Internationally competitive? The post-April 2025 tax rules for non-doms / internationally mobile individuals

UK resident foreign domiciliaries / internationally mobile individuals, and those who advise them, have been living through a period of seismic upheaval. In this note, we look at the current UK tax landscape, including the new special regime for “qualifying new residents”.

How did we get here?

The March 2024 Budget was not expected to contain much of interest to foreign domiciliaries or, as they have become known, “non-doms”. The Conservative government had, after all, previously rejected further changes to the tax regime for foreign domiciliaries, on the grounds that such reform would not raise any money.

It therefore came as a shock when, in the March 2024 Budget, the Conservative Chancellor Jeremy Hunt announced plans for radical changes to the tax rules regarding “non-doms”, including a complete abolition of the remittance basis, but also, as discussed below, sweeping changes to the inheritance tax (IHT) legislation. Even more surprising was the scheduled timetable for such reform, including repeal of the remittance basis with effect from 6 April 2025.

The March 2024 announcements represented a complete overhaul of the taxation of foreign domiciliaries, with the concept of domicile being removed altogether from the UK tax code and replaced with various residence-based tests. It was announced that the remittance basis would be replaced with a generous, but very brief, special regime for new UK residents, under which the foreign income and gains of qualifying individuals would be completely exempted from UK tax. This special regime would be made available to new UK residents free of charge, but for a period of four tax years only.

Whether non-UK assets are within the scope of IHT would also be determined by a residence-based test, both for personally-held assets and assets held in trust. In addition, the beneficial “trust protections” regime, primarily enjoyed by foreign domiciliaries who had been living in the UK for over 15 years, would be abolished, in most cases rendering trusts settled by such individuals effectively transparent for income tax and CGT purposes.

Since coming to power in July 2024, the Labour government has broadly implemented the Conservative proposals, which have been enacted by the Finance Act 2025. The only major deviation from the Conservative proposals was the decision by the Labour government not to provide comprehensive “grandfathering” of the IHT treatment of trusts settled by “non-doms” under the pre-6 April 2025 regime. This has undoubtedly exacerbated the negative reaction of affected taxpayers to the changes – a topic we return to below.

Summary of the changes

The changes may be summarised as follows:

• The remittance basis has been abolished, in the sense that it is not applicable to post-5 April 2025 foreign income or gains (FIGs). However, for former remittance basis users (RBUs) who are still UK resident, the remittance code continues to have relevance. For such an individual, a remittance to the UK of FIGs, dating from a tax year in which the remittance basis was used, will still give rise to tax. Moreover, changes have been made to the remittance code, which increase the scope for arrangements to be treated as giving rise to a remittance of pre-6 April 2025 FIGs.
• The April 2017 “trust protections” have been abolished. Consequently, post-5 April 2025 income and gains of non-UK resident trust structures are generally taxable on the settlor, if UK resident (subject to the QNR regime discussed below). In some cases, there may be scope to prevent settlors from being taxed on income of their structure by removing their ability to benefit from it. However, preventing settlors from being taxed on gains of their structures will generally be much more challenging.
• In place of the remittance basis, a new regime for “qualifying new residents” (QNRs) has been introduced, under which individuals are fully relieved from UK tax on their FIGs for their first four years of UK residence, regardless of whether such income and gains are remitted to the UK. There is also a limited relief for employment income of QNRs, insofar as the income is attributable to duties performed outside the UK. All individuals becoming UK resident after at least 10 consecutive tax years of non-UK residence are eligible for this regime, regardless of their domicile, and there is no charge for its use.
• A transitional relief has been made available to former RBUs, to encourage them to bring their unremitted FIGs into the UK. This “temporary repatriation facility” (TRF) allows former RBUs to remit pre-6 April 2025 FIGs into the UK, or to treat them as remitted, at a generous flat rate. In the 2025/26 and 2026/27 tax years the rate will be 12%, whereas in the 2027/28 tax year the rate will increase to 15%. The TRF also applies to certain capital distributions from non-resident trusts, if received within the TRF window.
• Since 6 April 2025, domicile has generally ceased to be relevant in relation to an individual’s exposure to IHT. In place of the pre-6 April 2025 domicile-based rules, residence-based tests have been introduced. Under the current IHT rules, individuals who qualify as “long-term residents” (LTRs) are in principle exposed to IHT on all assets; whereas non-LTRs are only exposed to IHT on UK assets (and non-UK assets connected with UK residential property).
• Generally, an individual is an LTR in any tax year in which it is the case that 10 or more of the 20 preceding tax years were years of UK residence. A non-LTR who becomes UK resident and remains resident for 10 tax years therefore acquires full IHT exposure at the beginning of tax year 11 (whether that year is a year of UK residence or not). Accordingly, to avoid acquiring LTR status, it is necessary to limit one’s period of UK residence to nine tax years.
• Moreover, the default position is that if an LTR ceases to be UK resident, the individual will remain an LTR for 10 years following a cessation of UK residence. In other words, there will be a “tail” of full exposure to IHT, by default lasting 10 years from the date of departure from the UK. However, this “tail” is reduced in certain circumstances, as explained below.
• The IHT treatment of trust assets has also changed radically. Where a trust has a living settlor, the trust’s exposure to IHT depends on whether the settlor is an LTR or not. All trust assets are within the ambit of IHT at any time at which the settlor is an LTR. In contrast, where the settlor is not an LTR, only UK situated trust assets (and non-UK situated trust assets connected with UK residential property) are within the ambit of IHT.
• Where trust assets are within the ambit of IHT, there is generally scope for tax charges under the “relevant property regime” (RPR). This is the special charging regime for trusts, under which there is potential for a charge to IHT at up to 6% on 10-yearly anniversaries of the creation of the trust or when capital is distributed out of the trust.
• There is also scope for a 40% IHT charge on the death of the settlor, unless (a) the trust is irrevocable and the settlor has been excluded, or (b) the settlor is not an LTR at the time of death and the trust assets are non-UK situated (and are not connected with UK residential property). Such scope arises under the “gift with reservation of benefit” (GWR) rules. Engagement of the GWR rules does not disapply the RPR. Nor does the application of the RPR affect whether the GWR rules are engaged. Tax paid under one of these regimes is not creditable against tax payable under the other. The combined impact of these two IHT regimes can therefore be penal.
• However, where the trust was funded prior to 30 October 2024 with non-UK assets (which were unconnected with UK residential property), and certain further conditions are met, a special relief will apply. If so, this will eliminate scope for IHT on the death of the settlor under the GWR rules, even if the settlor is an LTR at the time of death.

Some of these rules are complex. Additional detail is provided below.

The remittance basis is dead; long live the remittance basis!

As indicated above, although the remittance basis has ceased to apply to new FIGs, a post-5 April 2025 remittance of FIGs dating from a tax year in which the taxpayer was an RBU will still give rise to tax for the former RBU, if still UK resident.

The Finance Act 2025 included surprising and unwelcome amendments to the remittance code, expanding the circumstances in which a remittance may occur.  This seems to have been partly motivated by a defeat for HMRC in the courts in Sehgal v HMRC. The changes include the following:

• The core definition of “remittance” has been extended to cover use of FIGs outside the UK “for the benefit in the UK of a relevant person”.  The intention is clearly to widen the concept of a remittance, although it is unclear what additional circumstances the government thinks will be caught by the expanded meaning.
• A remittance will occur where property derived from FIGs is used to secure a “relevant debt” (essentially a debt incurred to acquire UK assets or to pay for a UK service). Under the pre-6 April 2025 law, there was a fair argument that the provision of property as security was not “use in respect of” a relevant debt, but HMRC have long argued otherwise. Clearly, the government now wishes to put the matter beyond debate.
• Technical changes to the remittance code mean that it is no longer possible to “cleanse” FIGs by remitting them to the UK during a period of non-residence. These changes have been made in a clumsy manner, which in some circumstances creates scope for current tax charges for former RBUs, by reference to FIGs which were “cleansed” by historic remittances to the UK. This topic is too complex to address adequately here.
• Business investment relief (BIR) will cease to be available from 6 April 2028. From that date, a use of FIGs to make a loan to a UK trading company or to acquire shares in such a company will give rise to a taxable remittance even if, under the current rules, it would be possible to make a claim to BIR and thereby cause the investment to be treated as not resulting in a remittance. BIR is a deeply problematic relief, and few advisers will mourn its passing.

Protected settlements are history

The protected settlement rules, also known as the “trust protections”, were introduced in April 2017. Under the pre-6 April 2025 law, their broad effect was to shield a UK resident, foreign domiciled settlor of a non-UK resident trust structure from tax which (in the absence of the protections) would be charged on the settlor by reference to foreign income received by the structure, and by reference to chargeable gains realised within the structure. Such shielding operated even where the settlor was deemed domiciled in the UK (and indeed, it was in that scenario that the shielding was most valuable).

These rules have been repealed, without any “grandfathering” of pre-6 April 2025 structures. Under current law, UK resident settlors of such structures are by default taxed by reference to all income received by them and all gains realised within them. However, settlors qualifying for the new QNR regime are partially protected (see below).

Mitigation through exclusion?

Settlors who are prepared to be excluded as beneficiaries of their trusts are, in some cases, able to eliminate their tax exposure with respect to trust income and underlying company income. However, this depends on technicalities regarding which limbs of the transfer of assets abroad legislation are engaged, which could catch settlors out where they are not well-advised.

Moreover, exclusions from benefit will generally not protect settlors from tax on gains realised by the trust or by an underlying company. The reason is that where trust gains are concerned, a trust is deemed to be settlor-interested (causing the settlor to be subject to tax on its gains, if UK resident) not only where the settlor or any spouse can benefit, but where a child or grandchild of the settlor or their spouse can benefit (or even where a spouse of such a child or grandchild can benefit). Objectively, this is absurd, but it is a longstanding rule, which has not been affected by the Finance Act 2025.

Scope for tax on distributions

Under the income and gains “matching” regimes applicable to offshore trusts, capital distributions and benefits made to UK resident beneficiaries are “matched” with accumulated trust income and trust gains, giving rise to deemed income / gains for the beneficiaries, on which tax is due.

Income and gains of a non-UK resident trust which are taxable on the trust’s UK resident settlor following the loss of the “trust protections” are not available for “matching” with benefits to UK resident beneficiaries. However, there is still scope under the post-5 April 2025 tax regime for capital distributions and benefits to UK resident beneficiaries (including the settlor) to be taxed by reference to pre-6 April 2025 income and gains of the trust.

This means that where a UK resident settlor is a beneficiary of a non-UK resident trust which was settled under the pre-6 April 2025 regime, there may be potential for tax not only by reference to post-5 April 2025 income and gains of the trust, but also (if capital distributions are received) by reference to pre-6 April 2025 income and gains of the trust.

The QNR regime

In place of the remittance basis, a special regime has been introduced for QNRs.  In the initial Conservative announcements, it was promised that this new regime would exempt users from tax on their FIGs for their first four years of residence, regardless of whether such FIGs were remitted. This made the regime sound remarkably simple. However, in reality, the QNR regime is more complex than this, and certain important aspects of how the regime will work are still unclear. In particular, there is uncertainty about what the reporting requirements will be.

Who will be eligible?

All individuals becoming UK resident after at least 10 consecutive tax years of non-UK residence count as QNRs and are therefore eligible for the new regime. The test for QNR status operates in an “all or nothing” fashion, in that any tax years of UK residence in the 10-year reference period disqualify the individual from accessing the regime.

QNR status lasts for four consecutive tax years, starting with the first tax year of UK residence after at least 10 consecutive tax years of non-UK residence. The limit to four consecutive tax years applies even if the individual is non-UK resident in any of the three tax years following the tax year of UK residence referred to above, or if the individual does not claim the relief in any of the tax years in which it is available. The regime operates on a “use it or lose it” basis. The benefit of QNR status, if unused in a particular tax year, cannot be carried forward.

Domicile is irrelevant to the QNR regime.  This means that individuals who are domiciled within the UK can benefit from the regime, provided that they have the requisite 10-year period of non-residence. The same goes for individuals who, upon becoming UK resident, would have been “formerly domiciled residents” under the pre-6 April 2025 legislation.

How does it work?

Under the new regime, QNRs can claim relief from tax in respect of:  

• foreign income (by way of a “foreign income claim”);
• foreign gains (by way of a “foreign gain claim”); and
• foreign employment income (by way of a “foreign employment election”, coupled with a “foreign employment relief claim”).

If such relief is claimed, it applies regardless of whether the income or gains are remitted. The QNR can decide which claims (if any) to make each tax year.

This is not the same as (or as simple as) a blanket exemption from tax on FIGs, as had been anticipated. When making a claim for relief, QNRs will apparently need to itemise in their tax returns each type of foreign income received and each foreign gain realised. This will represent a major compliance burden for QNRs (much greater than the compliance burden which applied to RBUs) and may be off-putting for some.

At the time of writing, there is uncertainty and debate about whether QNRs will need to quantify the FIGs in respect of which relief is claimed. If FIGs need to be quantified with accuracy in accordance with UK tax principles, this will add to the compliance burden, in many cases pointlessly (because typically, no UK tax will turn on the amount of the FIGs). The burden could be particularly significant in relation to foreign chargeable gains, for example gains realised on the disposal of shareholdings in private companies. It is hoped that HMRC will adopt a pragmatic stance regarding the quantification of FIGs under the QNR regime, recognising that in most scenarios the exact value of the FIGs will be academic.

There is no annual charge to take advantage of the QNR regime. Although it would have been perfectly possible to require some kind of “flat tax” payment from individuals who choose to utilise the regime, the government has chosen not to do this.

However, making any of the three claims available under the QNR regime in a particular tax year results in the loss of the income tax personal allowance and capital gains annual exempt amount. It also prevents the utilisation of foreign losses.

What is covered

It was originally stated that the special regime for QNRs would provide a complete exemption from tax on FIGs. However, there are some significant gaps in the relief.

In particular, the following categories of income and gains are excluded:

• foreign gains realised on the disposal of interests in so-called “property-rich companies” (i.e. companies whose value is substantially derived from underlying UK land);
• chargeable event gains under the life policy tax code (e.g. triggered by withdrawals from or surrenders of offshore life bonds); and
• “performance income”, meaning income received in connection with performances as a sportsperson or entertainer, anywhere in the world.

The first two exclusions are unsurprising. Gains realised on the disposal of “property-rich companies” are taxable even on non-UK residents, so exempting QNRs from tax on such gains would be illogical. Chargeable event gains were excluded from the scope of the remittance basis, so it was perhaps predictable that they would be excluded from the QNR regime (although logically, they should be covered by the regime where they arise in respect of a non-UK life policy).

However, the carve-out for “performance income” is unexpected and seems an odd decision. There was initially some excitement about the scope for the QNR regime to attract international footballers to the UK. Clearly, the government has no desire to emulate Spain’s famous “Beckham regime”.

Also unexpected is the limit on relief for employment income which is attributable to duties performed outside the UK. This relief is capped annually at the lower of £300,000 and 30% of the individual’s total employment income for the year. In this respect, the current relief for employment income of QNRs is much less generous that the equivalent relief for RBUs which applied up to 5 April 2025.

What about trusts?

Following the loss of the “trust protections”, described above, the income and gains of a non-UK resident settlor-interested trust structure are typically attributed to its settlor, if UK resident.  However, settlors who are QNRs are not taxable on FIGs arising within their non-UK resident trust structures (provided that the requisite claims are made) – although they are taxable on UK income and gains of such structures.

Beneficiaries who are QNRs also enjoy relief in respect of distributions from non-UK trusts. Income distributions from non-UK resident trusts are tax-free in the hands of QNR beneficiaries, assuming that “foreign income claims” are made. Capital distributions and other benefits received by QNR beneficiaries are in some circumstances also tax-free, again assuming the required claims are made, but here there is greater complexity.

For the purposes of the gains “matching” rules, a capital payment made to a QNR beneficiary is disregarded, provided that a “foreign gain claim” is made. This means that there can be no “matching” with trust gains, which means in turn that there is no requirement for the trust gains to be foreign gains. By contrast, for the purposes of the income “matching” rules, a benefit to a QNR beneficiary is tax-free only insofar as the benefit is “matched” with non-UK source income during the QNR window.

It follows that there will be scope for a QNR beneficiary to be taxed by reference to a capital distribution from a non-UK resident trust if:

• the distribution is “matched” with UK income of the trust structure; or
• the distribution is not fully “matched” with income while the beneficiary is a QNR and is “matched” with income after the beneficiary has become a regular (non-QNR) UK taxpayer.

There is considerable risk of such retrospective “matching”, not least because capital distributions to QNRs are disregarded for the purposes of the trust gains “matching” rules. This increases the risk of income being “matched” once the beneficiary has ceased to qualify for the QNR regime.

As the above makes clear, the current legislation perpetuates certain logically indefensible differences between the trust gains “matching” rules and the transfer of assets abroad “matching” rules which apply to recipients of benefits. This seems particularly perverse in light of the government consultation launched at the Autumn Budget with a view to making offshore anti-avoidance rules, including these “matching” rules, “simpler to apply in practice”.

Onward gifts by QNRs

Finally, the existing “onward gift rules” have been expanded, so that they can apply if a QNR beneficiary receives a capital distribution, and passes the proceeds on to a UK resident donee, who does not qualify for QNR relief. The broad effect of the onward gift rules, where they are engaged, is that the donee is taxed as though the onward gift were itself a trust distribution.

Reliefs for former RBUs

Major structural changes to the tax code are typically accompanied by transitional reliefs, which are intended to provide a little cushioning for individuals affected by a dramatic transition from one set of rules to another. Reliefs of this kind were a feature of the reforms to the taxation of foreign domiciliaries which happened in 2008 and 2017. It is therefore no surprise that the Finance Act 2025 incorporated some transitional reliefs. There are two such reliefs:

• The temporary repatriation facility (TRF): This enables FIGs of former RBUs to be treated as remitted to the UK, within a three-year window, at a low tax rate. The aim is to encourage former RBUs to bring money into the UK, and of course to generate a short-term boost to tax revenues.
• April 2017 rebasing: In certain cases, this relief reduces the gain realised on the disposal of an asset by a former RBU. In calculating that gain, the April 2017 market value of the asset can be used instead of the actual acquisition cost / the acquisition cost which would apply under general principles.

These two reliefs may be summarised as follows:

The TRF, in detail

As indicated above, the broad thrust of the TRF is that during the TRF window (i.e. the three tax years commencing 2025/26) former RBUs can treat FIGs as remitted to the UK, paying tax on them at a fixed rate of 12% (in the first two years) or 15% (in the third and final year).

Any former RBU is eligible for the TRF.  There is no requirement for the individual to have made a formal claim for the remittance basis, and there is no bar to the relief where the individual has become deemed UK domiciled or even actually UK domiciled.

There are effectively two limbs of the TRF:

• The first deals with unremitted pre-6 April 2025 FIGs of former RBUs which are represented by existing assets.
• The second deals with amounts derived from post-5 April 2025 trust distributions made to former RBUs within the TRF window.

The first limb: existing assets

The first, main limb of the TRF will allow former RBUs to “designate” amounts of unremitted pre-6 April 2025 FIGs in their tax returns and pay tax at the TRF rate on those FIGs. No further tax will be due on the remittance of the FIGs, whether such remittance occurs within the TRF window or later.

More precisely:

• A former RBU may designate an amount of “qualifying overseas capital” (QOC) in a tax return for 2025/26, 2026/27 or 2027/28.
• The designation of the QOC causes it to be subject to the “TRF charge”. This is 12% (if the designation is made in a return for 2025/26 or 2026/27) or 15% (if the designation is made in a return for 2027/28). No credit is given for any foreign tax borne by the QOC in question.
• Once an amount has been designated as QOC, there is no scope for the remittance of such amount to the UK to give rise to income tax or CGT for the former RBU.

There is no requirement to remit the QOC during the tax year in which it is designated and charged. In other words, a former RBU can:

• remit FIGs during the TRF window and designate them as QOC in his or her tax return for the tax year of the remittance, paying only the TRF charge on the remittance; or
• designate unremitted FIGs as QOC during the TRF window, paying the TRF charge for the tax year of designation, then remit the QOC at any point in the future, without further tax.

The QOC does not need to be money – it can be any asset which is derived from FIGs (or which is believed to be so derived, as discussed below).  If, for example, a taxpayer holds a non-UK situated artwork which is derived from foreign income, the artwork can be designated as QOC and the TRF charge paid, so that the artwork (or its future sale proceeds) can safely be remitted to the UK.  If a future sale of the artwork gives rise to a gain (taking into account the 2017 rebasing described above, where that is relevant), the taxpayer will be subject to CGT on that gain, in the normal way. But the foreign income originally used to acquire the artwork will not give rise to any further tax on remittance.

The legislation is somewhat confusing where QOC is concerned. There are three definitions of the term, two of which seem to cover the same ground. Generally, QOC must be an amount which will give rise to tax if it is remitted to the UK - so at first sight, it is necessary for an asset to be derived from FIGs for it to qualify as QOC. On the other hand, the legislation says that an individual can designate an amount “where it has not yet been determined whether the amount is [QOC]”.

The evident intention is that a former RBU should be able to designate an asset as QOC, and to pay the TRF charge on its entire value, regardless of whether and to what extent the asset is in fact derived from FIGs. In other words, there is scope to make precautionary designations in respect of amounts which may, in fact, be capital. The explanatory paper issued on the day of the Autumn Budget spelled this out:

• “It will also be possible to designate amounts of an uncertain origin or where the individual no longer has records to confirm the original source of the funds” (para 111);
• “Where an individual is unable to identify the content of a mixed fund, it will still be possible to make use of the TRF without having to identify each source of FIG contained within the fund” (para 117).

This functionality will be useful for those cases where an account or other asset is a “mixed fund” whose constituent elements are uncertain, where the accounting cost of precisely establishing the constituent elements would be disproportionate. However, in many cases incurring such accounting costs may still be desirable, to ensure that tax is not overpaid.

It is also possible for a former RBU to designate only part of an asset as QOC. For example, it appears that a taxpayer holding a cash account comprising £5m of mixed income and gains will be able to designate £2m as QOC.  The special “ordering” rules that apply to remittances from “mixed funds” have been amended so that, in this kind of scenario, the designated QOC element (which can be remitted tax-free) will always be treated as remitted in priority to the balance of the fund (i.e. the undesignated unremitted FIGs, which will give rise to tax on a remittance).

The legislation refers to QOC “of an individual”, meaning a former RBU. However, seemingly the TRF can be used in relation to assets even where they are held by some other person. There is no obvious requirement for an asset which is subject to a QOC designation to be owned by the former RBU, provided that the asset in question is derived from FIGs of that former RBU.

So, for example, it appears that where a former RBU has made a gift to another individual or indeed to a trust, and the subject-matter of the gift was derived from the former RBU’s FIGs, the TRF can be used with respect to the capital held by the other individual or trust. Assuming this is right, it is a useful feature, not only where it would be desirable for the capital to be returned to the former RBU, but also where the current owner of it is a “relevant person” for the purposes of the remittance code.

The second limb: post-April 2025 trust distributions

The second limb of the TRF applies to certain post-5 April 2025 capital distributions from offshore trusts. 

Where a former RBU receives a capital distribution during the TRF window, which is “matched” to pre-6 April 2025 trust gains, or to pre-6 April 2025 foreign income, the individual does not need to pay tax by reference to the matched income or gains at normal income tax or CGT rates, but can instead designate the distribution under the TRF and pay only the TRF charge, i.e. 12% or 15%.  It is worth emphasising that in the case of the income tax matching rules, this ability to use the TRF depends on the matched relevant income being income which arose before 6 April 2025, and being foreign source.

Utilising this second limb of the TRF requires care. In some situations, there may be a risk of post-5 April 2025 income being matched. For example, this could occur if any part of the distribution is unmatched in the tax year of its receipt, and relevant income arises subsequently.  Such matching could give rise to an income tax charge which the individual will not be able to mitigate through use of the TRF. A 45% income tax charge could be very unwelcome where the expectation was tax at 12% or 15%.

The position is more generous under the CGT matching rules, as for the purposes of the TRF relief post-5 April 2025 gains are effectively ignored.  The simplicity and generosity of this rule stands in bizarre contrast with the traps posed by the income tax matching rules.

It is worth emphasising that the TRF can also be used in relation to unremitted pre-6 April 2025 trust distributions, but there it is the first limb of the TRF which is relevant.

Potential take-up

The TRF relief is sensible and logical, as it should allow funds that would otherwise be trapped offshore to be invested / spent in the UK, and this should generate some additional tax revenue, for as long as the TRF is in force. However, the real question will be how many individuals are prepared to remain living in the UK for long enough to use the TRF, in light of the wider changes. 

The new IHT regime for individuals

Since 6 April 2025, the extent to which an individual is exposed to IHT has been determined by a residence-based test, rather than a domicile-based test. The previous distinction between those who are UK domiciled or deemed domiciled, and those who are not, has been replaced by a distinction between those who qualify as long-term residents, and those who do not.

The essence of the regime

Since 6 April 2025, whether an individual’s non-UK assets are within the ambit of IHT has depended on whether the individual is a long-term resident, or LTR. Only the UK assets (and Sch A1 property) of non-LTRs are within the scope of IHT. But individuals who are LTRs are exposed to IHT with respect to UK and non-UK assets alike:

The residence-based test

By default, any individual who has been UK resident for 10 or more out of the preceding 20 tax years counts as an LTR.

An individual’s residence status is determined by the SRT for those tax years in which the SRT has been in force (i.e. 2013/14 onwards). For earlier tax years the old, nebulous common law rules apply. It would perhaps have been sensible to provide an elective right for individuals to assess their status in tax years prior to 2013/14 using the SRT, but the legislation does not provide for this.

The ”10 out of 20” test means that once LTR status has been acquired, then by default such status will persist for 10 tax years from the date of any cessation of UK residence. In other words, there is by default a 10 year “tail” for full exposure to IHT, if an individual becomes an LTR and then ceases to be UK resident. However, 10 years is the maximum possible “tail”. Shorter “tails” apply in certain cases:

The maximum possible “tail” is 10 years. Even if an individual has been UK resident for 20, 30, 40 or 50 years, he or she will be able to escape exposure to IHT on non-UK assets (other than Sch A1 property) by becoming non-UK resident for 10 tax years.

The LTR definition is modified in relation to individuals who are younger than 20. The broad effect of the modification is that these individuals are LTRs if they have been UK resident for more than half their lives.

Treaties

An issue of some interest is the interaction of the residence-based regime described above with IHT treaties. These treaties can shield an individual’s personally-held non-UK assets from IHT on his or her death. In a few cases they can also protect trust assets from IHT.

The UK’s IHT treaties fall into two categories, commonly referred to as the “old” treaties (those dating from the period before IHT, when the equivalent tax was estate duty) and the “new” treaties (those entered into following the UK’s introduction of capital transfer tax / IHT). All these treaties are complex, and this is not the place to address them in detail. But it appears that, despite the recent move to a residence-based IHT regime, common law domicile will continue to be relevant for the application of all these treaties.

The LTR concept apparently has no role to play in relation to the “old” treaties, as it is unnatural to interpret references to domicile within Great Britain, in the “old” treaties, as meaning “having LTR status”. However, the amended IHT legislation states that in the “new” treaties, references to an individual being treated as domiciled within the UK for the purposes of IHT must be read as meaning “having LTR status”. It follows that for the purposes of the “new” treaties, an individual may be domiciled in the UK for treaty purposes either due to common law domicile within the UK, or due to the individual being an LTR at the relevant time. In contrast, under the “old” treaties, an individual can only be domiciled in Great Britain for treaty purposes if he or she is actually domiciled within a part of Great Britain, applying common law principles.

Assuming that the above is right, it may create anomalies. The implications will need to be worked out on a case by case basis.

The new IHT regime for trusts

Under the pre-6 April 2025 rules, non-UK situated assets (other than Sch A1 property) of a trust funded by an individual who was neither domiciled within the UK nor deemed domiciled were “excluded property”, and as such outside the scope of IHT. This was so even if the settlor had become domiciled within the UK, or deemed domiciled, since the trust was funded.

The excluded property rules are now very different. They focus on whether the settlor is an LTR (or, where the settlor is dead, whether the settlor was an LTR at the time of death). However, the pre-6 April 2025 IHT regime for trusts has effectively been “grandfathered” in cases where the settlor died under the old regime, i.e. before 6 April 2025.

The position can be summarised as follows:

Potential occasions of charge

The above tests for whether assets are within the scope of IHT apply on each potential occasion of charge. In most cases, there is scope for IHT on the following occasions, but only if the settlor is an LTR at the relevant time, or the assets in question are UK situated / Sch A1 property:

In each case, whether there is an actual charge will depend on whether the assets are excluded property, i.e. whether or not the settlor is an LTR at the time of charge and whether or not the assets are non-UK situated (and not Sch A1 property).

The summary above assumes that the trust is not subject to a “qualifying interest in possession” (QIIP). QIIPs are, very broadly, life interests created under will trusts. Where there is a QIIP, the RPR does not apply. However, there is scope for IHT on the termination of the QIIP, e.g. on the death of the beneficiary with the QIIP.

Where an LTR settlor ceases to be an LTR

Importantly, where an LTR settlor ceases to be an LTR (and there is no QIIP), this will trigger an exit charge of up to 6% under the RPR by reference to any non-UK assets (other than Sch A1 property) of the trust. Thereafter, such assets will be excluded property and outside the scope of IHT for so long as the settlor remains a non-LTR.

This exit charge was an unexpected element in the amended IHT legislation. However, it is a deliberate design feature: the intention is to impose an IHT charge whenever trust assets leave the IHT net due to a change in status of the settlor.

Limited relief for pre-30 October 2024 trusts

The original Conservative proposals in March 2024 promised full “grandfathering” of the pre-6 April 2025 IHT regime for all trusts settled prior to that date. In other words, it was stated that all such trusts would remain subject to the previous rules on what counts as excluded property, on an indefinite basis. However, Labour rejected this proposal, insisting that all trusts would be moved into the new regime, regardless of when they had been created.

Following significant lobbying, and in recognition of the fact that trusts had been created in reliance on the pre-6 April 2025 rules, a small concession was made. Under the amended IHT legislation, there is no scope for a 40% IHT charge on the settlor’s death under the GWR rules (where there would otherwise have been scope for such a charge) for most trusts funded prior to the date of the Autumn Budget.

The exemption from the GWR rules applies where:

• property was disposed of by way of gift prior to 30 October 2024,
• the property became settled property as a result of that gift,
• such property was “excluded property” immediately before 30 October 2024, and
• the property has at all times continued to be non-UK situated and non-Sch A1 property.

Where these conditions are met, no IHT will be due on the settlor’s death under the GWR rules with respect to the non-UK situated trust property, even if he or she is an LTR at the time, and even if he or she is a beneficiary of the trust / has a power of revocation.

However, non-UK situated trust property is subject to IHT under the RPR if the settlor is an LTR on occasions of potential charge under that regime. In other words, although the exemption from the GWR rules knocks out the possibility of a 40% IHT charge on the settlor’s death (assuming that the conditions for the exemption are met), it doesn’t eliminate the scope for IHT charges at up to 6% every 10 years and when capital leaves the trust.

Finally, it is worth noting that a similar relief applies to prevent an IHT charge on the death of the holder of a QIIP, where (1) the trust property in which the QIIP is held was excluded property immediately before 30 October 2024, and (2) the trust property has remained non-UK situated and non-Sch A1 property.

A new chapter, or the end of the road?

Prior to the April 2025 reforms, many UK tax advisers were sympathetic to the proposition that the remittance basis ought to be replaced by a simpler tax regime for “incomers”, which would not create a perverse incentive to leave wealth outside the UK.  Many also supported the stripping of the concept of domicile from the UK tax code.

However, the changes discussed above have made residence in the UK (on anything other than a very short-term basis) unattractive to wealthy, internationally mobile individuals. In the eyes of many advisers, the changes represent a serious error of judgement, and there is ever-growing evidence that they will damage the UK economically.

The QNR regime lacks lustre, not only compared to the remittance basis regime which it has replaced, but also compared to the special tax regimes for “incomers” that are available in many other countries. A four-year special regime is too short-lived to be attractive to most internationally mobile investors and entrepreneurs, and is utterly impractical for individuals with young families.

The regime is also unavailable to most individuals who were formerly users of the remittance basis. These individuals have very little fiscal incentive to hang around in the UK, and a significant proportion of them have already left. There are many other countries which are actively competing for these individuals’ presence and economic contributions.

The IHT changes are another driver, and indeed, are commonly cited as the most significant single factor affecting whether internationally mobile individuals are willing to remain UK resident. Many “non-doms” come from countries where there is no IHT, or where the rate of such tax is low. The 40% rate of IHT in the UK is regarded by many as shocking, and exposure to IHT on foreign wealth is widely felt to be unacceptable. For a significant proportion of “non-doms”, such exposure is a “red line”.

In a September 2024 survey, 67% of “non-doms” who were UK resident at the time said that they would not have moved to the UK if they had known of the 6 April 2025 tax changes; and 63% of remittance basis users surveyed stated that they were planning on leaving the UK within two years. Even if these statistics are taken with a pinch of salt, they are alarming.

In light of this, we expect that over the next five years or so, the number of foreign domiciliaries living in the UK will dwindle. Going forward, the UK is unlikely to be successful in attracting and retaining internationally mobile entrepreneurs and investors, unless there is a major change of tack. This lack of success will be a significant but invisible cost for the UK – represented by the loss of tax revenues that could have been generated from “non-doms” if a more intelligent fiscal policy had been adopted, and by the loss of economic growth that these successful entrepreneurial individuals could have helped to kickstart.

In the Autumn Budget, the Chancellor Rachel Reeves insisted that the new tax regime discussed in this note would be “internationally competitive”. Unfortunately, the UK’s “non-doms” disagree, and many are voting with their feet.