The Chancellor of the Exchequer, Rachel Reeves, delivered her first Labour budget on 30th October 2024. Although the announcements were largely as expected, this budget saw a few minor (and positive!) alterations to the non-dom changes announced by the Conservative government in March this year.
Clients of Suntera who have a current or historic connection to the UK should consider the impact of these changes on their structures and their tax affairs before 5th April 2025, to assess the impact and options available to them.
In this briefing we will focus on the key points for our clients, namely the changes to the taxation of non-UK domiciled individuals and the impact on the structures that we assist them with. However, to be clear, the 2024 proposed changes, both old and new, do not impact on Trusts with an already deceased settlor and do not impact on Trusts where a non-UK domiciled settlor is not and has never been UK resident.
The abolition of the UK non-domiciled (non-dom) individual regime was announced in March this year by the Conservative Government, to be replaced by the new 4 year foreign income and gains (FIG) regime, along with a proposal to make significant changes to UK inheritance tax (IHT). There were some hopes that the Conservatives would change their mind on the proposals, had they won the election, but shortly after Labour formed their Government they confirmed the abolition of the non-dom regime from April 2025, along with firming up proposals on the IHT changes. This budget has seen detail added to these proposals, as well as a few positive alterations, particularly to the transitional rules.
What’s changed?
Many of you will have been closely following the announcements since March and will have seen our previous two releases on the proposals, found here:
• August update for non-UK domiciled individuals
• UK Budget Update
So, what has changed between Labour’s initial announcement and now?
• Separate claims on a UK tax return for the FIG regime will be required for foreign income and foreign chargeable gains. One claim can be made without the other, but the entitlement to a personal allowance and capital gains tax annual exemption will be lost even if only one claim is made. The amounts against which a claim is being made will need to be quantified. The claim can be made for a single source of income or gains, or multiple sources, or all sources.
• The temporary repatriation facility (TRF), for those persons previously claiming the remittance basis, will be extended from 2 to 3 years, with a flat rate of tax of 12% on qualifying repatriated foreign income and gains (FIG) for the first 2 years and 15% for the final year. An election will be needed to use the facility.
• The TRF has also now been extended to include qualifying FIG within Trusts. FIG that was generated in a Trust prior to April 2025, and is matched to a benefit or capital payment within the TRF window, and is received by a previous remittance basis user, will be eligible.
• Amounts designated under the TRF do not need to be brought to the UK within the 3 year window and the TRF has been extended to certain non-cash assets. These widen the availability of the TRF in line with the previous Labour announcement to make the TRF as attractive as possible, to encourage inward investment to the UK.
• For Capital Gains Tax (CGT) purposes, qualifying current and previous remittance basis users will be able to rebase to 5 April 2017 sales of foreign assets that they held on 5 April 2017, when those assets are sold after 6 April 2025.
• A form of residence taper relief will now be available under the new IHT rules. For IHT, the domicile system will be replaced with a residency based system, with Long Term Residents (LTRs) being subject to UK inheritance tax on worldwide assets (subject to transitional provisions) where they have been resident in the UK for at least 10 out of the previous 20 tax years. They will remain in scope for between 3 and 10 years after leaving the UK, with individuals who were only resident for between 10-19 years being in scope for a shorter period under these tapering rules.
• Certain exemptions from the new IHT rules will be available for settled assets. Overall, the determination as to whether or not non-UK assets, that have been settled into a Trust, will be subject to UK IHT will be linked to the residency status of the settlor. These assets will come in and come out of the charge to IHT depending on whether the settlor is a Long Term Resident (LTR) at the time of the charge. However, this budget has included two exemptions:
o An exemption for settlors of settlor interested trusts which hold non-UK assets that, without the exemption, would fall to be taxable as a Gift with Reservation of Benefit under the new rule. The exemption is that, where non-UK assets were settled before 30th October 2024, at a time when the settlor was non-UK domiciled nor deemed UK domiciled, these assets will remain outside of the scope of UK IHT on the death of the settlor, or where the reservation comes to an end. This means that such assets will not form part of the estate of the settlor on death under the Gift with Reservation of Benefit rules.
o An exemption for non-UK assets which were comprised in a Qualifying Interest in Possession (QIIP) Settlement which were excluded property immediately before 30th October 2024. Such assets will not be subject to UK IHT when the QIIP comes to an end or on the death of the QIIP beneficiary.
• In light of the new rules which mean that the status of settled non-UK assets will follow the residency status of the settlor, such assets will now fall out of the charge of UK IHT when the settlor is not an LTR. An exit charge could apply at the point at which such assets fall out of the charge of IHT. We understand that the exit charge will be calculated in the same way as other IHT exit charges for trusts.
• There will be a transitional rule for non-domiciled or deemed domiciled individuals who are non-resident in 2025-2026. Such individuals will only be treated as long term resident if they satisfy the existing deemed domicile test, i.e. whether they have been resident for 15 out of the past 20 tax years immediately preceding the year of charge, and for at least one of the 4 tax years ending with the relevant tax year. If they return to the UK, the new rules will apply to them.
• Where the settlor of a trust has died before 6 April 2025, whether non-UK assets are within the relevant property regime or excluded property will be based on the old test, i.e. the settlor’s domicile at the time that the property was settled.
• From 6 April 2025, following a settlor’s death, ongoing charges to IHT at Trust level will be based on whether the settlor was an LTR at death.
• Existing qualifying Business Investment Relief (BIR) claims will remain in place with the old rules applying. However, a TRF claim, and accompanying tax charge, can be made on an existing BIR amount within the 3 year TRF window, if preferred, which should mean that the BIR funds can be kept in the UK free of further tax once the investment ends. Between April 2025 and April 2028 new BIR claims can be made using funds previously sheltered under the remittance basis, but after 2028 no new BIR claims can be made.
• There have also been changes to UK IHT in respect of business property, agricultural property and pensions.
A re-cap on the operation of the four-year FIG regime from 6th April 2025:
• To qualify for the new FIG regime, newly-resident individuals will need to have had a period of 10 tax years of non-UK residence. The FIG regime can apply to UK nationals and UK domiciled.
• individuals who previously were not able to use the remittance basis of taxation.
• The regime will allow qualifying individuals to pay no UK tax on FIG arising during their first four years of being UK tax resident. This FIG can be brought to the UK free from additional charges.
• After those first four tax years they will be taxed on their worldwide income and gains in the same way as a UK tax resident and domiciled individual.
• Individuals choosing to be taxed under the four-year FIG regime will lose entitlement to personal allowances and the capital gains tax annual exempt amount.
• An individual will be able to choose in each eligible tax year whether they wish to use the FIG regime or be taxed on worldwide income and gains.
A re-cap on changes for non-UK resident trusts with UK resident but non-UK domiciled settlors:
• Currently, unless a Trust is ‘tainted’ a non-UK domiciled settlor is protected from taxation on foreign income and gains as it arises within trust structures even once they have become deemed UK domiciled. This protection will be removed for such individuals who do not qualify for the 4-year FIG regime, meaning that outside of the FIG regime, all income and gains of settlor-interested trusts will be taxed on the settlor.
• From 6th April 2025, FIG arising in non-resident trust structures will be taxed on the settlor or transferor if they do not qualify for the four-year FIG regime.
• FIG that arose in a trust structure before 6th April 2025 will be taxed on settlors or beneficiaries if they are matched to trust distributions. Settlors and beneficiaries who do not qualify for the four-year FIG regime will be taxed on this matched FIG wherever the distribution is received (but this may be eligible for the TRF as mentioned above).
• Settlors and beneficiaries who can use the new four-year FIG regime will be able to receive benefits from a non-UK resident trust free from any UK tax charges, wherever the benefits are received. However, these benefits will not be matched to trust income and gains and will be subject to modified onwards gift rules and close family members rules.
Other key points from the Autumn Budget
• Capital Gains Tax has increased to 18% for the lower rate and 24% for the higher rate for disposals made on or after 30th October 2024. The 18% and 24% rates for the disposal of residential property will remain unchanged.
• The SDLT surcharge on second homes has increased to 5% from 31 October 2024.
• The employer’s NIC rate will increase from 13.8% to 15% from 6 April 2025, with the threshold at which employer’s start to pay NIC on employee’s earnings reducing from £9,100 to £5,000.
• There is a call for evidence from HMRC to review the personal tax offshore anti-avoidance legislation, in advance of further consultation in 2025.
Whist some of the aspects of the new rules for non-UK domiciled individuals have been watered down from the original proposals, these changes remain significant and far reaching. Clients of Suntera who have historically or currently have connections to the UK, or who are considering a move to the UK, will need to review their affairs before April 2025 to understand the impacts on their structures and personal tax position and what their options are. Suntera can assist our clients and their tax advisers with any decisions that are needed following a review of their tax affairs. Our in house tax team are on hand to provide guidance on where further UK tax advice may be needed.
If you have any questions please speak to your usual contact at Suntera.
Please note that these comments are intended as a general summary only and should not be regarded as tax advice. The proposed tax rules may change between now (November 2024) and implementation.
SENIOR MANAGER, TAX