Out of Africa: Part Three – Impact of the abolition of the remittance basis charge

In this article Julie Howard looks at how the the proposals to abolish the remittance basis of taxation with a residence-based regime will impact individuals relocating to the UK from Africa.

In the previous two articles of her Out of Africa series (see part one and part two), Partner, Julie Howard has considered pre-arrival planning for individuals considering a move to the UK from Africa and then their ongoing UK tax position once they are living in the UK. These articles discussed in particular the “remittance basis” of taxation, which has been a cornerstone of the UK tax regime for over 100 years, attracting many foreigners or “non-UK domiciled” individuals to the UK.

In March 2024 the government announced proposals to abolish the remittance basis of taxation from 6 April 2025 and replace this with a residence-based regime, which is also designed to encourage more investment in the UK. There has been an awareness for some time that the existing remittance regime encourages individuals to keep funds outside the UK.

The proposals are contained in brief documents from the government and we have not seen any draft legislation yet. The proposals may also be subject to amendment after the election later this year if there is a change of government and the Labour Party has already indicated that they would make certain changes to the proposals.

We continue to see clients emigrating to the UK from Africa, in particular South Africa, some of whom have complex business interests and existing offshore holding structures. The purpose of this article is to outline the proposed changes since an understanding of the proposals is crucial to enable people to plan successfully ahead of their move to the UK or, where they are already UK tax resident, to take steps before 6 April 2025 to review existing structures and/or restructure offshore wealth.

New 4 year regime to replace the current remittance basis

From 6 April 2025 the concept of domicile will be abolished as a connecting factor for UK tax purposes. A new favourable regime will apply from this date.  It will be available for an individual’s first 4 years of UK residence provided they have not been UK resident for the previous 10 tax years.

Under this regime for those first 4 years there will be no UK tax on foreign income and gains even if these are brought into the UK. This marks a significant change to the existing regime. For example, for people considering UK residence under the existing rules, they would need to consider carefully the timing of any disposals of assets or liquidity events to ensure these take place in the UK tax year before becoming UK resident. This will not be relevant if the 4 year regime applies.

A claim will have to be made for the new regime to apply, but individuals can opt in and out of it. For individuals considering relocating to the UK from Africa, who are keen to take advantage of the 4 year regime, it is important to review previous patterns of visits to the UK. We have found that many South Africans, for example, visit the UK regularly and may have existing business interests here or be undertaking preparatory steps ahead of moving to the UK. Due to the requirement of being non-UK resident in the previous 10 tax years, individuals will need to check that they have been below the relevant day count thresholds and have not inadvertently become UK tax resident under the sufficient ties test in previous tax years.

Individuals who have been UK tax resident for less than 4 tax years from 6 April 2025 may be eligible to claim the new regime for the remaining 4 year period.

After the 4 year regime, or if it does not apply, UK resident individuals will be taxed on their worldwide income and gains, even if these are kept abroad. Overseas workday relief will continue to be available for the first 3 years of UK tax residence.

The Labour Party has currently indicated that it supports this 4 year regime, so we expect it will be introduced even if there is a change in government following the upcoming election. There may well be some adjustments, for example, to encourage UK investments during the 4 year period.

Inheritance tax – personal assets

For UK tax purposes liability to inheritance tax has historically been based on the concept of domicile (essentially where someone regards their permanent home).

Instead under the proposals it will be based on UK residence with an individual becoming subject to inheritance tax on their worldwide estate once they have been UK tax resident for 10 years (a reduction from the current 15 years). Moreover, on ceasing UK residence there are proposals for a “10 year tail”, meaning that non-UK assets would remain within the scope of inheritance tax for a further 10 years.

These inheritance tax proposals will be subject to a consultation and there are very limited details about them at this stage, particularly about how the 10 year tail could work or be enforced. It is not yet known when the consultation will be published and when we are likely to receive further information.

Offshore trusts – income, gains and inheritance tax

From 6 April 2025 current income tax and capital gains tax protections for offshore trusts will be removed and foreign income and gains arising in settlor-interested non-UK trusts will be taxed on UK resident settlors as they arise unless the settlor is within the 4 year regime discussed above.

This marks a significant change to the UK taxation of offshore trusts where UK resident non-UK domiciled settlors have typically not been liable to UK tax on foreign income and gains within the structure unless they receive trust distributions or benefits and remit these to the UK.

In our experience, many African clients have offshore trusts in place. It will therefore be important to review existing trusts so that settlors who have become UK resident understand how they will be taxed in relation to these going forwards. In particular, there may be scope for restructuring, rebasing or reorganising investments within trusts.

UK resident beneficiaries who benefit from the 4 year regime will be able to receive trust distributions free of UK tax, even if these are brought into the UK. However, if the 4 year regime is not available, they will be liable to UK tax in respect of worldwide trust distributions – there will no longer be scope for keeping trust distributions offshore and claiming the remittance basis.

Currently trusts set up by non-UK domiciled individuals (who are not deemed domiciled under UK tax rules) benefit from excluded property status for inheritance tax purposes, meaning that the trust is outside the scope of inheritance tax provided it does not hold UK situated assets directly or certain UK assets indirectly. Under the government proposals such trusts made before 6 April 2025 would continue to enjoy this favourable excluded property status indefinitely. Where non-UK situated assets are settled onto trust after 6 April 2025, under the proposals the inheritance tax treatment will depend on the settlor’s residence on the date the assets are settled and/or on the 10 year anniversaries of the trust or on certain exit events when assets leave the trust (these are the tax points for trusts within the scope of inheritance tax).

However, the Labour Party has recently announced that it would look at abolishing excluded property status for existing trusts. As this will be subject to the results of the election and the outcome of a consultation, it remains to be seen if this will end up taking effect, but it is a risk that is important to be aware of.

For clients with existing trusts, a review of these trusts should be undertaken in order to understand the potential inheritance tax exposure if the above changes are implemented. The 10 yearly charges amount to roughly 6% of the value of the trust’s assets with proportionate exit charges when assets leave the trust. Depending on the expected lifetime of the trust, the exposure may be lower than the 40% charge applicable to personally held assets within the scope of inheritance tax.  There are certain inheritance tax reliefs that can apply for certain UK situated business assets and agricultural property held in trust, which can also be explored. It also remains to be seen how this new proposed regime would interact with certain inheritance tax anti-avoidance provisions that can apply where settlors retain an interest under a trust and we will need to see the consultation documents and draft legislation to understand this more clearly.

Transitional reliefs

The government proposals include the introduction of certain transitional reliefs set out below.

• For 2025/26 existing UK resident individuals who have been claiming the remittance basis and do not fall within the 4 year regime will only pay UK income tax on 50% of their offshore income in 2025/26 (the Labour Party has indicated that it may not introduce this proposal if elected).
• For 2025/26 and 2026/27 a special 12% flat rate will apply to remittances of pre-6 April 2025 foreign income and gains under a new “Temporary Repatriation Facility” (the Labour Party has indicated that it will explore ways to encourage people to remit stockpiled foreign income and gains to the UK).
• There will be a capital gains tax rebasing to 5 April 2019 values for personally held assets where the individual has been claiming the remittance basis and is not UK domiciled or deemed domiciled by 5 April 2025.

For individuals who are already UK tax resident and who have overseas structures and wealth, it is recommended to undertake a review before 6 April 2025 to ascertain the extent to which the transitional reliefs could be used, e.g. to extract funds by way of dividend from an offshore company this tax year and remit from 6 April 2025. Individuals who will not be eligible for the 4 year regime from 6 April 2025, but who currently claim the remittance basis, could consider receiving distributions from offshore trusts this tax year and keeping them offshore if these would otherwise be liable to UK tax from 6 April 2025.

The government proposals indicated that the 12% rate under the Temporary Repatriation Facility would only apply to income and gains arising personally to individuals. We therefore await details in the draft legislation to determine if, for example, the rate could apply to income/gains matched against distributions from offshore trusts.

Conclusion

It is important to obtain professional advice in advance of 6 April 2025. Individuals relocating to the UK from Africa, who will be eligible for the 4 year regime, will find this to be very favourable for their initial period of UK residence. However, they will need to check that they will be entitled to claim this if they have spent previous time in the UK. For people who have already moved here from Africa, reviews of existing offshore structures should be undertaken well before 6 April 2025 to understand the extent of their UK tax exposure going forwards and to identify appropriate planning that can be undertaken in advance to take advantage of potential transitional reliefs and ensure that existing structures are as tax efficient as possible.