United Kingdom – New Government Issues Update on Foreign Income and Gains Regime

Overview of Main Measures

As previously announced, the concept of domicile and the remittance basis regime will be removed from U.K. tax legislation, to be replaced with a new Foreign Income and Gains regime (“FIG”).  The new government has confirmed that 6 April 2025, remains the effective date for the new regime.

Under the new regime, eligible individuals will be taxable in the U.K. only on their U.K.-sourced income and gains, and will be able to claim full relief on their overseas income and gains, regardless of whether these are remitted to the United Kingdom.  This treatment will be available for a person’s first four tax years of U.K. residence.

Additionally, the government has clarified that, to qualify for the new regime, the individual must have been nonresident in the U.K. for “ten consecutive years,” which was not explicit in the original technical paper published in the wake of the Spring Budget.

Finally, the new policy paper refers to the FIG regime as a “100% relief,” so foreign income and gains would appear not to be exempt from U.K. tax under the new rules, but rather chargeable and then fully relieved.  This means that an individual who is taxed under the FIG regime is likely to still be considered resident in the U.K. for purposes of the U.K.’s double taxation treaties. 

Foreign Income and Gains Regime

As previously announced, the concept of domicile and the remittance basis regime will be removed from U.K. tax legislation, to be replaced with a new Foreign Income and Gains regime (“FIG”).  The new government has confirmed that 6 April 2025, remains the effective date for the new regime.

Under the new regime, eligible individuals will be taxable in the U.K. only on their U.K.-sourced income and gains, and will be able to claim full relief on their overseas income and gains, regardless of whether these are remitted to the United Kingdom.  This treatment will be available for a person’s first four tax years of U.K. residence.

Additionally, the government has clarified that, to qualify for the new regime, the individual must have been nonresident in the U.K. for “ten consecutive years,” which was not explicit in the original technical paper published in the wake of the Spring Budget.

Finally, the new policy paper refers to the FIG regime as a “100% relief,” so foreign income and gains would appear not to be exempt from U.K. tax under the new rules, but rather chargeable and then fully relieved.  This means that an individual who is taxed under the FIG regime is likely to still be considered resident in the U.K. for purposes of the U.K.’s double taxation treaties. 

Overseas Workday Relief

As announced at the Spring Budget, Overseas Workday Relief (OWR) will be retained for individuals who elect to be taxed under the FIG regime, allowing an individual to exempt the income relating to their non-U.K. income from U.K. taxation for the year of arrival and the two following U.K. tax years.

Transitional Measures

Transitional measures will remain; however, the following changes to the original proposals have been confirmed:

• Temporary Repatriation Facility will be available to former remittance-basis users from 2025/26, though the rate and duration (formerly 12 percent and until 5 April 2027, respectively) will be reviewed to make it as attractive as possible.  Additionally, expanding the scope of the TRF is under consideration with further details to be provided at the 2024 Autumn Budget.
• Capital Gains Tax Rebasing will be retained, though the rebasing date (previously 5 April 2019) is being reconsidered and will be set out at the Budget.
• Temporary 50-percent Foreign Income Reduction will not be taken forward, as previously advised by the Labour Party prior to the general election.

Inheritance Tax Proposals

As well as the introduction of the FIG regime, the previous government also proposed to change the Inheritance Tax system from a domicile-based system to a residence-based system, subject to consultation, applying from 6 April 2025.⁴  The basic test proposed was as follows:

• If a person has been resident in the U.K. for 10 years prior to the tax year in which the chargeable event (including death) occurs, the IHT charge will apply to his/her worldwide assets;
• Correspondingly, there will be a provision to keep a person within the scope of worldwide IHT on an ongoing basis for 10 years after breaking U.K. residence (the “ten-year tail”).

The new government has announced that plans for a full consultation on moving Inheritance Tax to a residency-based regime have been withdrawn.  Instead, the government will review feedback already gathered since the Spring Budget and carry out further stakeholder engagement. 

The basic test for IHT on worldwide assets remains as previously proposed.  However, the government will engage further with stakeholders on the operation of the new test, so that any refinements can be considered fully.  

As previously confirmed by the Labour Party prior to the general election, all foreign assets held in a trust (specifically Excluded Property Trusts) will be brought within the scope of worldwide IHT where an individual is liable, irrespective of whether those assets were settled pre- or post-April 2025.  Further stakeholder engagement will take place before details are published at the Autumn Budget, with a view to ensuring that transitional provisions may be put in place for existing trust arrangements affected by this change.

Next Steps

HM Treasury has published further details of its stakeholder engagement plans for the coming months, leading up to the Autumn Budget on 30 October.  A series of meetings will be held with interested parties during August, focusing on Overseas Workday Relief and Inheritance Tax, before the finalised measures are confirmed on 30 October.⁵ 

KPMG LLP (U.K.) will continue to keep readers informed of any further developments that concern individuals, including those on international assignments, and their multinational employers.

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