Technical notes were initially issued by the Conservative Government on 23 April 2024 setting out proposed changes to the tax rules in the UK relating to individuals who are non-UK domiciled. These technical notes were reviewed and reissued on 29 July 2024, then updated on 8 August 2024. Unsurprisingly, these rules will become more draconian under the new Labour administration which states that it is committed to addressing unfairness in the tax system.
Taxation of Non-UK Domiciled individuals
The headline points are:
1. From 6 April 2025 – implementation of a new residence-based regime and abolition of the existing preferential concept of “domicile”. This will impact the ways in which income tax, capital gains tax (“CGT”) and inheritance tax (“IHT”) is charged in the UK.
2. From 6 April 2025 – removal of the remittance basis of taxation for all future tax years. Instead, new arrivals (i.e. those who have been non-UK tax resident for the previous 10 consecutive tax years prior to arrival) will not pay any UK income tax or CGT on any of their Foreign Income and Gains (“FIGs”) for their first four years of UK tax residence.
3. For anyone who has been UK resident in past years and who has previously used the remittance basis of taxation, there will be a “Temporary Repatriation Facility” (TRF) in relation to income or gains which arose in a year when the remittance basis had been claimed. Further detail will be set out in the 30 October 2024 budget. The tax rate for this has not been set, but the previous Government had suggested a 12% rate, and the present Government has indicated it will be “reduced” from the current rate. Any funds which are not brought into the UK during the TRF window may then be taxed under the remittance basis, thus taxed at a higher rate if brought to the UK.
4. From 6 April 2025 – protection from tax on income and gains in settlor-interested trust structures will no longer be available for non-UK domiciled and deemed domiciled individuals who do not qualify for the four-year FIGs regime. FIGs prior to 6 April 2025 will continue to be treated as they are at present.
5. UK “anti-avoidance” legislation aimed at taxing overseas income and gains known as the Transfer of Assets Abroad and Settlements Legislation will be reviewed (and we presume the motive defence removed) to reduce ambiguity (and ensure recovery of more tax).
6. Transitionally, for CGT purposes there will be a rebasing date issued (to be set out in the 30 October 2024 budget) so that only gains arising after that rebasing date would be taxed.
8. From 6 April 2025 – IHT will be charged where the individual has been resident in the UK for 10 years prior to the tax year in which the chargeable event arises. There will be a provision to keep persons in scope for 10 years after leaving the UK, known as a 10-year tax tail. It will be difficult to monitor chargeable events occurring several years after an individual has left the UK, and we have questioned HMRC as to how they intend to do this. Deaths before 6 April 2025 are unaffected.
8. Excluded Property Trusts will no longer be recognised (the government is working on this for the 30 October 2024 budget and is working with stakeholders and advisers on this matter). It is not yet clear how these changes will affect existing trusts where the settlor has already died but the beneficiaries are UK tax resident. It is hoped that there will be a window of opportunity to unwind these structures without a tax charge or with a lower tax charge as has been done in the past.
As there is a relatively short time frame it is likely that there is already draft legislation underway which will be issued in time for the budget announcement on 30 October 2024.
What the Labour administration has so far failed to address is the treaty protection offered by four old tax treaties with India, Pakistan, Italy and France from the late 1960s. These treaties, in effect, trump any non-UK domiciled rules and yet there has been no discussion regarding their removal. They are bilateral treaties so one imagines that the Labour government would have to come to the table with each of the jurisdictions involved to make an agreement to amend the treaties. This will take time and a huge amount of diplomatic effort at a time when there may be more pressing issues. Such effort will not be rewarded with much press commentary as there is such scant comprehension about the effect of these conventions.
UK Domiciled individuals
UK domiciled individuals will also be affected by the changes which are anticipated in the October budget. Rumours of higher rates of CGT, reduced allowances (particularly for IHT Agricultural Property Relief and Business Property Relief) and increased taxes on property, particularly second properties, are rife. We do not have much detail about the changes for UK domiciled individuals, but all signs point to a budget which will bring more people and funds within scope of UK taxation.
Should you have any questions about the forthcoming changes to the non-UK domicile tax legislation or the effect of the existing succession tax treaties please do not hesitate to call Catherine Pugsley or Anna Gaston or any other member of the Private Client team on 0207 222 5381.