A Money Unspun guide to making the most of the FIG grace period and smoothing out tax issues when returning to the UK
In the 2024 autumn budget, Chancellor Rachel Reeves branded the concept of “domicile” in the tax system as outdated. For that reason, the government will pull the plug on the “non-dom” system next year.
In its place, they’ll roll out a simpler, residence-based system that applies to all UK residents, with some adjustments for temporary workers coming to the UK.
The residence-based tax system will come into force from April 2025 onwards.
In a nutshell, it means anyone living in the UK long-term (at least 10 years over the last 20) will face income and inheritance tax on their worldwide assets, not just those based in the UK.
CLOSING THE NON-DOM LOOPHOLES
Reeves intends to close gaps in the old system, which was flexible enough to allow high net-worth individuals to bypass a large proportion of tax with overseas income and assets.
Expats will come under the new Foreign Income and Gains (FIG) system. Newcomers or returnees won’t pay tax on foreign income for the first four years, as long as they’ve been away for at least a decade.
This gives you a bit of breathing room if you’re planning to return to the UK, but doesn’t compare kindly to the more permanent reliefs under the old rules.
In this guide, we’re going to look at how these changes impact you if you’re an expat thinking about coming back to the UK.
UNDERSTANDING THE END OF THE NON-DOM REGIME
What Was the Non-Dom Regime?
The non-dom regime was designed for people who lived in the UK but were considered “non-domiciled”. This means the UK wasn’t their permanent home.
If you qualified, you could live in the UK without paying UK taxes on your foreign income and gains as long as you didn’t bring that income into the country, commonly referred to as the “remittance basis.”
For people with assets and income all over the world, this system was ideal. They enjoyed the benefits of being in the UK without being fully exposed to the UK’s tax system on everything they owned or earned abroad.
Why the Change?
The government’s motivation behind scrapping this regime comes down to a few key factors.
- They’re aiming to raise funds. The Office for Budget Responsibility says this new residence-based system should bring in around £12.7 billion over the next five years. With government finances feeling the pinch, this is a good chunk of money to add to the public purse.
- Tightening up loopholes. There’s been a lot of talk in the media about how the non-dom regime is used as a workaround to avoid taxes, so this shift is partly about making sure everyone pays their fair share.
- The UK wants to align its tax system with other countries. It’s part of an international move to make tax rules fairer and to keep up with changes in other big economies.
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It’s quite a big shake-up. For people who relied on non-dom status, it means they’ll need to rethink their strategy and decide how or if they want to stay in the UK long-term.
INTRODUCING THE NEW RESIDENCE-BASED TAX SYSTEM
What the FIG (Foreign Income and Gains) System Means
If you’re planning to come back to the UK, the FIG system gives you a grace period to ease back into the UK tax system. For the first four years after you return, you won’t have to pay UK tax on your foreign income and gains, as long as you’ve been away for at least 10 years.
But after those four years any income or gains you earn worldwide will be subject to UK taxes. The idea is to let people return without an immediate tax hit, but the government still plans to eventually tax worldwide assets after the grace period ends.
Long-Term Residency Rules
If you’re in the UK long-term, the rules are a bit stricter. Anyone who’s been in the UK for at least 10 out of the last 20 years will face UK tax on their global assets.
If you’re an expat or non-dom returning to the UK and planning to stay for good, after that initial grace period, your worldwide income and assets will be part of the UK tax fold. This rule applies even if you leave the UK again afterwards with a “tail” rule that keeps you in the UK tax net for up to 10 years after leaving.
The real impact will be felt by people who used to manage income and assets overseas without being taxed in the UK.
Instead, returning expats need to rethink long-term financial strategies, especially if they plan to stay. It might mean changing investments, possibly looking into trusts or other structures if they want to protect their wealth from these new UK tax implications.
IMPACT ON DIFFERENT TYPES OF ASSETS
Let’s take a look at how this new system affects different assets for people returning to the UK.
Foreign Income and Capital Gains
Under the FIG system, foreign income and capital gains will get more attention from HMRC. Once the initial four-year grace period ends, any foreign income and capital gains earned will be part of your UK tax picture.
If you’ve got overseas investments like rental properties or international stocks, the income and gains from those will be taxed as if they were UK-based. This means expats who used to enjoy a lighter tax load by keeping investments offshore will need to change their strategy.
Inheritance Tax Changes
Inheritance tax (IHT) is where things get a bit more complex. Under the new rules, after 10 years of UK residency, worldwide assets become part of your estate for UK IHT purposes. So, if you’re passing on assets, whether in the UK or abroad, they’re going to be under the IHT umbrella, which could be a hefty 40% tax above your allowances.
The new rule applies for 10 years even if you leave the UK, so anyone returning to the UK with a long-term view will need to think about how this affects plans to leave assets to kids, spouses, or other family members.
If you’re passing assets to a spouse, they’re typically IHT-exempt. But for children, grandchildren, or other non-spouse beneficiaries, this could add up, especially if you’ve got property or investments abroad that now fall into the UK tax net.
Trusts and Unanswered Questions
Trusts, especially those set up by non-doms, are still a bit of a grey area. Right now, there’s no definitive answer on how income and capital gains in these trusts will be treated under the FIG system.
In the past, non-doms often used trusts to keep foreign assets outside of the UK’s reach for tax purposes. But with these changes, there’s a real question about whether those protections will hold. We know that if the trust creator (the settlor) is a long-term UK resident, the trust’s assets might still be subject to tax, but we’re waiting for specifics.
For now, financial and tax advisors are keeping a close eye on how this will play out. There’s a chance the government could offer some transitional reliefs or clarify rules to avoid double taxing assets within trusts. But until there’s official guidance, anyone with a trust will need to stay tuned and possibly revisit their estate planning with a financial advisor once more details emerge.
FINANCIAL PLANNING FOR EXPATS RETURNING TO THE UK
Using The Temporary Repatriation Facility (TRF)
If you’re thinking of bringing overseas earnings into the UK soon, the TRF might help. It’s a tax incentive aimed at encouraging people to bring their foreign wealth over to the UK by offering a reduced tax rate on those funds.
The TRF offers a special tax rate on foreign income and gains (FIG) you earned overseas, but only for a limited time. Here’s the breakdown:
- Tax Year 2025/26 and 2026/27: Any remitted FIG will be taxed at a 12% rate.
- Tax Year 2027/28: The rate goes up to 15%.
- After April 2028: Any remittances of FIG earned before 6 April 2025 will be taxed at regular rates, so the TRF opportunity will have closed by then.
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The TRF applies to FIG that was earned in a tax year when you were taxed on the remittance basis, meaning you only paid tax on the income and gains you brought into the UK. So, if you were a non-dom using the remittance basis and are now a UK resident, this might be your chance to bring over funds at a lower tax rate than usual.
It’s also available to people who benefit from offshore trust structures in these years. But, there are some qualifications, so you’d want to check that your specific setup qualifies.
One of the complex areas of remittance is the “mixed fund” rule, where funds that blend different types of income and capital gains are tricky to separate for tax purposes. The TRF is relaxing some of these rules to make it easier to take advantage of the reduced rates, though it’s still likely to be a bit of a maze to navigate.
After 2028, the usual tax rules apply, and the TRF benefit is gone. Business Investment Relief, which used to allow for bringing foreign income and gains into the UK without a tax charge when invested in a qualifying UK business, will also be phased out for new investments after April 2028.
TRF is an appealing option for those looking to bring their overseas wealth into the UK for spending or investing, but only in the short term. The limited window and staged tax rate increase add a bit of urgency if you’re considering this.
Using the FIG Grace Period
Think of this period as a unique opportunity to get your financial ducks in a row with less tax pressure. But you need to get your strategy right. The following steps will help.
- Timing Asset Sales: During the four-year exemption period, you’re not taxed on FIG brought into the UK, so it’s prime time to sell off assets that might bring in capital gains. Selling during this grace period could allow you to bring in that income tax-free, rather than waiting until the exemption expires and facing a UK tax hit on future sales.
- Strategic Distributions from Trusts: Since the UK won’t tax your FIG in the grace period, you can set up distributions to draw from the trust while the exemption is in effect. That way, you can pull out income or gains that may otherwise face tax down the line, particularly if you have a large amount stored in these trusts.
- Reviewing and Rebalancing Your Portfolio: If you have income-producing assets abroad, like dividend-paying stocks or rental properties, consider whether these fit into your longer-term plans. The tax-free status on FIG could mean taking advantage of income from these assets, and later on, perhaps shifting to investments more suited to UK tax rules.
- Bringing in Lump Sums at the Right Time: For any major cash sums you have abroad, plan your remittances with the FIG period in mind. Consider bringing in larger amounts while you’re exempt, allowing you to settle or reinvest this money in the UK without triggering immediate tax consequences.
- Thinking Ahead Beyond the Four-Year Period: Remember, this grace period doesn’t last forever. Consider where you want to be once the exemption period ends. Set up investments or trust structures now that will benefit you later under UK tax rules.
SEEK EXPERT ADVICE BEFORE YOU’RE RETURNING TO THE UK
As straightforward as the FIG system sounds, getting the timing right makes a big difference in the long run.
A financial advisor who specialises in UK expat tax planning helps you take the right actions according to your specific situation. Get in touch and we’ll help you utilise the grace period in the best possible way and set yourself up for a smoother tax experience after it ends.
