UK non-doms tax update – 30th July 2024

The first Budget of the new UK Government will be on 30th October 2024, but still has a look of Halloween for non-doms. We have always understood the Labour Party’s position to be that after a temporary period of grace, non-UK domiciliaries living in the UK would be subject to tax in the same way as someone born here. Our Finance Minister, does not propose to disappoint.

First, forget what has gone before and start again. This is what is promised will happen from 6th April 2025.

1. Income tax and CGT – the remittance basis will end for current year foreign income and gains (FIG) on 5th April 2025. It will remain in place for historic unremitted FIG, even if you are eligible for the new Temporary Repatriation Facility (TRF) (although how you repatriate something to a country you have just moved to seems bizarre).
2. The protection from taxation of FIG for overseas settlor interested trusts will also end.
3. The new TRF regime will be available for new arrivals to the UK for up to four tax years exempting their current year FIG from UK tax.
4. For pre 6 April 2025, FIG, there will be a new regime which will be designed to be “attractive” to those wishing to use it but its rate and length remains undecided. The previous Government had proposed a 50% reduction in tax, but Labour have confirmed that this will not be introduced.
5. The current inheritance tax regime, under which non-UK domiciliaries are exempt from tax on their foreign assets, will be replaced with a residence-based regime and will apply to those who have been resident in the UK for ten years or more. There is currently no indication of whether this means ten consecutive years or ten years out of say, 15 years, or whether there will be a “tail”, meaning that should you leave the UK, you remain within the scope of UK IHT for a number of years after departure.
6. The excluded property trust regime will cease to exist.
7. Stakeholders will be consulted on an appropriate form of relief for employees who are tax resident in the UK but also work abroad.
8. From 2025/26, the Government proposes to update the anti avoidance provisions relating to both the use of trusts and offshore entities (the settlement rules and the transfer of asset abroad rules (TOAA)).

The promised consultation on abandoning domicile as a criterion for taxation of individuals will not happen. Instead, the Government will review feedback already received from the proposals made by the last Government.

Commentary

Individuals

For non-UK domiciled individuals the message is you will be taxed on your UK income and gains (as is the case now) and have a tax holiday of up to four tax years on FIG. Subject to timing, that could be as little as three years and one day. NB four years in the UK is not enough time to obtain a British passport.

And after ten years, your global personal estate will be subject to the IHT on death. We assume that the existing escape route of making gifts and surviving for more than seven years will remain.

Offshore structures

For those with overseas trust and similar structures, then the position is uncertain.

If the structure is outside the settlor interested rules, i.e. the settlor is either dead (and died being non-UK resident) or is alive and non-UK resident, then it would appear that FIG of the trust will only be taxed on those individuals resident in the UK who receive a benefit from the trust, as is currently the case.

There is also mention of some relief for stockpiled income and gains. If they haven’t already done so, trustees of offshore trusts will need to review their records to ensure there is an accurate record of gains. This is likely to be a time-consuming and potentially costly exercise for trustees for long-standing trusts.

As for IHT, we can deduce that from 6th April 2025, no one can create an excluded property trust. At present, every trust or similar arrangement on the planet is within the scope of UK IHT UNLESS the settlor is not domiciled in the UK and to the extent that the assets of the trust are not UK assets. There will have to be a new modified test.

The Government has said that it,

“…intends to change the way IHT is charged on non-UK assets which are held in such trusts, so that everyone who is in scope of UK IHT pays their taxes here.”

But there is the rub, how do you determine how much of a trust’s assets should be taxed on a UK resident when those assets are not theirs?

Some countries take the Armageddon approach: if you are a UK resident beneficiary, named or otherwise of a foreign trust, then you can be taxed on its income and gains etc. The French tried this and it led to many trusts including all of the ministers in the French Government as named (discretionary) beneficiaries. Israel has a similar rule.

Such an approach would probably not affect trusts with a wide class of beneficiaries who could exclude UK tax resident individuals from benefit, but those whose beneficiaries consist of one nuclear family will find the trust of no value for UK tax purposes, but still an effective form of asset protection.