 April 2015 and 5 April 2025 will be eligible for the new QNR regime.
QNR status will be valid for the first four years after becoming resident, i.e. until 6 April 2029.
Tax benefits for QNRs:
- Foreign Income Tax Exemption: Individuals with QNR status will not pay tax on income earned abroad (investment income, intellectual property income, earnings from a foreign business, etc.), even if it is transferred to the UK.
- Capital Gains Tax (CGT) Exemption: Sale of assets abroad will be exempt from tax if claimed on your tax return.
- Trusts: Income and profits earned through overseas trusts may be exempt from tax if the owner is a QNR.
INTRODUCTION OF TEMPORARY REPATRIATION FUND (TRF)
From 6 April 2025, the UK will introduce a Temporary Repatriation Facility (TRF), a new mechanism that will allow individuals who previously benefited from the remittance tax regime to repatriate foreign income and capital gains to the UK at a reduced rate of tax.
One of the key aspects of the TRF is the possibility of applying a reduced rate of tax to distributions of income from trusts:
- The rate of tax will be 12% for distributions in the 2025/2026 tax year.
- In the 2027/2028 tax year, the rate will increase to 15%.
The TRF is only available to beneficiaries who have previously used the remittance regime and meet certain criteria.
To apply the preferential rate, the beneficiary must submit an application to use the TRF in their tax declaration.
UPDATE OF THE CONCEPT OF INHERITANCE TAX (IHT)
Currently, Inheritance Tax (IHT) in the UK depends on the domicile of the person: UK residents pay inheritance tax on all assets, while non-residents only on assets in the UK.
From 6 April 2025, domicile will no longer be a determining factor. Instead, a new ‘long-term resident’ rule will apply.
Individuals who have lived in the UK for 10 or more years out of the last 20 years will be considered ‘long-term residents’ and will be liable to pay IHT on all their worldwide assets. This status will remain in place until the individual has spent 10 consecutive years outside the UK.
For those who become non-resident in the 2025/26 tax year, there is a 3-year transition period: until 6 April 2028, they will continue to pay IHT under the old rules.
If an individual was not domiciled in the UK in 2024/25 and leaves in 2025/26, they will avoid long-term resident status.
CHANGES TO EXCLUDED PROPERTY TRUSTS (EPTS)
Excluded property trusts (EPTs) are an important tax planning tool for non-residents as they allow them to avoid inheritance tax. And they are also subject to changes from 6 April 2025:
- EPTs created before 30 October 2024 will remain exempt from inheritance tax (IHT), even if their settlor becomes a ‘long-term resident’.
- However, EPTs will lose their estate tax exemption if their settlor has lived in the UK for 10 years or more.
- Settlors of EPTs who directly own assets will pay income and capital gains tax from 6 April 2025.
Thus, these reforms will significantly change the approaches to international tax planning. Business owners should take these changes into account and adapt their financial strategy to the new rules.
If you need detailed advice on tax planning and optimizing your financial structure in light of the changes, please contact our experts.
