New residency-based tax regime and private equity businesses

On 6 April 2025 new tax rules took effect in the UK, replacing a regime dating back to the time of the Napoleonic Wars. This has not been a positive change for many taxpayers but could be an opportunity for private equity businesses based in the UK, who are seeking to attract talent from overseas.

The FIG regime, which took effect on 6 April 2025, applies to individuals coming to the UK either for the first time or after an absence of 10 tax years or more. Unlike the old domicile rules, the new regime does not discriminate between UK and non-UK nationals.

Individuals qualifying for the FIG regime do not pay tax on foreign income and gains for the first four years after becoming UK tax resident. Unlike the old rules, this applies even if the income or gains are brought to the UK.

The system is less generous in that it will only apply for the first four tax years of residence and will require disclosure of the foreign income and gains not subject to tax. For those with less complex overseas financial arrangements, who are coming to the UK for a short period of time, the FIG regime should represent a significant simplification. It will make it easier to access overseas capital and comply with tax reporting obligations while resident in the UK.

Overseas workday relief rules have also been revised. The previous rules enabled inbound, non-UK domiciled employees to claim an income tax exemption for income derived from non-UK duties. This applied for the first three tax years of UK residence, subject to that income not being remitted to the UK.

These rules have been modified to extend the applicable period from three to four tax years and remove the requirement that funds must be kept offshore.  This better aligns the rules with the new FIG regime.

From 6 April 2025, however, OWR has been subject to an annual financial limit of £300,000 (or 30% of qualifying employment income if lower).

Transitional arrangements will be available to existing non-UK domiciled individuals after 6 April 2025.

The FIG and OWR regimes will be available to individuals who moved to the UK before 6 April 2025 and are still within their first four tax years of residence.

OWR will also be available in 2025/26 for individuals who moved to the UK in 2023/24 or 2024/25 but do not qualify for the FIG regime.

Lastly, there will be a temporary repatriation facility (TRF) allowing individuals to remit pre-6 April 2025 foreign income and gains to the UK at a reduced 12% tax rate in 2025/26 and 2026/27, or 15% in 2027/28.

The significant reforms to the taxation of carried interest will also take effect from 6 April 2026 and draft legislation is expected on 21 July 2025.

Carried interest will be treated as a deemed trade subject to income tax and class 4 national insurance contributions. A 72.5% ‘multiplier’ will apply to qualifying carried interest and will reduce the amount of carried interest that is taxable, giving an effective tax rate for an additional rate taxpayer of 34.1%. Having listened to feedback from industry and professional bodies, the government has dropped proposals to include additional qualifying conditions.

It will, however, move ahead with its plan to extend the territorial scope of the UK taxation of carried interest, which will impact internationally mobile executives. From 6 April 2026, non-UK residents in receipt of carried interest will potentially be taxable in the UK, using a pro-rata method by reference to UK and non-UK workdays. Safeguards will be included within the legislation to limit this impact, including an exemption for UK duties performed before 30 October 2024, and a three-year time limit on UK tax exposure after leaving the UK.

Further reforms to address technical complexities in the rules have also been announced, as well as confirmation that tax and national insurance contributions payable in respect of carried interest will be included when calculating tax payments on account.

The new FIG regime creates significant challenges for existing UK taxpayers and for those who are moving to the UK for the first time but have complex overseas investment arrangements and structures. Despite these drawbacks, the new rules provide much needed clarity and flexibility for many internationally mobile executives.

For private equity firms, the new FIG and OWR regimes present a strategic opportunity to attract and retain international talent. By offering tax-efficient structures for inbound executives, firms can enhance their recruitment packages and potentially reduce the tax friction associated with cross-border mobility. Additionally, these regimes may support internal secondments from overseas offices, fostering global collaboration and talent development.

For example, consider an executive relocating from New York to London in 2025 to join a UK-based private equity firm. Under the FIG regime, the executive would not pay UK tax on their foreign income and gains for the first four years, even if those funds are brought into the UK. Simultaneously, the revised OWR rules would allow them to receive income from non-UK duties tax-free up to £300,000 annually, without the need to keep those funds offshore. This combination significantly enhances the executive’s net compensation and simplifies compliance.

The enhanced flexibility of the new FIG and OWR regimes should also simplify the process for businesses making carried interest distributions to their executives, by lessening the distinction between funds paid to UK and overseas bank accounts.

It is welcome that proposals to add further qualifying conditions for carried interest have been dropped and this avoids further complicating what is already a complex area of taxation. It is disappointing, however, that the tax payable on carried interest will not be exempted from the calculation of payments on account. Carried interest receipts fluctuate from year to year and with the penalty interest currently at 8.25%, this may discourage individuals to make claims to reduce these tax payments.

The extension of the territorial scope of carried interest to non-UK resident recipients will act as a disincentive to internationally mobile individuals looking to come to the UK to work for a short period of time, but the proposed safeguards will at least limit their impact.

We work with major private equity houses and investment banks to support their senior executives navigate the UK tax system, providing proactive advice to them and their families. This covers the tax position on their returns from funds and their remuneration from the business and also the longer-term solutions for that capital.

Please get in touch with your usual S&W contact or one of the contacts listed if you would like to discuss any of the above.

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