In brief

On 6 March 2024, the Chancellor of the Exchequer delivered his Spring Budget.

This contained a number of significant tax changes relevant to our clients, including changes to the way in which UK tax resident non-UK domiciled (RND) individuals will be taxed in future and a new advantageous tax regime for individuals becoming UK tax resident.

These changes are very significant and we recommend clients take immediate advice on the potential implications for them and their structures.

Summary

From 6 April 2025, the current remittance basis of taxation will be abolished and replaced with a four-year foreign income and gains (FIG) regime for individuals who become UK tax resident.

Qualifying individuals will not pay tax on FIG arising in the first four tax years after becoming UK tax resident following a period of 10 tax years of non-UK tax residence. If individuals come within these new rules, they will be able to bring these funds to the UK tax-free. This will provide a very favourable tax regime for those individuals considering relocating to the UK and significant planning opportunities for creating non-taxable income and capital sums.

Individuals who, on 6 April 2025, have been UK tax resident for less than four years will be able to use this new regime for any UK tax year of UK tax residence in the remainder of those four years.

Individuals who move from the remittance basis to the arising basis on 6 April 2025 and are not eligible for the four-year FIG regime will, for the tax year 2025/26 only, pay tax on 50% of their foreign income. This reduction will apply to foreign income only, not chargeable gains.

A rebasing will be offered to individuals who have claimed the remittance basis and are neither UK domiciled nor UK deemed domiciled by 5 April 2025. The effect of the rebasing will be to rebase foreign personally held assets to their value as at 5 April 2019, if the asset in question was owned personally on that date.

A new Temporary Repatriation Facility (TRF) will be introduced for individuals who have been taxed on the remittance basis previously. They will pay tax at a reduced rate of 12% on remittances of pre-6 April 2025 untaxed income and gains during the UK tax years 2025/26 and 2026/27.

In relation to existing trust structures, the reforms will have a significant impact on the way in which non-UK resident, settlor-interested trusts with UK tax resident settlors are taxed. The protection from taxation on income and gains as it arises within a trust will be removed for RND individuals who do not qualify for the new four-year FIG regime. Income and gains arising in such non-resident trust structures will be taxed on the settlor on the arising basis. For non-settlor interested trusts or trusts with non-resident settlors, the impact of the changes should be reduced and so advice should be taken.

The changes announced also include significant UK inheritance tax (IHT) reform. The UK Government intends to transition IHT from being a domicile-based regime to a residence-based regime.

Although changes to IHT are still subject to consultation, the UK Government envisages that the new rules will involve bringing within the scope of IHT the non-UK situated assets owned outright by an individual once they have been UK tax resident for 10 years, with a provision to keep their non-UK situated assets within the scope of IHT for 10 years after leaving the UK. In addition, there are expected to be changes to the rules for chargeability to IHT of assets comprised in a trust, including entry, 10-year anniversary and exit charges.

There is a planning opportunity to settle trusts shielded from the charge to IHT prior to 6 April 2025. This could be a very significant advantage as individuals relocating to the UK could build significant capital pots to fund their lifestyles within the four-year period and transfer funds for investment to trusts within the 10 year period to keep non-UK assets outside the scope of IHT indefinitely.

We provide an update on other announcements, including changes being introduced to the Transfer of Assets Abroad legislation following the Fisher case, below.

Historic position

Those who are UK tax resident, but who are not considered domiciled in the UK (e.g.. because they were born outside the UK and/or to foreign parents) have historically been able to elect to be taxed on the remittance basis of UK taxation.

In simple terms, this meant such RND individuals were only liable to UK income and capital gains tax on their UK source income and capital gains, and not their FIG, unless such FIG were “remitted” to the UK, and could benefit further using trusts.

In addition, such individuals (until considered deemed domiciled under the rules in place at the time and thereafter, using trusts) were only subject to IHT on their assets situated in the UK. Assets situated outside the UK were not subject to IHT.

The Cameron Conservative Government previously announced reforms to the rules, which took effect from 6 April 2017.

The effect of those reforms meant that an individual would become “deemed domiciled” for all UK tax purposes if they were UK tax resident in at least 15 of the previous 20 UK tax years.

The overall impact was that after 15 years as a RND individual, such individual was no longer eligible to be taxed on the remittance basis, and would be subject to UK tax on their worldwide income and capital gains.

However, with appropriate planning, it was possible to set up structures (such as the use of “protected trusts”) in order to mitigate the effect of becoming UK deemed domiciled, and retain a good level of tax efficiency on foreign income and foreign and UK source gains.

The regime was often viewed as a significant driver in encouraging wealthy individuals to relocate to the UK, with the associated benefits for the economy as a whole, albeit it was not without flaws insofar that the concept of domicile is outdated and it discouraged individuals to remit their foreign income and gains to the UK.

Further detail: Abolition of non-dom regime and introduction of new residence-based regime

Introduction

This Budget is likely to be the last budget before a UK General Election, which must take place before January 2025 (although the General Election may be timed to take place following the Autumn Statement).

The opposition Labour Party had previously announced its intention to “abolish” the RND rules if elected, and yesterday’s announcement by the Conservative Government is arguably an attempt by the Conservative Party to take control of the changes that were announced by the Labour Party before the General Election.

Under the proposal, there are changes to the taxation of foreign income and gains as well as to the IHT rules.

New FIG regime

The remittance basis of taxation is to be replaced with a new four-year FIG regime.

From 6 April 2025, this regime will be available to individuals for the first four tax years of UK tax residence, after a period of 10 years non-UK tax residence.

Eligible individuals will not pay tax on FIG arising in the first four years of UK tax residence, and will be able to remit these funds to the UK free from any additional tax charges.

This differs to the current rules, whereby untaxed foreign income and gains that are taxable on the remittance basis and brought to the UK are charged as a taxable remittance.

It also has an advantage over the previous rules in that individuals will not be required to track the movement of their FIG through investments in the way they are required to do at present. Arguably, the new four-year FIG regime is much simpler than the current remittance basis regime.

Individuals who on 6 April 2025 have been UK tax resident for less than four years (after a period of 10 years’ non-UK tax residence) will be able to use this new regime for any tax year of UK residence in the remainder of those four years. For example, an individual who became UK tax resident in the 2022/23 tax year, after a 10 year period of non-UK tax residence, will have been UK tax resident for up to three tax years by 6 April 2025. They will be able to benefit from the new four-year FIG regime for the tax year 2025/26 because this is their fourth year following a period of 10 years’ non-UK tax residence.
Important planning opportunities are presented in proposed transitional provisions:

For those not eligible for the four-year FIG regime and moving from the remittance basis to the arising basis of UK tax, only 50% of their non-UK income arising in the 2025/26 tax year will be subject to UK tax. The reduction will not apply to foreign chargeable gains. For the UK tax year 2026/27 onwards, tax will be due on worldwide income and gains in the normal way.
In relation to capital gains tax, a rebasing will be offered to individuals who have claimed the remittance basis and are neither UK domiciled nor UK deemed domiciled by 5 April 2025. The effect of the rebasing will be to rebase foreign personally held assets to their value as at 5 April 2019, if the asset in question was owned personally on that date.

There will be a new Temporary Repatriation Facility (TRF), which is aimed at providing some relief to those taxed on the remittance basis previously, whilst incentivising those taxpayers to remit those FIGs to the UK during the TRF period. In relation to FIG arising pre-6 April 2025 in a tax year for which the remittance basis was claimed, there is a two-year window (6 April 2025 to 5 April 2027) during which funds can be remitted with tax at only 12%. This is compared with the usual tax rates of, broadly, 20% on gains and 45% on income. This represents a good opportunity to bring funds into the UK at a reduced rate. Importantly, the TRF will not apply to pre-6 April 2025 FIG that has arisen within a trust structure. The above rules will only apply to FIG that has arisen to an individual personally. There will also be some relaxation of the mixed fund ordering rules to make it easier for individuals to take advantage of the TRF if, for example, they have untaxed foreign income and gains in a mixed fund and are unable precisely to identify their quantum. From 6 April 2027, remittances of pre-6 April 2025 FIG will be taxed at normal tax rates.

Impact for individuals with trusts and their trustees

In relation to non-UK trusts settled by non-UK domiciled and non-deemed domiciled settlors who have since become deemed domiciled (known as “protected trusts”), from 6 April 2025 any FIG arising in the trust where the UK tax resident settlor is not excluded from benefit will be taxed on the settlor, provided the settlor does not qualify for the new four-year FIG regime.
The matching of pre-6 April 2025 FIG to trust distributions will continue, but RND individuals will no longer be entitled to the remittance basis in respect of foreign trust distributions as under current rules.

Beneficiaries and settlors who are within the four-year FIG regime will be able to receive benefits from 6 April 2025 free from any UK tax charges whether or not the benefits are received in the UK. This represents an improvement from the previous position, whereby such funds could not be remitted without a tax charge. Such benefits are not matched to trust income and gains and will be subject to a modified onwards gift rule.

Overseas Workday Relief (OWR)

There will be reform to OWR in order to give a three-year window for individuals (such as international executives) to work in the UK in a tax-efficient manner under simplified legislation.

OWR is an existing relief from income tax on earnings for employment duties performed outside the UK. OWR can apply to treat part of the earnings from a UK employment wholly or partly performed abroad as if it were foreign source income.

From 6 April 2025, relief will continue to be available for employees who opt to use the new four-year FIG regime. The amount subject to OWR under the modified rules will be able to be remitted to the UK without a charge to UK tax.

The new OWR will be like that currently available, providing relief on earnings for employment duties performed outside the UK. The new OWR will be available for the first three tax years of UK residence and provide good opportunities for globally-minded executives wishing to base themselves in the UK.

IHT reform

IHT is currently a domicile-based system. The Government intends to transition IHT to a residence-based system from 6 April 2025.

Although the changes are still subject to consultation, it is envisaged that the new rules will involve bringing within the scope of IHT the non-UK situated assets owned outright by an individual once they have been UK tax resident for 10 years, with a provision to keep a person’s non-UK situated assets within the scope of IHT for 10 years after leaving the UK.

UK situs assets would remain in charge on the same basis as at present, regardless of residence.

It is envisaged that the new rules for chargeability of assets comprised in a trust would depend upon whether a settlor meets the residence criteria or is within the 10-year tail provision at the time the assets are settled and/or when charges such as that on the 10-year anniversary of the creation of the trust or exit charge arises.

The treatment of non-UK assets that are settled by a non-UK domiciled settlor and become comprised in a settlement prior to 6 April 2025 are not expected to change. Provided the assets in the settlement continue to meet the legislative requirements to be “excluded property” under current legislation, it is expected there would be no IHT charges. This presents a possible planning opportunity to set up “excluded property settlements” prior to 6 April 2025.

Other announcements

With the government’s focus at this stage being on trying to secure votes, as expected, there were not significant business tax or policy development announcements. Some announcements of note include the reduction in the higher rate of capital gains tax on disposals of residential property from 28% to 24% (one percentage point below the current UK corporation tax rate) and abolishing Multiple Dwellings Relief for Stamp Duty Land Tax effective 1 June 2024. More detail on the announcements affecting business tax can be found in our Key Business Tax Highlights alert below.

Additionally, it appears that the government have reacted quickly to the judgment in the recent Fisher case, with changes to the Transfer of Assets Abroad legislation coming into effect as of 6 April 2024. These changes are designed to ensure that transfers made by certain companies do not fall outside the definition of a “relevant transfer” for the purposes of the Transfer of Assets Abroad legislation. This should be seen as welcomed clarity on a complex area of legislation.

Conclusion

Whilst the proposed reforms represent dramatic change to the taxation of RND individuals, there remain a number of good planning opportunities for those wishing to move to the UK, and certain RND individuals who are already UK tax resident. Arguably, the proposed reforms maintain the UK’s status as an attractive place for wealthy individuals to live.

For those currently living in the UK who are being taxed on the remittance basis and will not be eligible for the new four-year FIG regime, the introduction of the TRF (to bring funds to the UK at a reduced rate), the availability of the capital gains tax rebasing election, and the reduction in the non-UK income arising in the tax year 2025/26 that is subject to UK tax, all allow good planning opportunities to mitigate the effects of the withdrawal of the remittance basis.

It should be noted that the Conservative Government are currently trailing Labour in all reputable polls. It is therefore probable that a Labour Government will be elected within the next 12 months and it cannot be ruled out that they may decide to amend these proposals or replace the Conservatives’ proposals entirely with their own.

However, now the Conservative Government has announced the abolition of the non-dom regime and has come up with a reasonable alternative, it may be that a Labour Government will decide to adopt the regime announced yesterday, rather than incurring further legislative time in creating their own similar regime.

If you have any queries in relation to the above, or would like to find out more about these developments, please contact any member of the Baker McKenzie London Wealth Management team below.

United Kingdom: Budget 2024 – Abolition of non-dom regime and introduction of new residence regime

In brief

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