Tax announcements from the new government
Following Labour's victory in the UK's General Election on 4 July 2024, the new Chancellor, Rachel Reeves, delivered her first major speech on 29 July. She announced that she will deliver her first Budget on 30 October 2024, and published two key papers of interest to private clients covering the government's approach to the non-dom rules, and a call for evidence relating to the taxation of carried interest.
The end of the non-dom regime
In March 2024, the Conservative Chancellor announced a significant overhaul in the UK's taxation regime for UK resident non-domiciled individuals (non-doms). As a General Election was anticipated at that time, there was much uncertainty as to when (and whether) the changes would be introduced. The Treasury has now published a Policy Paper confirming what the new Labour government's approach will be.
In headline terms, the government intends to implement the changes outlined in March. This means that the existing non-dom regime will be abolished from 6 April 2025, and a new residency-based system will be introduced. The Labour party had indicated that it considered aspects of the Conservative party's proposals to be overly generous, therefore as anticipated there are some changes, which are highlighted in our summary below. Areas of uncertainty remain.
The government will engage with advisors and other stakeholders over the summer period in relation to certain aspects of the proposals, and further details are expected in the Budget on 30 October 2024. We will continue to make representations, and will provide updates as matters progress.
The new four-year regime for income and capital gains
From 6 April 2025, the current remittance basis of taxation will be abolished for UK resident non-doms. Please see box below for a brief summary of the current remittance basis regime for UK resident non-doms.
This will be replaced with a new four-year foreign income and gains (FIG) regime for individuals who become UK tax resident after a period of ten consecutive years of non-UK tax residence. Individuals who meet the conditions will not pay tax on FIG arising in the first four tax years after becoming UK tax resident and will be able to remit these funds into the UK free from any additional charges. In addition, they will not pay tax on distributions from non-resident trusts. They will, as currently, pay tax on UK income and gains.
Income tax and capital gains tax for UK resident non-doms: current regimeA person who is non-UK tax resident is only chargeable to UK tax in very limited circumstances. For income tax purposes, this broadly only applies to UK rental income or trading income. For capital gains tax purposes, a non-UK resident person is only charged on the disposal of UK real estate (or shares of a company which derives its value from UK real estate). A person who is UK tax resident will usually be charged to UK income tax and CGT on their worldwide estate on the 'arising basis'. However, where an individual is UK resident and non-UK domiciled and has not become deemed domiciled, they can benefit from the 'remittance basis of taxation'. They will be taxed on their UK income and chargeable gains on the arising basis, however they will only be taxed on their foreign income and chargeable gains which are brought to, used in or 'remitted' to the UK. It is necessary to elect for the remittance basis to apply. For those who are resident in the UK for a longer period of time, a remittance basis charge must be paid. This is set at £30,000 for individuals who have been UK resident in seven or more of the nine tax years before the year of claim, increasing to £60,000 for individuals who have been UK resident in 12 or more of the 14 tax years before the year of claim. Once an individual has been resident for 15 out of the previous 20 tax years, they will become deemed domiciled and will no longer be able to take advantage of the remittance basis. |
We understand that it remains the case that:
- the Statutory Residence Test will be used to determine tax residence, ignoring treaty residence or non-residence and split years;
- it will be necessary to make a claim for each year that the four-year FIG regime is to apply; and
- individuals who make a claim for the new regime to apply will lose their entitlement to personal allowances and the capital gains tax (CGT) annual exempt amount. This is the same as currently for remittance basis users.
Individuals who have been tax resident for less than four years on 5 April 2025 (and who were non-resident for a period of ten years before that) can use the new regime while they are UK resident for the remainder of the four-year period.
Formerly Domiciled Residents
It would seem that the unfavourable regime for so called 'formerly domiciled residents' (FDR) i.e., those who were born in the UK with a UK domicile of origin, will also be abolished, as domicile will no longer be the connecting factor for these purposes. Under current rules an FDR will be subject to tax on their worldwide income and gains from the first year of tax residence in the UK. Based on the information thus far, they will fall instead within the new four-year regime (provided that they meet the ten-year non-resident requirement).
Transitional arrangements – the new government's proposals
The previous government had proposed a one-year 50% reduction in the amount of foreign income that will be subject to tax, for individuals who move from the remittance basis to the arising basis from 6 April 2025 and who are not eligible for the new four-year FIG regime.
The new government's Policy Paper makes it clear that this will not be introduced, which means that individuals in this situation will be liable for income tax on all foreign income from 6 April 2025 (subject to any reliefs such as double tax treaty relief).
There remain two transitional provisions that the new government will introduce:
- Capital Gains Tax rebasing
If, on or after 6 April 2025, individuals who are not eligible for the four-year regime but have previously claimed the remittance basis, dispose of foreign assets, they will be able to elect to rebase those assets. The previous government had announced a rebasing date of 5 April 2019, however the new government has said it is still considering an appropriate rebasing date.
- Temporary Repatriation Facility (TRF)
In a bid to encourage non-doms to bring wealth earned overseas to the UK for both spending and investment, a reduced rate of tax will be introduced for remittances of FIG. The previous government had announced a reduced rate of 12% for remittances made in tax years 2025/2026 and 2026/2027, however the new government is reconsidering the rate and the length of time the relief will be available "to make use as attractive as possible".
Importantly, and reflecting representations made, they have also indicated that they are looking at expanding the application of the TRF, beyond that previously announced, to income and gains within overseas structures, with details to be confirmed at the Budget on 30 October 2024.
Overseas Workday Relief
Relief is currently available on earnings for employment duties performed outside the UK and a form of this will continue to be available, however the Policy Paper is short on details and it seems clear more work is required to design a relief that will be consistent with the new regime. Again, further details will be announced at the Budget on 30 October following stakeholder engagement.
Protected trusts
Once an individual no longer qualifies for the four-year FIG regime, they will be taxed in the same way as a UK resident domiciled person. This includes in relation to income and gains arising within a trust settled by them, so that all such foreign income and gains would be potentially taxed in their hands as it arises.
It was previously understood that pre-6 April 2025 foreign income and gains within protected trusts would continue to be protected, and that foreign income and gains arising in a trust during a settlor's four-year FIG period would similarly be protected, however the details are still awaited.
Inheritance Tax
Currently, domicile and the situs of assets are the primary connecting factors when it comes to determining a person’s liability to inheritance tax (IHT). The basic rule is that, if a person is either UK domiciled or deemed domiciled, they will be subject to IHT on their worldwide estate (subject to any exemptions and reliefs that may apply). A person who is neither UK domiciled nor deemed domiciled is generally only liable to IHT in respect of property situated in the UK. There are special rules however which bring certain non-UK assets within the scope of IHT if they derive their value from UK residential property.
The new government has affirmed the proposal to move to a residence-based system from 6 April 2025. The general proposals remain the same so that where a person meets the 'residence criteria' i.e., they have been resident in the UK for ten years, they will be subject to IHT on their personally owned worldwide assets.
There is to be a 'tail' provision to keep such a person within the scope of IHT on their worldwide assets for ten years after leaving the UK. This would be a significant extension of the current domicile-based regime where a person continues to be deemed domiciled for IHT purposes for the first three years of non-residence. As such, they are presently only subject to IHT on their worldwide estate until the start of their fourth year of non-UK residence.
Settled property
The previous government had stated that:
- the current IHT treatment would continue for non-UK property settled by a non-UK dom settlor prior to 6 April 2025 i.e. it would be outside the scope of IHT unless it represented the value of UK residential property; and
- ·new trusts settled on or after 6 April 2025 by non-UK dom settlors would be subject to the new residence-based rules.
The new government's Policy Paper states that they will "end the use of Excluded Property Trusts to keep assets out of the scope of IHT". It seems likely that trusts settled after 6 April 2025 will be subject to the residence criteria as set out above, therefore. The government acknowledges that allowance should be made for pre-existing trusts, but their intentions are clearly not fully formed. The Policy Paper refers to allowing for "appropriate adjustments" of existing trust arrangements, whilst ensuring the treatment of all long-term residents of the UK is the same for IHT purposes. This may still mean that pre-existing trusts benefit from some 'grandfathering' provision, or that trusts will be given some time to adapt but will then be taxed on the same basis whoever is the settlor.
Disappointingly, there will be no formal consultation on the IHT proposals, but there will be "further external engagement" over the summer (possibly in meetings as happened throughout May) and details published at the Budget on 30 October 2024.
Transfer of Assets Abroad rules and Settlements legislation
The government intends to review anti-avoidance legislation including the Transfer of Assets Abroad rules and the Settlements legislation. This would be welcome if the outcome is indeed to remove ambiguity and uncertainty, as stated, as the Transfer of Assets Abroad rules in particular are complex and difficult to apply in practice. Further details will follow, but no changes are expected before April 2026.
Carried interest
The government has published a call for evidence on the taxation of carried interest, a form of performance-related reward which can currently be taxed at capital gains tax rates of up to 28%, instead of income tax rates of up to 45%. The government is committed to "decisive action" (beyond raising the rate of CGT, which is also rumoured to be on the cards) whilst acknowledging the need to "protect the UK's position as a world-leading asset management hub". In the coming weeks, Treasury officials will hold meetings with stakeholders and are requesting written submissions by 30 August 2024. Further announcements will be made at the Budget on 30 October.
Information contained in this note is current as at the date of first publication and is for general information only. It is not intended to provide legal or tax advice.
