Hello FIG regime for Arrivers
Prior to 6 April 2025, there was a long-established concept of deemed domicile in the UK. Individuals who moved to the UK, and were not originally domiciled in the UK, had a grace period of 15* years UK residence before they became “deemed dom”.
The benefit of being deemed domiciled was enjoyed by those individuals who had significant foreign income and gains. Any foreign income and gains that they did not bring into/”remit” to the UK would be outside the scope of UK taxation, if they claimed the remittance basis of taxation on their UK personal return.
The remittance basis of taxation did come with a price – the remittance basis charge – once those individuals reached 7 years of UK residence. This charge increased as the years of residence increased.
From 6 April 2025, the remittance basis of taxation and concept of deemed domicile will be abolished, replaced by a residence based system. For individuals considering a move to the UK, they will now enjoy a 4-year grace period for their foreign income and gains, known as the “FIG regime”.
For settlors of trusts who are within their first 4 years of tax residence in the UK, they will not be taxed on the income and gains of the trust as they arise.
*15 of the last 20 tax years.
Say Goodbye to the Protected Settlement, unless in FIG
With effect from 6 April 2017, HMRC made a favourable change to the income and capital tax treatment of UK resident non-domiciled settlors of trusts. These trusts were known as “protected settlements” due to the protection they afforded to the settlor. Previously such settlors were taxed on income and gains of the trust as they arose, but from April 2017 the settlor was protected from being taxed on an arising basis, and they would only be taxed to the extent that they received a benefit or distribution from the trust, in the same way as other beneficiaries. This protection continued even after the settlor became deemed domiciled in the UK.
From 6 April 2025, however, the concept of a “protected settlement” will be abolished.
Example
A, is a non-UK domiciled individual, who has lived in the UK for 11 years. Prior to moving to the UK, A set up a trust 15 years ago. No further additions were made to the trust, and it has not been tainted. The trust holds an investment portfolio which earns approximately £100,000 of income every year. A receives an income distribution of £20,000 each year from the trust and has no other income.
Since April 2017, A has not been taxed on the income and gains of the trust as they arise. A has only been taxed on the annual distribution they take from the trust which, in 2024/25, equates to a tax liability of £1,486.
From 6 April 2025, A will be subject to tax on the income and gains of the trust as they arise. A would therefore be taxed on the £100,000 of income earned by the trust portfolio, which equates to a tax liability of approximately £27,432 (using 2024/25 allowances).
As a result of the abolition of the protected settlement, A’s tax liability has increased by 1746%!!
If however, A had been UK tax resident for less than 4 years, the protection would still apply for those first 4 tax years and their tax liability would remain at the £1,486 level.
Trustee Considerations
- Review the trust structure and settlor position where the settlor is UK resident to check if individual is caught by this change in legislation.
- Monitor the settlor’s tax residency position if they are not in the UK but have plans to move there, to ensure they are aware of the potential impact on their personal tax position and the 4-year FIG regime.
- Obtain updated tax advice to validate its efficiency and assess any impact of the protected settlement being abolished.
- Discuss the possibility of excluding the settlor and their spouse/civil partner as beneficiaries of the trust, as this would prevent foreign trust income being assessed on the settlor on an arising basis (note that exclusion does not prevent gains being attributed on arising basis).
- Consider alternative investment strategies and options such as offshore bond wrapper or bespoke funds that mitigate the attribution of income and gains.
As a reminder Alex Picot Trust does not offer advisory services on matters of UK taxation.
