Spring Budget 2024 – the impact for non-domiciled individuals

In advance of the pre-election Budget, it had been mooted that the current government may seek to change the regime applicable to non-domiciled individuals. Whilst various thoughts as to the potential reform had been floated, not much was known as to how the Chancellor was seeking to alter the regime. Individuals and advisors alike were therefore left guessing as to the impact that any changes would have.

Today’s announcements see bold, wide ranging reform to the system of taxation applicable to non-domiciled taxpayers.

We have summarised the new proposed regime below, though noting that there is significant detail missing as to the operation of the reforms in practice, and we await further clarity here.

Timeline

The current regime available to non-domiciled individuals (the remittance basis) will come to an end on 6 April 2025.

Impact of the end of the remittance basis

From 6 April 2025 it will not be possible to make an election for the remittance basis of taxation and any foreign income and gains arising after that date will be subject to tax at the relevant marginal rate (subject to transitional rules for existing users – see further below).

The new regime

The remittance basis will be replaced with an advantageous basis of taxation for those who have recently become UK tax resident:

1. Available for the first 4 tax years of residence to those who have not been UK tax resident consecutively for the previous 10 years
2. No tax on foreign income and gains arising within the 4 year window – these funds can be brought to the UK without tax charge
3. Retention of the Overseas Workday Relief system with some simplification to align this with the new regime.

Transitional provisions

The following will be introduced to soften the impact of the changes:

1. A reduction of 50% in the rate of tax charged on personal foreign income for those who will cease to be able to elect for the remittance basis by virtue of the introduction of the new regime for the 2025/26 tax year
2. Re-basing of foreign capital assets to 5 April 2019 values for individuals who have previously claimed the remittance basis for all disposals from 6 April 2025
3. Historic foreign income and gains remitted to the UK will be subject to a reduced tax rate of 12% if transferred between 6 April 2025 and 5 April 2027 (Temporary Repatriation Facility).

Changes to the taxation of overseas trusts

We will see an end to the existing protected trust regime (introduced in April 2017) from 6 April 2025.

As with the removal of the remittance basis, there are transitional rules in place for pre 6 April 2025 foreign income and gains held by those trusts.

Consultation and potential reform of IHT

The Government will consult on ways to change the existing regime for IHT (presently structured with reference to a combination of domicile and situs) to a system more aligned to residence. Any changes will not take place until 6 April 2025 at the earliest (based on the current policy summary).

It is understood that the IHT status of trusts settled by non-domiciled individuals, holding excluded property, will not be impacted by a change in rules, subject to those assets being settled on to trust before 6 April 2025.

Initial thoughts

The replacement of the remittance basis by the new regime considerably simplifies the tax position that will apply to new arrivals to the UK, and takes away the disincentive to bringing funds to the UK. This is welcome.

The transitional rules also allow taxpayers an opportunity to plan, and are likely to encourage inward investment from those individuals. This is also helpful.

However, there are some concerns about the short time period in which the new regime will be available. The window in which individuals from overseas can take advantage of a preferential regime will effectively be reduced from 15 years to only 4 years. From the perspective of foreign individuals, this takes the UK from being one of the most attractive tax regimes to one of the least attractive, compared to our competitors. This may discourage individuals from moving here, and those already here, who have the flexibility to leave, may be encouraged to do so.

What now?

In positive news, there is a window in which one can consider how best to move forward and plan accordingly. At this stage there is only limited detail available, but it is clear that these significant changes are going to require much thought, and advice should be sought at the earliest stage possible. We would add that any current advice being taken will now need to consider the impact of not only the known changes, but the potential reform of the IHT regime also.

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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