The Chancellor’s October budget confirmed the previous government’s proposals to modernise the non-domiciled tax system. The new tax regime, which is called the Foreign Income and Gains (FIG) regime replaces the UK’s existing non-domicile tax system with a residency-based system.

The FIG regime winners are new arrivals to the UK, where in a major policy change, they will be able to bring untaxed overseas income and gains into the UK, without paying UK tax.

In contrast, the losers are existing foreign nationals residing in the UK, especially those who have been here between four and seven years. Whilst wider commentary on the impact of the new regime can be read here, this article focusses on US citizens and Green Card holders (resident aliens) living abroad, as their UK tax position has to be understood through the complexities of the US worldwide tax system and IRS reporting rules.

Whilst it’s possible to be subject to both US and UK tax in other circumstances (for example, a UK tax resident who spends a lot of time in the US) these circumstances are rare and are not ones on which to base general commentary. Similarly, the concepts in this article don’t apply to non-resident US taxpayers.

US taxpayers & the remittance basis: a brief history

US taxpayers, who are living in the UK, have had a nuanced relationship with the existing non-domicile and remittance-based tax system. This is because they are still subject to the US tax system, which applies tax on their worldwide income and gains.

As a reminder, the remittance basis allows certain UK taxpayers to exempt their foreign income and gains from UK tax, unless transferred to the UK; whereafter their foreign income and gains become taxable again. For US taxpayers, the UK remittance basis is less attractive, as there is always an element of US income tax (albeit usually at lower rates than the UK).

Consequently, each year, US taxpayers carefully weigh the more limited benefit of the remittance basis against the restrictions on transferring money to the UK (as transfers of income and gains would be subject to UK tax again). The introduction of the Remittance Basis Charge further complicated this annual decision, as the outcome relied on being able to utilise the Remittance Basis Charge as a credit against US tax.

For the first seven years of living in the UK, the decision was simpler, as the remittance basis provided an obvious benefit in limiting the interaction between the UK and US tax system. In many cases, this reduced complexity resulted in outcomes that were easier to understand and lower fees.

A typical US/UK taxpayer would therefore claim the remittance basis for the first seven years, and then move to the arising basis (worldwide UK tax) when the Remittance Basis Charge became relevant.

Proposed Changes and the Impact on US Taxpayers

The FIG regime fundamentally changes how transfers of untaxed foreign income or gains to the UK are taxed. In contrast to the remittance basis, under the FIG regime, new arrivals can freely transfer income and gains to the UK (even when it has been excluded from UK tax in their first four years of UK tax residence).

The ability to bring tax-free foreign income and gains (to the UK) will be a significant advantage for US taxpayers, as it means they don’t have to hedge their tax planning. For example, US taxpayers who decide to extend their time in the UK often want to buy a home. Therefore, the ability to use income and gains as a deposit, will be a welcome tax relief.

The proposed rules should also give US taxpayers more time to plan their financial affairs. Currently, it has been advisable for a taxpayer’s affairs to be aligned for both UK and US tax from day one of their UK tax residency. The proposed rules afford US taxpayers more time to align their affairs with the UK tax system. Importantly, it will give US taxpayers time to determine how long they are likely to stay in the UK and allow them to fine-tune their financial affairs accordingly.

Linked to this greater flexibility, US taxpayers will be able to retain their existing US advisors for longer, as the interaction between the UK and US tax systems will be limited over the four-year period.

From April 2025, the UK will be a more attractive tax option for US taxpayers wanting a four-year hiatus outside the US. What remains to be seen is whether the political hot-potato of immigration policy will help or hinder US taxpayers seeking refuge in the UK. The FIG regime has some hallmarks of a digital nomad scheme, but has notable differences, because it operates independently from the immigration system. A US taxpayer’s ability to access the benefits of the FIG regime will, therefore, depend on their ability to immigrate to the UK; and in today’s world, this is no easy feat.

For more information on US/UK tax matters, or to discuss any of the issues raised, please contact Tom Buchan, Janice Lloyd or Steve Wren on 44 (0)20 7079 8888 or email tom.buchan@srlv.co.uk .

ABOUT SRLV

SRLV is a mid-tier firm of chartered accountants and tax advisors, business management specialists, and corporate and private client advisors, based in the heart of London’s West End.

Founded in 1988, the firm has 20 partners and employs 180 staff, with specialist for music and the creative industries, digital, premium hospitality, luxury retail and real estate.

This material is published for the information of clients and contacts. It provides only an overview of the regulations in force at the date of publication (16 December 2024), and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or SRLV LLP.