Changes to the taxation of non-UK domiciled individuals’ policy paper published

The Government released its policy paper providing an initial road map of their desired changes to the current regime applicable to non-domiciled individuals. The document confirms their commitment to the introduction of a residency-based system for inheritance tax, and the removal of the remittance basis of taxation from April 2025. In addition, it confirms an end to the ‘protected trust’ regime for settlor-interested arrangements.

Taxation of foreign income and gains – end of the remittance basis

Much of the policy paper echoes the previous government’s pre-budget document of Spring of this year, though noting that the transitional concession of a reduced rate of tax for foreign income for those who have lost access to the remittance basis will no longer be available. Positively, a rebasing opportunity for the purposes of CGT should be available (though the date of rebasing has not been confirmed) which should mitigate some of the impact of the change for foreign gains realised post 5 April 2025. As was expected, a form of relief will be available under a Temporary Repatriation Facility (‘TRF’) for unremitted foreign income and gains (‘FIG’) transferred to the UK. The Government has stated that they want to encourage taxpayers to use this relief and so it is hoped the regime will be generous in both the applicable rate and period of availability. Further details on these transitional reliefs will be announced within the Budget, which is now set for 30 October 2024.

The regime applicable for new arrivers for tax year 2025/26 and forward

Individuals arriving in the UK, who have not been resident in the prior 10 tax years, will benefit from a 4-year exemption from tax on FIG.

Reform of the Settlements legislation and Transfer of Assets Abroad framework

The Government intends to review the existing non-UK anti-avoidance provisions that are currently in place with a view to removing ambiguity and ensuring effectiveness. These changes are not expected until the 2026/27 tax year.

The policy document does not mention similar provisions that are applicable to capital gains, which is a concern given the broad drafting of s86 TCGA 1992 and its extended definition of settlor-interested for these purposes.

The introduction of a residence-based system of inheritance tax (‘IHT’)

From 6 April 2025 the Government intends to replace the current IHT system, which uses domicile as one of its connecting factors, with a system based around residence. It is assumed that situs will still be the other determinant of liability.

After 10 years of tax residence (‘long-term’) an individual will become liable to IHT in respect of their worldwide estate (subject to any treaty reliefs).

The policy document states that chargeable events (including death) that occur prior to 6 April 2025 will not be impacted by the change.

In addition, a 10-year IHT ‘tail’ will be introduced, meaning that former long-term UK residents will be subject to tax for the 10 years following their exit from the jurisdiction.

Abolition of the concept of an Excluded Property Trust (‘EPT’)

The Government will introduce legislation to prevent EPT structures from offering a permanent shelter from IHT. The aim will be that in some form, the settlors of trusts that are within the EPT regime are subject to tax in relation to those assets.

It is intended that transitional arrangements will be introduced for existing arrangements but the form of these, as well as the structure of the new legislation, will be the subject of engagement with the profession.

The Government has stated that it will not carry out a formal policy consultation on the move to a residency-based system of IHT but will instead reflect on stakeholder feedback already given and continue to externally engage over the summer.

Edwin Coe’s view

Reform has been required in this area for some time, but the ideas outlined in the policy paper do nothing to allay fears that the UK is damaging its competitiveness and its ability to attract talent and wealth to the country.

Clarity on the form of the proposed changes and the timetable for implementation is appreciated, but the lack of engagement with stakeholders before releasing this policy paper is worrying. The current government has committed to external input on all major fiscal policy decisions from the Office of Budget Responsibility in an effort to ensure that policy decisions in this area are properly considered. It is disappointing to see them not take a similar approach to engaging properly with the profession and taxpayers in relation to some of the most substantive changes to tax policy in the most recent era. It is accepted that the number of individuals affected by these changes is relatively limited, but the potential loss of these people to other jurisdictions will create immeasurable damage to the economy. At a time when the Government is seeking to stimulate growth, any policy decision that results in wealth creators leaving the country is surely a poor one.

The recognition by the Government that some form of transitional arrangement is required as relates to EPTs is a relief, and it is hoped that whatever is introduced here will balance the needs of the Government with those of the individual.

At Edwin Coe, we are well-placed to advise on domicile, residence, tax and estate planning in accordance with each client’s unique circumstances. Please contact any member of the Private Client and Tax teams listed here should you require assistance.

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