Legislative tax changes to consider before crossing the Atlantic

Historically, Americans have been some of the most significant users of the remittance basis of taxation, but this may soon become redundant.  So how will the proposed tax reforms relating to non-domiciled individuals who have or are considering making a move from the US?

US citizens and green card holders are taxed on a worldwide basis by the US. They were, historically, largely prepared to set up a number of accounts segregating their offshore income and capital gains, allowing them to remit funds to the UK tax efficiently.  However, from 6 April 2025, the remittance basis of taxation will be abolished and a new regime for the taxation of personal foreign income and gains will be available for the first 4 tax years of becoming a UK tax resident, provided this follows a period of 10 years of non-UK tax residence. Accordingly, considerations for those who have already or who are looking to relocate to the UK will now focus on how long they plan to remain in the UK and how long they have been here to date.

The new rules mean that eligible individuals will not pay any tax on foreign income and gains arising within those initial 4 years, provided that a claim is made. Those successful in making that claim will be able to remit their funds to the UK free from any additional tax charges. This is a considerably shorter period of tax advantageous remittances than the former regime allowed for, having been 15 years, albeit with fees being charged after the first 7 years but it is not all bad news.

Although the new relief is for a shorter period than the remittance basis previously allowed, it is more generous and there is no charge to use it.  The new relief may also benefit those who are UK domiciled but have spent a prolonged period living outside the UK.

The new policy also allows for non-UK domiciled persons to remit overseas funds to the UK at a flat rate without the painstaking “cleansing” and segregation process that was required last time significant changes were made to the taxation of non-UK domiciles.

However, at the end of the 4-year period, individuals will pay UK tax on their worldwide income and gains on the arising basis (as is currently the case for UK residents who are also UK domiciled or deemed domiciled).

For those currently able to benefit from the remittance basis of taxation but who have been UK resident for more than 4 years already, certain transitional arrangements have been proposed:

• In fiscal year 2025-26 only, non-domiciled residents will pay tax on 50% of their foreign income.
• They may be able to elect to rebase assets to their value as at 5 April 2019.
• If they have used the remittance basis previously, they may be able to elect to remit foreign income and gains that arose before 6 April 2025 to the UK at a reduced tax rate of 12% for tax years 2025-26 and 2026-27.

These proposals are thought to aim to encourage those living in the UK currently to bring their assets onshore, but their success will have to be measured in due course. 

Changes to the taxation of trusts:
 

It is currently also still possible to create an excluded property trust which could help to protect any offshore assets from becoming subject to UK inheritance tax at the point at which they are considered UK domiciled.

Trusts established by resident but non-domiciled persons benefit from “protected settlement status”, whereby a settlor is protected from an immediate tax charge on income and gains arising within the trust structure once they are deemed domiciled in the UK. Only upon receipt of a benefit by a UK resident beneficiary would there be tax payable in respect of trust profits which is “matched” with income or gains arising within the trust structure.

However, the proposed reforms will remove protected settlement status, including for those trusts already in existence. Instead, the new four-year regime proposes that individuals will not pay UK tax on the income and gains of the trust as they arise or on receipt of trust distributions within the first 4 years which could be helpful for those looking to make a move to the UK, supported by family funds held in trust.

Thereafter, the individual will be obliged to pay UK tax on all profits arising within a trust structure which they have established.

Inheritance Tax Reforms:

These reforms may be particularly important for those planning to be here for more than 4 years but perhaps not permanently. Although the full inheritance tax provisions have not yet been published, there is mention in a technical note produced by HMCR that there will be a 10 year “tail” for people leaving the UK, having become domiciled or deemed domiciled here. This means that one may have to remain tax resident outside of the UK for 10 years before the UK loses the right to subject one’s worldwide estate to inheritance tax at 40%, less any available reliefs.  

This is a significant contrast to the current 4-year tail and may make many US persons consider how long they actually want to be in the UK. This is essential because the point at which assets become subject to IHT is one of the most substantial trans-Atlantic differences.  In the US currently, there is an estate duty exemption of $13.61 million ($27.22 for married couples). Contrast this with the nil rate band in the UK of only £325,000 and becoming domiciled with a 10-year tail suddenly becomes quite a daunting prospect.

A consultation on these issues is currently being held by HMRC and we expect that their initial results will be published in the next few weeks.  However, there are still ways that you can protect against a huge IHT bill with life insurance and careful planning.

All of the above is, of course, subject to Labour announcing their proposed reform of the non-dom regime, so it would be advisable to watch this space if you are still undecided about coming to the UK.

further information

If you would like any further information or advice about the topic discussed in this blog, please contact Laura Harper or our Private Client team.

The contents of this article was drafted in June 2024.

about the author

Laura Harper is a consultant in the Private Client team. Laura joined KN in July 2021 from McDermott Will & Emery UK LLP, a well-respected US private client firm. She advises both UK resident and non-UK resident/domiciled individuals, families and trustees on a wide variety of UK tax, trust law and international estate planning issues, including the planning to be undertaken when moving to or from the UK. She also has extensive experience working on cross-border matters and structuring involving family-owned businesses.