As expected, the new Chancellor, Rachel Reeves, has now released further details of the changes to the taxation of ‘non-doms’ that will go ahead under the Labour Government. This will see the scrapping of the concept of domicile with a shift towards a residency based system.
Many of the proposals made by her predecessor in March 2024 have remained, but there are also some significant changes.
Who is affected?
- Anyone who has been UK tax resident for more than 4 tax years
- Those who have an overseas settlor interested (Protected) Trust
- Those who have an interest in any Excluded Property Trust
- Those looking to come to the UK shortly
When is this being implemented?
These rules will come into force on 6 April, 2025. However, some aspects will not be introduced until 2026/7 at the earliest.
Key proposals
The bad news…
- From 6 April, 2025, individuals who are UK tax residents for more than 4 tax years will be subject to UK income tax and capital gains tax on their worldwide income and gains. There will no longer be any opportunity to protect those non-UK income and gains by using the remittance basis, which will be scrapped
- The previously announced transitional rules that would have provided a 50% tax relief on income and gains arising in 2025/26 will not be introduced. There will be no soft landing for those affected
- From the same date, income and gains arising within overseas settlor interested trusts (previously known as Protected Trusts) will lose that protection from UK income tax and capital gains, other than for those individuals who qualify under the Foreign Income and Gains regime (FIG regime – see below)
- Inheritance Tax (IHT) rules will also change to reflect a residence-based system from 6 April, 2025, with the rumoured 10-year threshold coming into effect for both individuals and trusts. This will seemingly mean that those who have been a UK tax resident for 10 years will be subject to UK IHT on their worldwide estates, both for transfers in life and on death. The new rules will also introduce a 10-year tail, so that those who have been previously within the regime will remain so, until they have been non-resident for 10 years
- It looks like the concept of an Excluded Property Trust will also be scrapped. Further details have not yet been released, and it will be interesting to see how the Government intends to make this work in practice
In better news…
- New arrivals will be able to take advantage of the FIG regime and claim 100% UK tax relief against FIG during their first 4 years of UK tax residency, provided they have not been UK tax resident in any of the 10 consecutive years prior to their arrival
- For longer term residents, there will be some form of rebasing for capital gains tax purposes, where the remittance basis has been claimed in the past. Details of how this will work and at what date rebasing will apply have not yet been confirmed
- There will also be some form of Temporary Repatriation Facility (TRF) to enable historic untaxed overseas income and gains to be remitted, although details of what this will look like have not been released. This may be extended to stockpiled income and gains for overseas trusts
- Overseas Workday Relief (OWR) is to be reviewed but is expected to remain in some form
What else do we know?
- The existing Transfer of Assets Abroad and Settlement legislation will also be updated so that any potential ambiguities that currently exist in the system are clarified. Changes will then be implemented, it is expected, no earlier than the 2026/27 tax year
What next?
- More details will no doubt be released in the Budget on 30 October 2024, if not before if the new Governments piecemeal approach to introducing tax rules is to be continued! However, this week’s release gives us something to work on until then
- What is clear is that from April 2025, anyone who has been in the UK for more than 4 years and remains a UK tax resident will be paying UK income tax and capital gains tax on their worldwide income and gains, potentially with some relief in respect to gains, where rebasing applies
- There may also be some relief for remitting historic income and gains under the TRF. The previous Government proposed a 12% tax rate for 2 years, though It would seem that the Labour Government sees this as too generous. We are yet to see what the rate or the rules will look like. However, given that we are told that there is a £22billion hole in the budget, we are not expecting it to be too enticing…
Can we do anything?
Capital Gains Tax
It would seem sensible not to trigger any non-UK capital gains until there are clear rules about what rebasing will be on offer, unless being done for unavoidable practical reasons.
Income Tax
There is also no immediate rush to remit historic overseas income, as this may still benefit from a lower TRF rate in the coming years.
Inheritance Tax
However, those with interests in overseas trusts, be it previously Protected Trusts or Excluded Property Trusts, will need to think carefully about what, if anything, can be done to restructure these with the goal of protection from the UK tax regime. This is especially the case when it comes to UK IHT which, at a rate of 40%, will be unpalatable to most.
Options may include bringing the trusts onshore to at least benefit from lower ongoing costs, if nothing else can be done. There may also be some scope to remove beneficially interested settlors, although that may or may not help the situation, depending on the wider circumstances.
Equally those with significant, directly held overseas assets will need to consider the implication of the proposals.
If not here, then where?
Exiting the UK may be a possibility for some, but the 10-year sting in the tail for IHT purposes may mean that even this is not effective.
We will shortly be releasing the results of our global survey that has been compiled with the help of our international network, DFK. This will give those that are asking themselves the question, ‘if not here, then where?’ an idea of the tax benefits that other countries have to offer.
Before doing anything, it is important that you take professional advice and consider all your options and the implications.
Please get in touch with our Gravita Tax Consultancy team for further information and advice.
The information contained here is necessarily of a general nature. Specific advice should be sought for specific situations.
