Autumn Budget 2024 - final plans for the reform of the taxation of non-domiciled individuals

At the Autumn Budget on 30 October, the UK government published the final details of their reform of the taxation of non-domiciled individuals.  This came after months of speculation fuelled by intermittent announcements.   

In relation to the taxation of foreign income and gains (FIG), both for individuals and trustees, the final measures are broadly along the lines previously announced.  

However, the most significant concern for many non-domiciled individuals over the last 6 months, was the government's proposals to bring all overseas property, including that held in trust, within the scope of UK inheritance tax (IHT).  In late September, reports suggested that the Chancellor was revisiting her proposals in this regard, and the paper and draft legislation published with the Budget indicates that the original measures have been ameliorated to some extent. 

In this note, we highlight the key principles of the measures and summarise the main changes from the government's earlier proposals.  We also provide some comment on the new rules, and set out planning points for individuals considering their position ahead of the 6 April 2025 deadline.

SUMMARY OF PRINCIPAL MEASURES 

IHT - general principles

• The test to determine whether non-UK assets are in scope for IHT will be whether a person has been resident in the UK for at least 10 of the last 20 tax years immediately preceding the tax year in which the chargeable event (including death) arises.  Such a person will be referred to as a “long term resident” (LTR).
• An individual will remain within the scope of IHT in respect of their non-UK assets for 10 years after leaving the UK if they have been UK resident for at least 20 years.  For those who have been UK resident for between 10 and 13 years, the “tail” period to remain in scope of IHT will be reduced to 3 tax years.  This will increase by one tax year for each additional tax year of residence (7 tax years for someone resident for 17 years, for example). 
• After 10 consecutive tax years of non-UK residence, the clock will reset, and an individual will no longer be regarded as an LTR if they return to the UK.
• There will be advantageous transitional rules for non-domiciled individuals who are non-resident in tax year 2025/26. For those individuals, they will be LTRs if they satisfy the existing test of deemed domicile for tax purposes (having been resident for at least 15 out of the previous 20 tax years).  However, they will only remain in scope for IHT until their fourth year of non-UK residence, so a much shorter "tail".  If they return to the UK, the new rules will apply.

IHT on trusts

• Broadly, under the new measures, overseas property held in most trusts will be within the IHT net at any time at which the settlor is an LTR from 6 April 2025 onwards.  The settlor's status as an LTR, or otherwise, at the date of their death will determine whether overseas property in the trust is within the IHT net or not for the remaining duration of the trust.   

• The test will apply to all settlements, regardless of when property was settled, unless the settlor dies before 6 April 2025. 
• For settlements within the relevant property regime (i.e. those where there is no beneficiary with a qualifying interest in possession), if at any time from 6 April 2025, a settlor ceases to be an LTR, an exit charge will apply when non-UK relevant property becomes excluded property and leaves the IHT net.  Regular IHT charges will then apply while the settlor remains LTR, including ten-yearly charges at rates up to 6% of the trust assets, and exit charges where property leaves the settlement.
• Where a UK domiciled settlor is not LTR as at 6 April 2025, an exit charge will arise on that date. However, there will be no ongoing IHT charges (e.g. ten yearly or other exit charges) while the settlor remains not LTR. Essentially, for the first time, non-UK assets in a trust established by a UK domiciled settlor may become excluded property in appropriate circumstances. 
• The rules for settlements where there is a beneficiary with a qualifying interest in possession are slightly different and the residence status of the beneficiary with a qualifying interest in possession will also be relevant.
• For trusts in existence immediately before 30 October 2024, the gift with reservation (GWR) provisions will not apply.  This means that even if the settlor is or becomes an LTR at some point after 6 April 2025, so that ten yearly and exit charges may apply to the property, the property will not be treated as remaining part of the settlor's personal estate if he or she is able to benefit from the trust, as would be the case under the general GWR rules.  Settlors of trusts created on or after 30 October, will need to take into account the GWR rules when deciding whether or not they should be excluded from benefit.

Foreign income and gains 

• The 4-year foreign income and gains (FIG) regime is to be introduced as planned, and will be available to individuals coming to the UK for the first time, or after a period of 10 consecutive tax years resident outside the UK.  Those who claim will receive 100% relief from tax on FIG arising in the first four tax years in which they are UK resident. 
• For those who qualify for the FIG regime, it will also be extended to income distributions and other benefits received from trusts. 
• The promised Temporary Repatriation Facility (TRF) will be available for 3 tax years from 6 April 2025 (rather than 2 tax years as originally proposed) to encourage previous remittance basis users to remit to the UK FIG that arose prior to 6 April 2025 and pay a reduced tax rate. 
• The tax rate will be 12% in tax years 2025/26 and 2026/27 and 15% in tax year 2027/28.  Once the tax has been paid on a “designated amount” of income, that income can be remitted to the UK in that year, any future year, or not at all, with no further charge to tax.
• For individuals to whom the remittance basis applied for any tax year prior to 6 April 2025, the TRF will also extend to trusts and other overseas entities, subject to specified conditions.
• CGT rebasing - from 6 April 2025, UK residents who are ineligible for the FIG regime, or choose not to claim it for a tax year, will be subject to CGT on foreign gains.  As promised, and subject to specified conditions, there will be an option for current and past remittance basis users to rebase their personally held foreign capital assets to their value at 5 April 2017 when they dispose of them on or after 6 April 2025. 

Other measures

• Review of anti-avoidance legislation - the government is undertaking a review of offshore anti-avoidance legislation, including the Transfer of Assets Abroad and Settlements legislation, with a formal consultation planned for 2025.
• Overseas Workday Relief – as promised, a form of Overseas Workday Relief is to be retained.  The details are beyond the scope of this note.

PLANNING POINTS

Existing UK resident non-doms who will be outside the FIG regime 

Those who have waited for the Budget on 30 October before making any concrete plans will now wish to do so.  For anyone who will be outside the FIG regime from 6 April 2025, or who will be within the scope of IHT, you could consider taking some or all of the following steps before the end of the tax year.  For example:

• If this is your final year of being a remittance basis user, you might consider realising FIG now so that you can either retain it outside the UK or benefit from the advantageous tax rates under the TRF for remittances from 6 April 2025. 
• Decide whether there are any foreign assets you wish to dispose of now we know the date and qualifying conditions for the CGT rebasing rules.
• Consider whether there are any foreign assets that you wish to give away to non-UK based family members to benefit from the current excluded property rules for IHT. 
• Review existing trusts and other structures from which you could be excluded as a beneficiary to prevent FIG from being attributed to you.
• If you will qualify as an LTR from 6 April 2025, consider with your trustees whether there is any action you wish to be taken in respect of trusts of which you are a settlor to avoid assets falling into the relevant property regime, and the potential tax charges that will apply going forward.

UK resident non-doms who will be within the FIG regime

• If it is possible to delay FIG from arising until after 5 April 2025, this may be beneficial, as any such FIG may be brought to the UK tax free while you are taxed under the FIG regime.  In the case of income, this may be easier to achieve within trust or corporate structures. 
• Where this is not possible, if you are currently a remittance basis user, or have been in the past, you may be able to take advantage of the TRF to reduce the rate of tax you pay on remittances of pre-April 2025 FIG, and, if you meet the relevant conditions, may also be able to take advantage of the option to rebase for capital gains.

UK domiciled individuals who have left the UK 

• Non-resident, but UK domiciled, settlors of trusts holding non-UK assets may find that those assets become excluded property if they do not qualify as an LTR as at 6 April 2025, potentially giving rise to an exit charge on that date. This is likely to be the case if they left the UK more than 10 years ago, but have not acquired a new domicile under the common law.  Individuals in this position should consider whether there is any action they can take to mitigate, or at least plan for, such a charge.

Individuals planning to come to the UK 

• Anyone who is considering coming to the UK either for the first time, or after a period of non-residence of any length, should take advice in advance to ensure that they take up or resume UK residence as tax-effectively as possible. 
• Trustees of trusts with settlors or beneficiaries planning to move to the UK should also ensure that they are aware of the new rules with regard to the taxation of trusts, and how the UK tax status of the assets they hold in trust may be affected both in the short term and, more significantly, the longer term.

COMMENTS ON THE NEW MEASURES 

Foreign income and gains

After months of uncertainty for non-doms, the final measures are welcome in so far as they provide a degree of certainty - the domicile-based remittance basis will be replaced by a residence-based regime, and will do so with effect from 6 April 2025.

It is still the case that the 4-year grace period for those arriving in the UK is lower than many other countries, and the 10-year tail is longer, and this is likely to make the UK relatively less attractive to overseas individuals considering moving here. However, a residence-based system will be less complex than one based on domicile, and it should be easier in future for individuals to be certain where they fall within the regime. 

The transitional provisions are welcome, especially the extension of the TRF to three tax years rather than two, and that it will include FIG held within trusts and other overseas structures.  However, the rules for trusts are complex, which detracts slightly from the benefit of simplification that was the main advantage promised by the new rules.

Both the FIG regime and the TRF will be beneficial for new or recent arrivals and existing residents respectively.  However, it is important to note that both require claims and are subject to substantial reporting requirements and deadlines, so detailed advice will be required to ensure compliance. 

IHT – generally

Clarity is particularly welcome in relation to the new IHT measures, especially as they relate to trusts. While a 10-year tail during which individuals leaving the UK will remain within the scope of IHT is lengthy, the sliding scale from 3 years upwards for those who have lived in the UK for under 20 years is an unexpected and helpful concession. 

The impact of the 20-year period over which the tail must be determined is likely to be most keenly felt by UK domiciled individuals leaving the UK.  For them, the new residence test appeared to provide a much clearer path to moving beyond the UK tax net than reliance on losing their domicile. However, whereas in the right circumstances, they could have achieved this in as little as 3 years under the old rules, now they will need to ensure that they carefully track their residence status over the relevant 20-year period. 

The government's lengthy paper on the changes refers only once to the UK's Double Tax Conventions with other countries, and then only to say that there are no changes to the treaties or how these operate.  How this will apply in practice remains to be seen, but hopefully individuals who enjoy beneficial status under such Conventions will continue to do so, for example, UK residents who are domiciled in India.

IHT – property held in trust

It is encouraging that the government has modified its proposals in relation to the taxation of excluded property settlements, having listened to the concerns of advisors over the summer.  It is welcome that it will be possible for non-UK property held in trust to remain excluded property provided that the settlor is not an LTR.  It is also reassuring that the government has confirmed that the GWR rules will not apply to settlor-interested trusts established before 30 October 2024. 

Unfortunately, it may prove to be too little too late for some overseas individuals.  The last few months of uncertainty, allied with the complexity of navigating the new rules, have deterred many from moving to or investing in the UK for anything other than short periods, or at all. 

Individuals who are planning to move to the UK for a significant period but to leave again in the future, will need to think carefully about the assets (if any) that they place in trust, in order to avoid giving rise to a potentially significant exit charge when they lose their LTR status. 

 This is an area where new arrivals, who are able to plan in full knowledge of the new rules, may have an advantage over those who have established trusts already. 

This note provides an overview of the proposed reform of the taxation of non-domiciled individuals following the announcements at the Budget on 30 October.  The measures announced are wide-ranging, and in some cases subject to detailed conditions, which are beyond the scope of this note. 

Before making any decisions you should take advice as to how these or other changes may affect you and any trusts of which you are the settlor or trustee.  If you would like to do so, please get in touch with your usual Howard Kennedy contact or a member of our Private Client team.