The 2024 Spring Budget introduced major changes to the taxation of non-UK domiciled individuals. The new Labour government’s Budget on 30 October incorporated most of the changes announced by its predecessor – the abolition of the non-dom regime and an introduction of a new Foreign Income and Gains (“FIG”) regime, which will take effect from 6 April 2026.
Current tax regime
The general UK domestic position is that all UK residents are subject to UK tax on their worldwide income and gains. This position is changed for those individuals who are not UK domiciled (broadly being those whose permanent home is outside of the UK). Non-dom individuals are able to access the remittance basis of taxation. So long as certain conditions are met, the remittance basis allows an individual to shield their non-UK income and gains from UK tax unless and until those sums are brought to, or used in, the UK. After 7 years, the taxpayer must pay the remittance basis charge of £30,000 to access the remittance basis.
The UK inheritance tax (IHT) applies to UK domiciled individuals on the value of the worldwide assets. For non-UK domiciled individuals, IHT applies to their UK situs assets.
Once an individual has been resident in the UK for 15 out of the last 20 UK tax years, they are considered “deemed domiciled” and they are subject to UK tax on a worldwide basis. Many non-doms settled “excluded property trusts” which allowed them to shelter their non-UK assets from IHT and their non-UK income and certain capital gains from UK tax even once they became deemed domiciled for UK tax purposes.
US citizens and US green card holders (“US taxpayers”) are subject to US Federal taxation on a worldwide basis, regardless of their residence. For US taxpayers in the UK, there is a US UK Double Taxation Agreement (the “Income Treaty”) which determines which jurisdiction has the primary taxing rights on income which is subject to tax in both jurisdictions. Under the terms of the Income Treaty, the US would allow a credit for UK taxes charged on non-US sourced income or gains, and the UK would allow a credit for US tax charged on non-UK income or gains.
There is a US UK Gift and Estate Tax Treaty (“Estate Tax Treaty”) which ensures that the estates of US taxpayers who were resident in the UK are not subject to double tax.
The new FIG regime
The remittance basis regime is being abolished and replaced with a 4 year exemption from UK tax on foreign income and gains (“FIG”) for individuals who were not UK resident in previous 10 years. After the 4 year exemption, the individual would be subject to UK income tax and capital gains tax on a worldwide basis.
Some taxpayers may benefit from the transitional rules, providing they have claimed the remittance basis under the old non-domiciled tax regime:
- A Temporary Repatriation Facility (“TRF”) will be introduced allowing Individuals to designate income previously sheltered from UK tax using the remittance basis as TRF capital. TRF capital is taxed at a favourable rate and then can be remitted to the UK without further taxation. For a period of three years from 2025/26 the flat rate will be 12% for the first two years and 15% in 2027/28.
Individuals will be able to “rebase” their non-UK assets to the market value as of April 2017 for capital gains tax calculation purposes, as long as they not have been UK domiciled or deemed UK-domiciled at any time before 6 April 2025.
The new Long-Term Resident Rules for Inheritance Tax
Individuals who have been UK tax resident for at least 10 of the previous 20 tax years will be considered long-term residents of the UK and will be considered within the scope of IHT on all their assets (including non-UK assets).
UK assets will remain in the scope of UK IHT, regardless of an individual’s residence status.
For those non-doms who settled trusts, it has been confirmed that trusts settled prior to 6 April 2025 will still provide IHT protection.
If the settlor is considered long-term resident (resident in the UK for 10 years), any non-UK assets settled in a trust will now be within the scope of the IHT rules for “relevant property trusts” and subject to IHT charges at trust level (even if the trust was created prior to 30 October 2024). This applies whether or not the settlor is able to benefit from the trust.
How do these changes affect US citizens and US green card holders living in the UK?
US taxpayers may be less affected by the upcoming changes than other non-doms. Since the US already imposes worldwide taxation on its citizens and green carder holders, regardless of their residence, many US taxpayers, even those who are eligible to access the remittance basis, elect not to do so – instead, it can be favorable to align the UK tax charges with those in the US so that the liabilities can be offset against each other under the Income Treaty. This allows the taxpayer to bring their foreign income and gains to the UK without restriction and avoids some of administrative headaches of having to track and segregate untaxed foreign income and gains into different bank accounts.
There are, though, many circumstances when a US taxpayer may have chosen to shield their non-UK income and gains from UK tax, particularly where the US and UK tax positions do not align or where the UK tax rate would be significantly higher than in the US.
A common example would be where a US taxpayer has interests in a US LLC or S corporation. US LLCs or S corporations are normally taxed as partnerships in the US but are taxed as corporations in the UK. This can result in a true double tax for the taxpayer, as they will be subject to US tax when income arises but also UK tax when a distribution is paid out to them.
Under the remittance basis regime, distributions from the LLC could be shielded from UK tax, but the individual would have to ensure that the funds were retained outside of the UK. The new FIG rules would allow these funds to be brought to the UK with no additional tax due if received in the first 4 years of UK tax residence.
The 4 year window included within the FIG rules will mean that a US taxpayer may need to weigh up the pros and cons of remaining in the UK earlier than anticipated in comparison to the timeframes available under the current regime. For those individuals who decide to remain in the UK, careful planning will need to be undertaken as the 4th year approaches, to ensure that the US and UK tax treatments of their assets align as best as possible. This may involve an earlier than expected discussion with an investment manager experienced in issues surrounding US taxpayers living in the UK, and a careful consideration of their foreign tax credit position.
If a US taxpayer wants to take advantage of the transitional rules they will need to be mindful of the impact of the rebasing of assets – while the rebasing election will reduce the UK charge to capital gains tax, from a US perspective the cost basis of the assets will remain unaltered.
From an Inheritance Tax perspective its worth noting that US citizens who find themselves within the UK Inheritance Tax net after 10 years of residence may be able to benefit from the application of the Estate & Gift Tax Treaty. However, this will need careful consideration.
A US person in the UK who is the settlor of a US trust will need to carefully consider their position under these news rules. If the settlor is long-term UK resident the trust may be subject to UK trust tax rules. We would expect that the Income Treaty could provide some relief from double taxation, but the UK may have taxing rights over certain income and gains. It is also important to note that the UK and US tax treatment of trusts does not always align and this can cause complexity and double taxation.
Summary
As ever, it is important for US taxpayers in the UK to work with qualified US / UK tax professionals so as to navigate the complex interaction of the US and UK tax rules. The FIG regime may offer some opportunities to new arrivals but those individuals who have been resident in the UK for some time may need advice earlier than expected.
