Much of the content of today’s Budget had been leaked to the press beforehand so many of the announcements were not unexpected, but there were still some surprises for private clients; chief among them a more radical reform of the “non-dom” tax regime than had been rumoured, and a cut to the rate of capital gains tax (CGT) on certain residential property disposals.
A summary of the key announcements for private clients is set out below.
National insurance
As widely expected in the leadup to the speech, the government’s flagship “tax cut” was to national insurance contributions (“NICs“) with an additional 2p reduction to the main rates of employee and self-employed NICs from 6 April 2024. This follows cuts to NIC rates in the 2023 Autumn Statement and means that Class 1 employee NICs are reduced from 10% to 8%.
The government is also cutting the main rate of Class 4 self-employed NICs to 6% and will launch a consultation later this year to deliver its commitment to fully abolish Class 2 NICs.
“Non-dom” tax regime
It had been rumoured over the past week that, to help fund the above NICs cuts, the government was considering reforming the tax regime for non-UK domiciled individuals (“non-doms“) so as to remove the tax benefits they currently enjoy. It was unclear, however, what shape that reform would take.
What the Chancellor announced was more radical than many predicted. From April 2025, the current “remittance basis” of taxation (whereby the foreign income and gains of non-doms are only subject to UK tax if those income and gains are brought into the UK) will be abolished; so too will the concept of “domicile” for these tax purposes. In its place will be an “exemption regime” based on residence, whereby non-doms who have been non-tax resident for the last ten years will be exempt from UK tax on their foreign income and gains for four years, and thereafter will pay UK tax like other UK residents. During that four-year period, non-doms will be able to bring their foreign income and gains into the UK without the tax charge they would suffer under the “remittance basis” regime.
Non-doms with income from employment duties carried out overseas will also, if eligible, be able to claim “overseas workday relief” in their first three years of tax residence.
Non-doms currently resident in the UK (and who have been so for longer than four years) and who are making use of the remittance basis regime will be significantly affected by these announcements. Transitional arrangements have been included, however. Existing non-doms claiming the remittance basis will have the option of rebasing the value of capital assets to 5 April 2019 figures, and will have a temporary 50% exemption for the taxation of foreign income for the first year of the new regime (tax year 2025/26). The government will also offer a two-year “temporary repatriation facility” for individuals who have paid tax on the remittance basis prior to 6 April 2025 to bring previously accrued foreign income and gains into the UK at a 12% rate of tax.
The implications for inheritance tax (IHT) are not yet clear. At present, UK resident non-doms are not subject to IHT on their foreign assets until they have been resident in the UK for fifteen of the last twenty tax years (unless they acquire a UK domicile in the meantime). This is a significant IHT benefit as it prevents those assets from being subject to a potential 40% IHT charge. In the Budget, the government announced “the intention to move to a residence based regime for IHT and will consult in due course on the best way to achieve this“. There was a commitment that no changes will be made to non-dom IHT before 6 April 2025. The IHT aspects of these reforms will be key as a 40% tax charge on worldwide assets would do much to drive away the non-dom talent and investment that the government is saying it wants to encourage.
These non-dom reforms should encourage newly resident non-doms to bring their funds into the UK but the four-year exemption period is short in comparison with the regimes of other countries (Italy, for example, has an exemption period of fifteen years). As well as being revenue-raising (a projected £2.7 billion per year), there is of course a political motivation to these announcements. Much will be made of the fact that it steals one of Labour’s main tax policies and it will be interesting to see how the Labour party react in their manifesto.
What is clear for non-doms currently in the UK is that they should take advice now on how these reforms impact them and the extent to which the transitional arrangements can be used.
Inheritance tax (IHT)
Despite speculation following the 2023 Autumn Statement, the government did not announce any IHT cuts or reforms to the tax. While many people will benefit from the various other tax cuts, it will be a source of frustration to many that a combination of the long-frozen IHT allowance and the 40% main rate means that many people cannot pass on their hard-earned wealth and assets to their families.
In the end, the Chancellor had his hands tied by Office for Budget Responsibility (“OBR“) forecasts which made any planned IHT cuts unaffordable and prevented him from announcing meaningful policy changes in an area that may have increased Conservative popularity ahead of the election.
Given that the Labour party have been clear they do not intend to abolish, and may even increase, IHT rates, it seems unlikely that there will be any IHT reductions in the foreseeable future, particularly if Labour are successful at the general election.
Those concerned about their succession planning and what they will be leaving to the next generation should plan on the basis of existing IHT rules on the assumption that, after today’s lack of announcement, IHT is likely to remain part of our tax system for some time to come. We will, however, have a clearer picture once the parties publish their election manifestoes.
Capital gains tax (CGT)
CGT tax cuts did generally not feature in any of the pre-Budget rumours and press leaks, so the announced reduction in the rate of CGT, from 6 April 2024, on the sale of residential property from 28% to 24% came as a surprise.
The reasoning is that the reduced CGT rate should encourage second-home owners and landlords to make residential disposals (thereby raising CGT revenue) but at the same time making more homes available for a variety of buyers including those looking to get on the housing ladder for the first time. The news will be welcome to second-home owners but will generally not affect those with a single residence as there is a CGT exemption for your “main residence”.
Transfer of assets abroad
The government announced that they are legislating to close a lacuna in the “transfer of assets abroad” (“TOAA“) legislation following the case last year of HMRC v Fisher [2023] UKSC 44. The TOAA legislation broadly deems income arising from an asset transferred abroad to be the income of the UK resident transferor in certain circumstances. In the Fisher case, the Supreme Court ruled that a transfer of assets by a UK family company to a Gibraltar company as a consequence of which income arose to the shareholders of that Gibraltar company (the same persons as the shareholders of the transferee UK company), ostensibly without triggering UK income tax, did not engage the TOAA rules.
As from 6 April 2024, the Income Tax Act 2007 will be amended so that the TOAA rules will apply to a transfer made by a “closely-held” company (very broadly, a company that has five or fewer shareholders, or shareholders all of whom are directors) such that it will be treated as being made by an individual with a qualifying interest in that company, where the individual will have the power to enjoy the income arising abroad, or received a capital sum, as a result. Given that these changes are being brought into effect swiftly, those who have arrangements similar to that of the Fisher case will need to take advice on their options as a priority.
Property taxes
The government announced that it was making “the property tax system fairer and more efficient” by abolishing the “furnished holiday lettings” (“FHL“) tax regime and abolishing stamp duty land tax (“SDLT“) “multiple dwellings relief” (“MDR“).
The rationale behind the FHL abolition is to remove the current incentive for landlords to offer short-term holiday lets rather than longer-term homes. The reform will take effect from April 2025.
MDR is an SDLT relief for bulk purchases and the announced abolition will take effect from 1 June 2024. Property transactions with contracts that were exchanged on or before 6 March 2024 will continue to benefit from the relief regardless of when they complete, as will any other purchases that are completed before 1 June 2024.
Closing comment
As we draw closer to a general election, many people will be focused not on today’s announcements but on the Labour party’s response to it, in the event that Labour are successful in coming into government. In particular, with the non-dom tax changes not due to come into force until April 2025 (which is after the latest date for a general election), it is possible that they will not be introduced in their current form at all, if Labour get into power and chose to go further.
Although it is difficult to plan at this stage, it is important to be prepared especially if you are vulnerable to tax increases in any of the areas that Labour may target, as a quick turnaround in terms of legislation after the election cannot be ruled out.
We would advise those affected to seek advice now so that they are aware of their options whatever the future holds.