How will the recent changes to the UK domicile regime affect individuals who have relocated to the UK or who are intending to relocate to the UK?
The changes to the UK Domicile regime announced at the Spring budget pose some issues for individuals who benefit from the current remittance basis regime, but may not be as lucky under the proposed new rules.
For Australians currently living in the UK, or those intending to relocate to the UK, our comparison of both the old and new rules can be found below.
Who is eligible?
Existing Regime – Under the existing regime an individual is eligible to claim the remittance basis of taxation if they are non-UK domiciled. Broadly, this means any individual who has their permanent home outside the UK and has been resident in the UK for less than 15 of the last 20 tax years.
New Regime – Under the new regime and individual is eligible to benefit from the system if they are in their first four years of UK residency provided they have not been resident in the UK for at least 10 consecutive years before that.
Impact on Australians – This removes the concept of domicile from the regimes and relies on the statutory residency test (SRT). This will benefit Australians moving to the UK who may have been born there and would not previously have benefited from the remittance basis.
How will this affect the taxation of income and gains being remitted to the UK?
Existing Regime – Under the existing regime UK source income and gains are taxable on receipt and foreign income and gains are only taxable in the UK to the extent that they are remitted to the UK.
New Regime – Under the new regime UK source income and gains are taxable on receipt. Foreign income and gains are exempt from UK tax and can be remitted to the UK without a UK tax charge if they have been earned within the first 4 years of becoming tax resident (provided that they were non-UK resident for at least 10 consecutive years before that).
Impact on Australians – Income and gains can be remitted within the first 4 tax years without a UK tax charge. This allows for some generous tax planning.
How will this affect an individual’s exposure to UK Inheritance Tax?
Existing Regime – Under the existing regime Non-domiciled individuals who have not been resident in the UK for 15 of the last 20 tax years are only subject to IHT on UK assets.
New Regime – Under the new regime, individuals will only be subject to UK inheritance tax on their UK assets within the first 10 years of UK residency (provided that they were non-UK resident for at least 10 consecutive years before that). After the 10 year period, they will be subject to IHT on their worldwide assets.
Impact on Australians – For individuals relocating to Australia permanently it has been possible to reset the domicile clock for IHT by being non-UK resident for at least 4 years. Under the new regime this will now take 10 years.
How will this apply to trusts?
Existing Regime – Under the existing regime, foreign income and most gains within a trust that has been settled by a non-UK domiciled individual can roll up in the trust free from UK tax. UK tax is usually by reference to distributions unless the trust is not considered protected.
New Regime – Under the new regime, during the first four years of UK residency, distributions from the trust will be free of UK tax charges.
Impact on Australians – Distributions from overseas trusts are tax free in the UK which allows for some generous tax planning to tax advantage of income being distributed within the first 4 years free of tax in the UK.
How will this apply to IHT due on Trust assets?
Existing Regime – Under the existing regime non-UK assets held by a trust settled by a non-domiciled individual who has not been resident in the UK for 15 out of the last 20 years are exempt from UK inheritance tax.
New Regime – Under the new regime, non-UK assets held by trusts settled after 6 April 2025 will be exempt if they are settled in the first 10 years of UK residency.
Impact on Australians – For Australian trusts there is the ongoing risk that these trusts are within the scope of UK IHT through the ‘settlor’. For UK tax purposes the settlor is the individual who has contributed the majority of the capital to the trust. This may mean that the trust has different settlors for UK and Australian tax purposes.
The team at Salann will be following these changes closely and how they will impact on individuals with UK and Australian connections. Contact Ruya Ozalgan or Paula Tallon to discuss your particular circumstances.
