Entity Setup
Entity Setup Essentials: Using the Foreign Income & Gains Regime vs Reverse Hybrids to Reduce UK Double Tax Exposure
Structuring your investment into foreign entities? Learn why the FIG regime and proposed reforms for reverse hybrid entities are central to avoiding unexpected UK taxation after April 2025.
By NomadicTax Research Team • 7 min read • August 31, 2026
## Background: What changed after April 2025
HMRC eliminated the remittance basis of taxation and replaced it with a **residence-based system**. Under the new rules, UK residents are taxed on worldwide income and gains, with relief available under the **Foreign Income and Gains (FIG) regime** for qualifying new residents. ([gov.uk](https://www.gov.uk/tax-foreign-income/non-domiciled-residents?utm_source=openai))
Additionally, the government has brought forward consultations around the treatment of members of **reverse hybrid entities**, including certain US LLCs, to address double taxation arising from overseas entities. ([gov.uk](https://www.gov.uk/government/publications/summary-of-tax-update-2026-simplification-modernisation-and-fairness/tax-update-2026-simplification-modernisation-and-fairness-summary?utm_source=openai))
## What is the FIG regime?
FIG is available to **qualifying new residents** in their first **4 years of UK residence** (after 10+ years of non-residence). It allows relief on foreign income and/or gains in those years. You don’t need to remit (bring money into the UK) to get relief for qualifying income and gains. ([gov.uk](https://www.gov.uk/government/publications/foreign-income-and-gains-fig-regime-self-assessment-helpsheet-hs266/hs266-foreign-income-and-gains-fig-regime-2026?utm_source=openai))
## Why reverse hybrids matter
- **Reverse hybrids** are entities treated differently by the UK vs. foreign jurisdiction. For example, a US LLC may be treated as transparent in the US but opaque in the UK (or vice versa), causing **double taxation** or complex withholding exposure.
- The government has launched a **consultation** (June 2026) to tackle the tax issues where members of such entities are subject to very high effective tax rates (sometimes above 75%), seeking to align treatment and remove unintended mismatches. ([gov.uk](https://www.gov.uk/government/publications/summary-of-tax-update-2026-simplification-modernisation-and-fairness/tax-update-2026-simplification-modernisation-and-fairness-summary?utm_source=openai))
## Comparing FIG vs reverse hybrid pitfalls
| Feature | FIG Regime | Reverse Hybrids Issues |
|---|---|---|
| Relief period | Limited to first **4 UK tax years** for qualifying new residents after 10 non-resident years. ([gov.uk](https://www.gov.uk/government/publications/foreign-income-and-gains-fig-regime-self-assessment-helpsheet-hs266/hs266-foreign-income-and-gains-fig-regime-2026?utm_source=openai)) | No time limit per se, but relief depends on entity status and double tax treaties. May be permanent if structure persists. |
| Remittance requirement | Not needed for FIG; income/gains relieved even if brought into UK. ([gov.uk](https://www.gov.uk/government/publications/foreign-income-and-gains-fig-regime-self-assessment-helpsheet-hs266/hs266-foreign-income-and-gains-fig-regime-2026?utm_source=openai)) | Mismatch can result in foreign jurisdiction treating entity member differently, possibly taxing distributions or profits, or UK taxing on arising basis without credit. |
| Complexity | Primarily involves domestic law (ITA/ITEPA) and self-assessment elections and claims. | Needs cross-border law, treaty interpretation, entity classification in foreign vs UK jurisdiction. |
## Structuring tips and examples
- **Example**: *Hiroko* lived outside the UK for 20 years, then returns in April 2025. Under FIG, she claims relief for her overseas dividends and rental income that arise from non-UK sources in each of her first 4 years without bringing them into the UK (no remittance needed). But she also invested via a US LLC: under consultation, the treatment of her LLC-income might currently lead to taxation both in the US and UK without relief. By structuring via treaty entities or choosing transparent entities, and monitoring the consultation outcomes, she may reduce the exposure.
- If you expect your overseas entity income to be significant, you may benefit from participating in the reverse hybrid consultation to shape favourable rules, or restructure before any reform to avoid steep tax bills.
## What to watch out for
- **Treaty residence status**: Being “UK resident” under domestic law isn’t always enough; treaty residency might affect whether reverse hybrid structural mismatches are mitigated.
- **Disclosure and compliance**: UK taxpayers must report foreign entities and pay tax accordingly. Incorrect classification can lead to penalties.
- **Changes still underway**: Many FIG/ reverse hybrid proposals are under consultation (2026), not fully legislated. Ensure your strategy is adaptable.
## Action plan for investors and entity owners
1. **Audit your non-UK income sources and entity involvements**, particularly LLCs and similar hybrids.
2. **Understand whether you’re a qualifying new resident**—check 10 years non-residence, assess whether FIG applies.
3. **Claim FIG relief appropriately** in your Self Assessment tax return for each year you are eligible.
4. **Monitor the reverse hybrid entity consultation**, possibly respond with submissions if structure applies to you.
5. **Ensure documentation and accounting** reflect your entitlements — days worked abroad, income split, entity classification. Avoid surprises.
## Common missteps to avoid
- Assuming FIG relief is automatic — you need to make a claim.
- Under-estimating foreign income or ignoring treaty implications in hybrid structures.
- Waiting too long: with consultation ongoing and legislative change possible, delaying restructuring can be costly.
## Conclusion
For individuals with overseas income, choosing between the FIG regime and structuring via foreign entities like LLCs or reverse hybrids has big implications. FIG offers clarity and limited relief for new UK residents. But hybrid structures remain a frontier—potential pitfalls and opportunities ahead. Be strategic, claim what you're eligible for, and stay informed.