Why the UK’s new foreign income and gains regime is not simply a four-year tax holiday
When he moved to the United Kingdom, the assets he had left behind in the United States did not initially appear to present a significant UK tax problem.
The first was a property in New Jersey that had previously been his home but was now rented to a third party. The monthly rent broadly covered the mortgage, insurance, property taxes, maintenance costs and other running expenses, which meant that he did not regard the property as generating any meaningful personal profit. His longer-term intention was to sell it, and he understood that the United States might exempt some or all of the resulting gain because he had occupied the property as his principal residence before moving abroad.
He also held shares in a US company that he had acquired before becoming UK resident. The shares had increased materially in value and occasionally produced dividends, but he had not yet decided whether to retain them as a long-term investment or sell them to fund other investments in the United Kingdom.
From his perspective, the position appeared commercially straightforward. The property was located in New Jersey, the rent and dividends were paid into US bank accounts, and any eventual sale proceeds from the property or the shares would also initially remain in the United States. He therefore assumed that these assets remained principally an American tax matter.
The UK analysis was less intuitive.
Once an individual becomes UK tax resident, foreign income and gains do not remain outside the UK tax system merely because the assets are situated abroad, the funds are retained overseas or the income is largely absorbed by mortgage payments and other expenses. From 6 April 2025, UK residents are generally taxed on their worldwide income and gains as they arise unless a specific relief applies. For qualifying new residents, the principal relief is now the four-year foreign income and gains regime, commonly referred to as the FIG regime.
The New Jersey property and the US shareholding therefore raised several connected questions. Would the rental profit and dividends be taxed in the United Kingdom? Would the gain arising on the sale of the property or shares also be taxable? Could the proceeds be brought to the United Kingdom without a further tax charge? Would the answer change depending on the date of disposal? Most importantly, did he genuinely have four years in which to act?
The final question proved to be the most important.
The regime had already started before it existed
He had arrived in the United Kingdom during the 2024/25 tax year, having been non-UK resident for considerably more than ten consecutive tax years beforehand.
That residence history was sufficient, in principle, to satisfy the ten-year non-residence condition. However, the FIG regime did not commence until 6 April 2025. His first UK-resident year, 2024/25, nevertheless counted as the first year of the statutory four-year residence period.
This is one of the least intuitive features of the new system.
Where the four-year residence period began before 6 April 2025, the individual may use the FIG regime only from 2025/26 until the end of the original four-year period. An individual whose first relevant UK-resident year was 2022/23, 2023/24 or 2024/25 therefore has only the balance of that four-year period available once the regime takes effect.
For someone who became UK resident in 2024/25, the practical window is normally:
- 2024/25: the first UK-resident year, but with no FIG claim available because the regime had not yet commenced;
- 2025/26: the second year of the four-year period;
- 2026/27: the third year; and
- 2027/28: the fourth and final year.
The result is not four years of FIG relief, but potentially only three.
That distinction materially affected the strategy for both the New Jersey property and the US shares. A disposal completed by 5 April 2028 might fall within the remaining FIG window, whereas a disposal completed shortly afterwards could be fully exposed to UK Capital Gains Tax.
The four-year regime was therefore not a general promise of four future tax-free years. It was a statutory clock that had started running when UK residence began.
The rent was not simply “covering the mortgage”
The first issue concerned the rental income.
His commercial understanding was that the New Jersey property did not generate much profit because the rent was being used to meet the mortgage, property taxes and operating costs. That may be a reasonable cash-flow assessment, but it is not how UK taxable property income is calculated.
A mortgage payment contains different elements. The repayment of borrowed capital is not a deductible expense merely because it is funded from rental receipts. Finance costs are also subject to specific UK rules, while repairs, insurance, management charges, property taxes and other expenditure must each be considered according to their nature and the relevant UK tax principles.
The relevant figure is therefore not the amount of cash remaining in the US bank account after all mortgage payments and expenses have been made. It is the profit of the overseas property business calculated under UK tax rules.
For a qualifying new resident, foreign property income may fall within the FIG regime. A valid foreign income claim can therefore relieve the relevant foreign rental profit from UK Income Tax for a qualifying year.
The relief is not automatic. It must be claimed through Self Assessment for each tax year and in respect of the relevant income or gains included in the claim. A claim made for one year does not carry forward automatically into the following year, and there is no general de minimis exemption under which smaller amounts can simply be ignored.
This creates an annual decision rather than a one-off election.
Where the foreign rental profit is modest, the UK tax saved through a FIG claim must be compared with the allowances lost as a result of making that claim. An individual making a relevant FIG claim generally loses entitlement to the UK personal allowance for that year, while a foreign gain claim also removes the Capital Gains Tax annual exempt amount.
For a higher-income taxpayer whose personal allowance has already been withdrawn, that cost may have limited practical significance. For someone with lower UK income and only a small amount of foreign rental profit, claiming FIG relief could potentially produce a worse result than paying UK tax on the income in the ordinary way.
The FIG regime is therefore elective, but it is not cost-free.
The dividends created a separate annual decision
The US shareholding introduced a second category of foreign income.
Dividends paid by the US company are foreign income for UK tax purposes and, in the absence of a valid FIG claim or another applicable relief, would generally form part of the individual’s worldwide income subject to UK tax.
The fact that the dividends were paid into a US account did not alter their character. Under the new regime, the focus is not on whether the funds are remitted to the United Kingdom but on whether the income is qualifying foreign income and whether a valid claim has been made.
This meant that the rental income and the dividends had to be modelled together.
A FIG claim might shelter both sources of foreign income, but the value of the relief would depend on the amount of income arising in the relevant year, the individual’s UK income position, the loss of the personal allowance and the availability of any foreign tax credit relief for US tax already paid.
The correct answer could therefore vary from year to year. In one tax year, the combined rental profit and dividends might be sufficiently large to justify a FIG claim. In another, the income might be low enough that the loss of the personal allowance would outweigh the UK tax saved.
The regime does not require an individual to make the same decision every year. It does, however, require the decision to be made on the basis of actual figures rather than broad assumptions about whether the foreign income is “significant”.
The sale of the property created a much larger timing question
The potential disposal of the New Jersey property changed the scale of the analysis.
If he sold the property during a qualifying FIG year, the resulting gain on the foreign asset could potentially be included in a foreign gain claim and relieved from UK Capital Gains Tax. The proceeds could then be transferred to the United Kingdom without creating an additional UK tax charge, because the new regime does not depend on whether the relieved income or gain is remitted.
This is a fundamental departure from the former remittance basis.
Under the old system, the location and movement of funds were central. Under the FIG regime, the principal questions are whether the individual is a qualifying new resident, whether the income or gain falls within the statutory categories and whether the appropriate claim has been made.
The bank account into which the sale proceeds are paid does not determine the result. A qualifying gain does not cease to qualify merely because the proceeds are brought immediately to the United Kingdom, and leaving the money in the United States does not protect a gain arising after the FIG period has expired.
Timing is therefore more important than remittance.
Suppose the New Jersey property is sold on 31 March 2028, while the individual remains within his final FIG year. Subject to the detailed conditions and a valid claim, the foreign gain may be relieved from UK Capital Gains Tax.
Suppose instead that completion takes place on 10 April 2028. The individual has entered the 2028/29 tax year, the four-year FIG period has ended and the same economic gain may now fall within the ordinary UK Capital Gains Tax regime.
A difference of ten days could produce a materially different UK tax result.
That does not mean that a property sale should be accelerated solely for tax reasons. Market conditions, legal completion risk, US federal and state tax, financing arrangements, exchange-rate movements and the availability of a buyer remain commercially important. It does mean that the end of the FIG period is a genuine tax deadline and should be incorporated into the transaction timetable well before the property is marketed.
The company shares created a second disposal deadline
The US shareholding raised a parallel issue.
The shares had increased in value before and after the move to the United Kingdom. If they were sold during the remaining FIG period, the resulting foreign gain could potentially be included in a foreign gain claim and relieved from UK Capital Gains Tax.
If the sale occurred after the FIG period had ended, the gain would generally fall within the ordinary UK Capital Gains Tax regime, subject to any applicable reliefs.
This created a wider sequencing question. The individual had to decide not only whether and when to sell the New Jersey property, but also whether to realise the gain on the shares before the FIG window closed.
The two disposals did not necessarily have to occur in the same year. Indeed, there could be commercial and tax reasons for separating them. However, each disposal had to be considered against the same final deadline of 5 April 2028.
The shareholding also required a careful review of the acquisition history, base cost, corporate actions, reinvested dividends and any other transactions affecting the UK tax computation. Where shares had been acquired in several tranches, the identification and pooling rules could materially affect the amount of the gain.
If the holding was in a private company, valuation and liquidity considerations would also be relevant. If the shares had been received in connection with employment, a separate employment-related securities analysis might be required.
The broader point remained the same: the FIG regime could provide a significant exemption, but only if the disposal was completed within the remaining statutory period and the relevant claim was properly made.
The American exemptions were not UK exemptions
He believed that the gain on the New Jersey property might be exempt in the United States because he had previously occupied it as his main home.
That assumption required separate verification.
Under the US federal home-sale rules, an individual may generally exclude up to $250,000 of qualifying gain, or up to $500,000 for certain married couples filing jointly, where the ownership and occupation conditions are satisfied. Broadly, the taxpayer must have owned and used the property as a principal residence for at least two years during the five-year period ending on the date of sale.
A period of rental use does not necessarily prevent the exclusion. However, depreciation claimed or allowable during the rental period may remain taxable, and the detailed rules concerning non-qualified use, ownership, filing status and previous home-sale exclusions must still be reviewed.
The position concerning the company shares was different. The US tax treatment of any gain would depend on the individual’s US status, the nature of the company, the character of the holding and the relevant federal and state rules. The fact that the shares were held in a US company did not, by itself, produce an exemption comparable to the principal-residence exclusion.
More fundamentally, the US treatment and the UK FIG relief are entirely separate regimes.
A US exemption does not automatically exempt the same gain in the United Kingdom. Conversely, a valid FIG claim may eliminate UK tax without eliminating US federal or state tax.
The correct conclusion was therefore not that the property or shares were “tax-free”. It was that the US and UK systems had to be analysed independently before the treaty position and any available foreign tax credits could be understood.
The first UK year could not be ignored
There was another complication.
He had become UK resident before the FIG regime commenced. Consequently, the foreign rental income and dividends arising during the UK part of 2024/25 could not be covered by a FIG claim.
That year remained governed by the rules in force before 6 April 2025, including the former remittance-basis framework where the relevant conditions and claims were satisfied. In the absence of an effective remittance-basis claim, a UK-resident individual was generally taxable on worldwide income and gains as they arose.
The fact that the rent and dividends remained in the United States was therefore potentially relevant for 2024/25 under the former rules, but largely irrelevant for qualifying income arising from 6 April 2025 where FIG relief was validly claimed.
This illustrates why the transition between the two regimes cannot be analysed through a single rule.
The same assets may produce:
- rental income and dividends governed by the former rules during 2024/25;
- rental income and dividends potentially eligible for FIG relief during 2025/26 to 2027/28;
- exempt foreign gains if the property or shares are sold within the remaining FIG period; and
- fully taxable worldwide gains if either asset is sold after that period.
The tax treatment changes even though the assets, owner and source country remain the same.
The decision was not simply whether to claim FIG
Once the figures were assembled, the advice became a sequencing exercise.
The first task was to establish the precise UK residence position for 2024/25, including whether split-year treatment applied and the date on which the UK part of the year began. The ten preceding tax years then had to be reviewed to confirm that the statutory non-residence condition was satisfied.
The second task was to calculate the foreign rental profit under UK principles rather than relying on the cash surplus after mortgage payments. The dividends also had to be identified by tax year, together with any US withholding tax.
The third task was to model the consequences of a FIG claim. For the rental income and dividends, the comparison was between the UK tax saved and the value of the personal allowance and other reliefs lost. For the eventual disposals, the value of a foreign gain claim was potentially much greater, although the Capital Gains Tax annual exempt amount would also be lost.
The fourth task was to compare alternative disposal dates for the property and the shares. That required modelling not only the UK tax consequences but also the commercial timing, expected market values, exchange-rate exposure and any US tax arising on disposal.
The final task was to coordinate the UK planning with US advice. The anticipated federal home-sale exclusion, depreciation recapture, New Jersey tax consequences, property basis, share basis, selling costs and timing of completion all required confirmation from the US adviser before any UK recommendation could be finalised.
What initially appeared to be a simple question about foreign rent had therefore become a coordinated residence, income, capital gains, investment and treaty exercise.
The broader lesson from the first FIG filing season
The FIG regime has now moved from policy discussion into its first full compliance cycle. The first claims require taxpayers to identify the specific foreign income and gains for which relief is sought, quantify those amounts correctly and accept the statutory consequences of the claim.
The fact that income is foreign, retained overseas or already taxed abroad does not remove the requirement to analyse and report it properly.
For internationally mobile individuals, the most important planning question is often not whether they qualify for the FIG regime in principle. It is how much of the four-year period remains, which income and gains should be included in a claim, and which transactions should be completed before the window closes.
In this case, the New Jersey property and the US shareholding were not merely foreign investments generating rent, dividends and potential gains. They were assets whose UK tax treatment could change materially depending on the tax year in which they were sold.
He had not arrived in the United Kingdom with four future years of exemption ahead of him. By the time the FIG regime took effect, one of those four years had already passed.
That was the detail that changed the strategy.
How Vectigalis Tax can assist
Vectigalis Tax advises individuals, entrepreneurs, internationally mobile executives and family offices on the UK taxation of foreign income, overseas property, international investment portfolios and cross-border disposals.
Our work includes confirming eligibility for the four-year FIG regime, reviewing Statutory Residence Test and split-year positions, analysing foreign rental income under UK rules, modelling the cost and benefit of annual FIG claims, reviewing foreign dividends and investment income, advising on the disposal of overseas property and company shares, coordinating foreign tax credit and treaty relief, and identifying transactions that may need to be completed before the FIG period expires.
The new regime can provide substantial relief, but its value depends on residence history, transaction timing, the nature of the foreign income or gain and the interaction with the tax system of the country in which the relevant asset is located.
For a confidential discussion concerning the FIG regime or the UK tax treatment of overseas income and assets, please contact:
Vectigalis Tax