Autumn Budget 2024 – changes to the taxation of non-domiciled individuals

The Chancellor presented her first Budget to the House of Commons earlier today. A number of our clients were particularly concerned as to the implications of the much discussed abolition of the regime applicable to non-domiciled individuals. The current government had already issued a policy paper in late July of this year outlining what the proposed changes were going to be. The last few weeks had seen various press articles suggesting a softening of the approach previously outlined, which does not in practice seem to have materialised.  In particular, we were still awaiting the details and the impact these would have for current UK residents and for trusts, in particular those located outside of the UK.

The policy document issued in July covered the broad strokes of the changes, and we are of the view that the detail issued today is in fact in line with the majority of the statements made earlier in the year. That said, there is a significant amount of additional information now available (including the draft legislation). It is important to note that the legislation remains subject to change, but we can now provide our initial summary of the changes that will take effect from 6 April 2025:

Change in the structure of taxation applicable to non-domiciled individuals and the shift to residence as the determining factor

The UK will abolish the concept of domicile as a factor in determining an individual’s exposure to taxation for the purposes of the taxation of foreign income and gains (FIG) and inheritance tax (IHT).

Individuals will no longer be able to elect for the remittance basis of taxation.

Individuals will be subject to IHT on their worldwide assets once they are a ‘long term resident’.

The ‘protected trust’ regime, which was introduced to address some of the perceived unfairness in the changes to the regime applicable to non-domiciled individuals, will come to an end.

The new regime applicable to foreign income and gains

As previously announced, a new 4 year regime will apply for newly/recently arrived residents, broadly being those who have not been UK tax resident in the last 10 years, which will result in almost all FIGs being excluded from taxation for that period. Individuals will need to make a claim for the new regime and will need to quantify the amount of FIG they are claiming relief for. The amounts subject to the claim can be brought in to the UK in the same year, or a later year, without an additional charge.

Interestingly, individuals will be able to make claims for income and capital gains separately, and opt in and out on a year by year basis. A more detailed consideration of the interaction with foreign capital losses and claims on an annual basis will now be required.

There are some complexities relating to the new regime and distributions from overseas settlements that will require careful planning.

Attribution of income and gains to UK residents – the end of the ‘protected trust’ regime

The intention of the new regime is to remove the protections offered to UK residents under the ‘protected trust’ regime such that they will be subject to income tax and capital gains tax by way of attribution of the income or gains arising to the trust and connected structures (in most circumstances these structures would generally be non-UK resident corporates).  This will most typically apply to settlors of such structures.

These changes come with additional amendments to the close family member rules and onward gift rules.

We will be publishing a more detailed summary on the implications for those with interests in relevant settlements in the coming days.

Overseas Workday Relief (OWR)

A modified form of OWR, removing domicile as a determining factor, will be available.

Business Investment Relief (BIR)

The BIR regime will cease from 6 April 2028. Existing investments will qualify as they did under the previous rules. There is an interaction with the Temporary Repatriation Facility that may present some opportunities for individuals in the next 3 years.

Capital Gains Tax (CGT) Rebasing

CGT rebasing will be available for certain individuals who are unable to use, or chose not to use, the new 4 year regime. The rebasing date will be April 2017, which is not at all generous.

In order to qualify:

1. The individual will need to have not been UK domiciled or deemed domiciled before tax year 2025 and 2026
2. The individual will need to have made a claim for the remittance basis in the years 2018 to 2025 inclusive
3. The individual will need to have held the asset at 5 April 2017 and disposed of it after 6 April 2025
4. The asset must have been situated outside of the UK from 6 March 2024 to 6 April 2025 (with some exemptions)

There are some issues to consider as relates to 2008 rebasing elections for trustees. Importantly, rebasing to 2017 values is limited to individuals alone.

Temporary Repatriation Facility (TRF)

In order to encourage individuals who had previously protected FIG from taxation by making a claim for the remittance basis the TRF offers a reduced rate of taxation in relation to transfers made in the three years from 6 April 2025. The rates are as follows:

2025/26 – 12%

2026/27 – 12%

2027/28 – 15%

The amounts subject to the TRF are designated and tax is paid on the basis of that designation. The funds would not need to be immediately brought to the UK, and could be retained overseas. Unfortunately the payment of a TRF charge will, if funded from previously untaxed FIG, constitute a remittance, unlike the relief that applied to payments of the remittance basis charge.

There are a number of complexities, in particular in relation to the interaction with foreign tax credits, the ‘mixed fund’ ordering rules and unattributed FIG held within overseas structures, but broadly the TRF seems to be a positive.

IHT – the end of domicile as a connecting factor

The position for UK assets will remain the same. Non-UK assets will be subject to IHT once the individual has been UK resident for 10 out of the last 20 tax years (long term resident) immediately preceding the year of the chargeable event (including death).

In addition, subject to transitional provisions applicable to individuals who exit the UK in the 2025/26 tax year, non-residents will potentially be subject to IHT on their non-UK assets for a longer period than presently, and the length of time spent in the UK prior to exit will determine the length of this ‘IHT tail’.

IHT – Trusts

The excluded property trust regime, subject to some grandfathering for existing trusts as relates to the gift with reservation anti-avoidance rules (GWR), will come to an end from 6 April 2025.

The determining factor as to the IHT status of the trust will be the long term resident status of the settlor.

This will result in previously excluded property held by trustees becoming ‘relevant property’ with reference to the settlor’s status, rather than the status at the time of the settlement. The effect will be that these trusts will then be subject to the ten year anniversary and exit charge regime. In addition, where a UK domiciled settlor ceases to be long term resident an exit charge can now arise, and similarly a long term resident settlor ceasing to be within the scope of IHT will also result in an exit charge.

Where a settlor can benefit from a trust they have settled, the current excluded property regime does not result in the assets of the trust being deemed to be within their estate for IHT purposes. This was because the test as to whether the trust assets constituted excluded property applied at the time of their original settlement, rather than at the time of a chargeable event (such as death).  However, under the new rules, it appears that if the settlor is a long term resident at the time of their passing, (and can benefit from the trust), the assets of the trust would be deemed to be within their estate and subject to IHT.

One significant detail is that existing excluded property trusts settled before 30 October 2024 will not be subject to these changes. This grandfathering provision only applies to the GWR rules and so the relevant property trust rules applicable to the trustees will still apply. Any new additions to the trust after this date will be subject to the new GWR rules.

Tax Partner Hetal Sanghvi had the following comments following the budget:

Following the rumours circulating in advance of the Budget and a number of representations made by the profession, what we had hoped for was some watering down of the changes proposed in Labour’s policy paper of 29^th July. This is not what we got. Despite Rachel Reeves assertions of being internationally competitive, discussions with clients likely to be affected identified the new ‘4-year FIG regime’ would not be considered competitive. The lack of any material grandfathering for pre-existing excluded property trusts is disappointing, though there is an interesting alignment to excluded property status, based on the new ‘long term resident’ provision, which we welcome and will offer some relief.

The lack of foresight when it comes to the reform of the non-domicile regime and the tail attached to IHT, and how this may lead to taxpayers exiting the UK, is galling. Many of the headline changes originally proposed by the Conservatives in March proceed with some amendments to encourage the transfer of funds to the UK, which will be worth reviewing, particularly the extension of the Temporary Repatriation Facility to distributions from trusts.

The new regime leaves space for many questions and it will be paramount that those who may be impacted seek a review of their position to ensure that effective planning can be implemented prior to the rule changes.

Sean Bannister, Head of Tax, commented:

I welcome the end to domicile as connecting/determining factor and believe that a shift to a residence based system is both modern and provides greater certainty to taxpayers, which is a huge positive.

I will read with some interest over the coming days the workings behind the published tax revenue projections for the changes announced, as I do not believe the new policy framework is particularly competitive.

Clients impacted by the changes will have a number of important decisions to make in advance of 6 April 2025 and advice is going to be essential to help deliver positive outcomes. In particular, those with interests in settlements will need to think carefully about their future needs for funds held by said structures, the requirement to a retention of benefit and the impact this will have on the attribution of foreign income on an arising basis in particular. It will certainly be at the forefront of many individuals minds as to what options and steps could be taken to ameliorate the effect of these rule changes without disturbing the structure where partial IHT protections remain available.  

We have long been of the view that the changes in this area were rushed and would leave individuals in a difficult position, that has certainly been borne out.

David Goepel, Head of Private Client International commented:

There has also been confirmation of more detail on the changes on IHT for non-doms and offshore structures. Despite the concerns expressed by so many over the likely adverse impact of some of the proposed non-dom reforms as set out in the Government’s policy documents in the summer, it appears that significant IHT changes will apply to non-domiciled individuals and existing offshore structures, in particular those where the settlor can benefit.  Many of the proposed changes take effect from 6 April 2025, and so it will be essential for many clients to take the opportunity during the next few months to conduct a holistic review of their existing structures together with their wider estate planning.  Leaving the UK is not the only option(!) – but advice needs to be taken quickly before next April.   

If you aren’t receiving our tax updates directly to your mailbox, please sign up now