In this “stop press” edition of our Globally Speaking e-bulletin, we provide our initial thoughts on the most highly anticipated Budget in the UK for a generation; the first by a Labour government in fourteen years and more significantly the first to be delivered by a female Chancellor, the Right Honourable Rachel Reeves MP.
The anticipation around this Budget has been particularly notable in the context of the non-dom reforms, first proposed by the former Conservative government in their Spring Budget delivered earlier this year, as covered by previous editions of Globally Speaking. There has been a vast amount of speculation about what the Chancellor may or may not do to put Labour’s stamp on the non-dom reforms, with a policy statement issued at the end of July and purported leaks to the media and lobbying groups advocating on behalf of high net worth non-doms, many of whom are considering leaving the UK for good.
Our detailed commentary regarding the previous announcements concerning the non-dom reforms can be found here.
But, where are we now?
The non-dom changes
The Chancellor made some high-level statements in her address to Parliament itself, confirming the government’s commitment to the abolition of the non-dom regime, but as is often the case, the devil was in the detail, with interested parties having to wait until her Parliamentary address was over before receiving the detail of what this abolition means in a supporting technical note. As many commentators have already noted, it will take time to digest all of the implications arising from this technical note, but what follows is a summary of the key points.
Impact for individuals: income tax and capital gains tax (“CGT”)
Currently, UK resident non-doms can avail themselves of the “remittance basis” of taxation. This means that they are not subject to income tax and/or CGT on their foreign income and gains (“FIG”) providing those FIG are not brought into or otherwise remitted to the UK. As anticipated, the Chancellor confirmed that the remittance basis will be abolished from 6 April 2025. Instead, and as already anticipated, a “4-year FIG regime” will be introduced whereby individuals will not be exposed to UK tax on their FIG (whether or not remitted to the UK) for their first four years of UK residence, providing they have been non-UK resident for at least 10 consecutive tax years prior to becoming UK resident. FIG falling within the regime can be remitted during the 4-year FIG regime period or at a later date without incurring further UK tax. As a consequence, from 6 April 2025, domicile will no longer be a connecting factor for income tax and CGT purposes in the UK.
The government has made some concessions to non-doms who will be unable to qualify for the FIG regime, namely:
- Rebasing: current and past remittance basis users can rebase personally held foreign assets to 5 April 2017 for disposals on or after 6 April 2025 subject to certain conditions.
- The introduction of a Temporary Repatriation Facility (“TRF”) allowing individuals who have been taxed previously under the remittance basis to designate amounts derived from pre-6 April 2025 FIG and bring such funds to the UK at a reduced rate of tax. The TRF will be available for three years (2025/26, 2026/27 and 2027/28). Designated amounts will be taxed at a rate of 12% in 2025/26 and 2026/27 increasing to 15% in 2027/28. Once a TRF designation has been made, and the TRF tax paid, the individual will have freedom to choose the year in which to remit the designated amount to the UK. This could be a tax year after 2027/28.
Overseas Workday Relief (“OWR”) currently provides income tax relief to UK resident, non-UK domiciled employees in relation to earnings which are paid and kept outside the UK and relate to days working outside the UK. OWR will be retained and from 6 April 2025, eligibility for the relief will be based primarily on whether the employee is eligible for the 4-year FIG regime.
Impact for individuals: inheritance tax (“IHT”)
From 6 April 2025, domicile will no longer be a relevant connecting factor in relation to IHT. Instead, if an individual has been resident in the UK for at least 10 of the last 20 tax years immediately before the chargeable event, they will be considered a “long-term resident” (“LTR”) and their worldwide assets will be within the scope of IHT.
The “10-year tail” which had been proposed by the previous government (i.e. that all individuals will remain within the scope of IHT on their worldwide assets for 10 years after becoming non-UK tax resident) has been curtailed in certain cases, which is welcome news; the length of the “tail” will depend on how long the individual was resident in the UK and could be as little as three tax years.
Transitional rules will apply for non-domiciled or deemed domiciled individuals who are non-UK resident in the 2025/26 tax year. They will be considered LTR if they satisfy the existing deemed domicile test for IHT, i.e. if they have been UK resident for at least 15 out of the previous 20 tax years and for at least one year in the four years ending with the relevant tax year, which is a welcome concession.
Impact on trust structures: income tax and CGT
The protected settlements regime will be abolished. FIG arising in settlor-interested trust structures will no longer be protected from tax unless the settlor qualifies for the 4-year FIG regime. FIG arising in the settlement before 6 April 2025 will be taxed to the extent that distributions or benefits are made to UK residents who are themselves not eligible for the 4-year FIG regime.
The TRF will be available for distributions from “qualifying overseas trust structures” (or where unremitted FIG within a structure has been attributed to a taxpayer), at a high level for UK resident settlors or individuals who receive benefit from an offshore trust structure during the three-year TRF period; where the individual is a former remittance basis user; and the benefit is matched to FIG arising within the settlement before 6 April 2025. This could be helpful in the context of any moves to wind up structures faced with the IHT consequences outlined below.
Impact on trust structures: IHT
The Chancellor has not introduced full “grandfathering” provisions for existing excluded property trusts as had been hoped, despite extensive lobbying from industry experts. For IHT purposes, the excluded property status of non-UK assets settled into a trust will not be fixed at the time the assets are added to the settlement (the way it is currently). Instead, non-UK assets will only be excluded property where the settlor is not LTR at the relevant time, i.e. IHT will be charged on non-UK assets comprised in a settlement at times when the settlor is LTR. Consequently, even if a settlor settles non-UK assets into trust at a time when they are not LTR, such assets will be considered relevant property within the scope of IHT if the settlor is LTR at the relevant time, and regardless of whether the settlor can benefit from the trust. There will be an additional test for certain interest in possession settlements which looks at the residence position of both the settlor and the beneficiary.
Some limited protection has been given to excluded property comprised in a settlement immediately before 30 October 2024 from the application of the Gift with Reservation of Benefit (“GWR”) provisions. The GWR provisions are a set of anti-avoidance rules which prevent individuals gifting assets or settling them in trust but reserving a benefit in the property they have gifted or settled. Under existing rules, if the settlor can continue to benefit from the trust and they are UK domiciled or UK deemed domiciled at the time of settling the trust, the GWR provisions apply and the trust fund will be treated as remaining part of the settlor’s personal estate for IHT purposes. This means that the trust fund is exposed to IHT at 40% on the settlor’s death, in addition to any other relevant property charges. The government has confirmed that the GWR provisions will not apply to excluded property comprised in a settlement immediately before 30 October 2024. However, such property will be subject to relevant property charges from 6 April 2025 where applicable.
Where the settlor of a trust dies before 6 April 2025, the test for whether trust assets are excluded property will remain the old test (i.e. the settlor’s domicile at the time the property became comprised in the settlement). However, where a settlor dies on or after 6 April 2025, the excluded property status of the trust will depend on whether or not the settlor was LTR at the date of death.
Other changes that could impact international clients
- Changes to the rate of CGT: the Chancellor had a difficult decision to make in the context of increasing the rate of CGT. Although an increase was expected, increasing the rate too significantly could reduce overall tax-take by discouraging disposals. In the event, the Chancellor has increased the maximum rate of CGT from 20% to 24% (aligning the rates with those imposed on the disposal of UK residential property). The basic rate will increase from 10% to 18%. This measure has been imposed with immediate effect (i.e. from 30 October 2024). The rate of CGT applying to Business Asset Disposal Relief will increase to 14% for disposals made on or after 6 April 2025 and again to 18% for disposals made on or after 6 April 2026.
- IHT changes: the government has frozen IHT thresholds (i.e. the value above which IHT becomes payable) until 2030. The government also announced reform to Agricultural Relief (“AR”) and Business Relief (“BR”) from April 2026. A lifetime limit of £1m will be introduced. For agricultural and business property exceeding the threshold, only 50% relief will be available (i.e. a rate of IHT of 20% will be applied). AIM shares (and shares listed on similar markets) which previously qualified for 100% BR, will now also be brought within the scope of IHT, at an effective rate of 20%.
- Carried interest: the rate of tax payable on carried interest gains will increase from 28% to 32% from 6 April 2025 with further reform in 2026 to make the rules “simpler, fairer and better targeted”.
- VAT on school fees: from 1 January 2025, private school fees will be subject to VAT at 20%. Any pre-payments made on or after 29 July 2024 relating to terms starting on or after 1 January 2025 will also be subject to VAT.
- Stamp Duty Land Tax (“SDLT”): the SDLT surcharge imposed on the purchase of additional homes will be increased by 2% (i.e. from 3% to 5%) from 31 October 2024.
In conclusion, this historic Budget was packed with detail, which we will begin to process over the coming days and weeks and unpick in a future edition of Globally Speaking. Although it seems as though some opportunities have been missed to soften the blow for the non-dom community, at least we now have much more certainty as to the tax environment for the next few years enabling clients to plan accordingly.