Autumn Budget 2024: changes to non-dom tax
The Chancellor has confirmed that the current remittance basis regime for non-UK domiciled individuals will be replaced with a residence-based regime from 6 April 2025. What does this mean for non-doms?
Under current law, a non-UK domiciled individual (broadly someone whose origins are outside the UK and who does not intend to remain in the UK permanently), is able to claim to be taxed on the ‘remittance basis’, until they have been resident in the UK for 15 of the past 20 tax years. Under the remittance basis, an individual is subject to UK tax only on UK-source income and gains, and on any non-UK income and gains that are remitted to the UK.
In his Budget speech in March 2024, the former Conservative Chancellor announced that the remittance basis would be abolished from 6 April 2025 and replaced with a new ‘foreign income and gains’ regime.
The current Labour Chancellor has adopted the main aspects of these rules, with some clarifications, mainly to the available transitional measures and the inheritance tax rules.
Foreign income and gains regime (FIG regime)
Under the FIG regime, individuals will not pay tax on foreign income and gains for the first four years after becoming UK tax resident. The regime will be available, subject to a claim being made by the taxpayer, for those coming to the UK either for the first time or after an absence of more than 10 years irrespective of domicile status.
Taxpayers who choose to use the regime will not be entitled to an income tax personal allowance or capital gains tax annual exemption for the relevant tax year and they will not be able to claim relief for foreign income losses and capital losses in the year of the claim.
If a taxpayer does not qualify for the FIG regime, they will be subject to UK tax on worldwide income and gains, irrespective of whether or not income and gains are remitted to the UK. Such individuals may be able to claim credit for tax paid overseas depending on the terms of any relevant tax treaty.
Income and gains that arose in an earlier tax year when the remittance basis was claimed will still be taxed if they are remitted to the UK. Taxpayers may still need to be aware of the rules around remittances and maintain records of the composition of any ‘mixed’ accounts used to fund UK spending.
Transitional arrangements
The new rules include two transitional arrangements, available to existing non-UK domiciled individuals:
- A temporary repatriation facility (TRF) will be available for individuals who have been taxed on the remittance basis at any time before 6 April 2025. These individuals will be able to designate existing pre-6 April 2025 foreign income and gains on which a reduced tax rate will be paid on the income and gains at the time of designation. The facility will be open for three years, from 6 April 2025. The tax rate will be set at 12% for income and gains designated before 6 April 2027, rising to 15% in 2027/28.
Designated income and gains on which the TRF charge has been paid can then be remitted to the UK with no further tax being due. The actual remittance does not need to be made within the TRF window and could be made in a later tax year.
The current rules for ordering remittances from mixed funds will be adjusted, so that income and capital gains designated under the TRF will always be treated as remitted to the UK in priority to other amounts comprised in the mixed fund.
The TRF will also be available for settlors and beneficiaries of non-UK resident trusts, who receive capital payments and benefits that match to trust income and gains. To qualify, the benefit must be received in the TRF window and the trust income and gains must have arisen within the trust before 6 April 2025.
- There will be an option to rebase (for capital gains tax ‘cost’ purposes) the value of non-UK capital assets to their value on 5 April 2017. This will be available for individuals who are currently non-UK domiciled and not deemed-UK domiciled under existing rules, who have claimed the remittance basis in any tax year from 2017/18. The asset must have been situated outside the UK from 6 March 2024 to 5 April 2025, subject to existing rules around temporary importations.
Those who qualified for the rebasing rules under the 5 April 2017 changes (those becoming deemed UK domiciled from 6 April 2017 who had claimed the remittance basis), will be unaffected by this rule.
The previous Government’s proposed 50% reduction in the amount of foreign income assessable on former remittance basis users from 2025/26 has been scrapped.
Overseas workday relief (OWR)
Under existing rules, inbound non-UK domiciled employees can benefit from an income tax exemption on income from non-UK duties for the first three years of UK residence, subject to that income being received outside the UK and not being remitted to the UK.
From 6 April 2025, there will no longer be a requirement to keep the income offshore, meaning that the overseas element of the employment income can be brought to the UK without a tax charge. The ability to claim OWR will be available for the first four tax years after becoming UK resident, aligned with the qualifying period for the FIG regime. OWR will be limited to the lower of 30% of qualifying employment income and £300,000.
Taxpayers who claim relief under OWR will not be entitled to an income tax personal allowance or capital gains tax annual exemption for the tax year of the claim and they will not be able to claim relief for foreign income losses and capital losses in that tax year.
Income and gains of non-UK resident trusts
From 6 April 2025, protection from tax on income and gains arising within settlor-interested trusts will no longer be available and the foreign income and gains will be taxable on the settlor, unless the settlor qualifies for and claims the FIG regime.
If the trustees have made a ‘2008 rebasing election’, the effect of that election will continue for the purpose of calculating capital gains realised by the trustees after 5 April 2025.
If a trust beneficiary, who receives a payment or benefit from a non-UK resident trust that would otherwise match to trust income and gains, qualifies for and claims the FIG regime, the payment or benefit will not be taxable. The pool of trust income and gains will not, however, be reduced in these circumstances subject to modified onward gifting and close family member rules.
Inheritance tax
A residence-based regime will be introduced for inheritance tax (IHT), to take effect from 6 April 2025.
New arrivers to the UK will not be subject to IHT on non-UK assets for the first 10 years after becoming UK resident. After this, IHT will be chargeable on the taxpayer’s worldwide estate.
There will be a ‘tail provision’ to keep a taxpayer within the scope of UK inheritance tax on their worldwide assets for a period after ceasing to be UK resident. The length of the IHT tail will depend on how long the individual was UK resident for. Individuals who had been UK resident for between 10 and 13 of the previous 20 tax years before they left the UK will remain in the scope of IHT for three tax years after ceasing to be UK resident. The tail will then increase by one tax year for every additional tax year of residence, so an individual who was UK resident for all of the previous 20 tax years will remain in the scope of IHT for 10 tax years after leaving the UK.
Individuals who are within the scope of worldwide IHT will be referred to as ‘long-term residents’.
There will be a transitional rule for individuals who are neither UK resident nor UK domiciled in 2025/26. Those individuals will only be treated as long-term residents if they meet the current conditions to be deemed UK domiciled, which requires them to have been UK resident for 15 of the previous 20 tax years and for one of the four tax years ending in the current tax year. If those individuals resume UK residence, then the new IHT rules for determining long-term residence status will apply to them.
The IHT status for assets held in a trust will depend on the long-term residence status of the settlor at the time of the chargeable event. This means that assets held in trusts might move in and out of the scope of UK inheritance tax depending on the status of the settlor at the relevant time.
The new IHT rules for trustees will apply to all trusts regardless of whether they were created before or after 6 April 2025 and regardless of the domicile or deemed-domicile status of the settlor at the time of the settlement. The only exception to this rule is where a settlor has died before 6 April 2025. In such cases, non-UK assets held in the trust will continue to be excluded property for IHT purposes if the settlor was neither UK domiciled nor deemed UK domiciled when the settlement was made. This grandfathers existing IHT rules for trusts with deceased settlors.
Where non-UK assets have been settled into a trust and the settlor has retained a benefit, the assets will be subject to IHT under the gift with reservation of benefit regime if the settlor is a long-term resident at the time of their death. There will be an exemption for non-UK assets that were added to excluded property trusts before 30 October 2024. Such assets will be subject to the relevant property regime, so will be chargeable to IHT on trust 10-year anniversaries and exits after 6 April 2025.
There is now a short window during which affected taxpayers should take the opportunity to review their tax affairs and plan for how the new tax regime will affect them in the future.
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Detailed analysis
The Autumn Budget brought significant announcements in relation to inheritance tax (IHT) for landowners and business owners. While the existing nil-rate band and residential nil-rate band will remain unchanged, important reliefs for business property and agricultural property will be restricted from 6 April 2026. The inheritance of unused pension funds at death will also be brought within the scope of IHT.
Summary
IHT rate bands
IHT is a capital tax paid on the value of an estate on death and on certain chargeable lifetime gifts. The current rate of IHT is 40%.
An estate valued up to the nil-rate band (NRB) of £325,000 can be inherited without IHT. Any unused NRB of an individual can also be passed to their surviving spouse or civil partner. A further residential nil-rate band (RNRB) of up to £175,000 is available to reduce the value of an estate if a family home is left to direct descendants. Like the NRB, an amount of up to 100% of the unused RNRB can be passed on to a surviving spouse. A potential combined NRB and RNRB of up to £1m may therefore be available for a married couple whose joint estate is worth £2 million or less.
The Chancellor announced that the current NRB and RNRB will not change and has also frozen them at current thresholds for a further two years until 5 April 2030.
Business and agricultural property relief
Current rules allow relief from IHT for the value of trading business assets or agricultural land and property gifted during lifetime or held at the time of death. Broadly speaking, 100% business property relief (BPR) is available for a trading business, or an interest in a business, and unlisted shares in a trading company.
A 50% relief applies to some other forms of business assets, such as assets used by a trading business.
100% agricultural property relief (APR) is available for land or pasture used to grow crops or rear farm animals as well as associated property such as farmhouses and cottages. Relief can be restricted to 50% depending on the asset and tenancy arrangements.
Qualifying Alternative Investment Market (AIM) shares have historically qualified for 100% BPR, when held for more than 2 years.
Changes introduced
From 6 April 2026, the availability of BPR and APR at 100% will be limited to a total allowance of £1 million. The balance of qualifying assets will be eligible for relief at 50%. The rate of 50% applying to certain business and agricultural property will remain unchanged.
This new allowance will apply to the combined value of business property or agricultural property and will cover transfers during lifetime and the value of property in a death estate.
For example, the allowance could be divided across £750,000 of property qualifying for BPR and £250,000 of property qualifying for APR.
If the total value of the qualifying property to which 100% relief applies is more than £1 million, the allowance will be applied proportionately across the qualifying property. For example, if there was agricultural property of £6 million and business property of £4 million, the allowances for the agricultural property and the business property will be £600,000 and £400,000 respectively.
Assets automatically receiving 50% relief will not use up the allowance and any unused allowance will not be transferable between spouses and civil partners.
AIM shares will qualify for relief at 50%.
Anti-forestalling measures will be introduced in relation to lifetime transfers made on or after 30 October 2024 where the transferor passes away on or after 6 April 2026, meaning the £1 million limit could apply to those gifts.
The £1 million allowance also applies to trusts. Trustees of most trusts are liable to an IHT charge of up to 6% every ten years on the value of property held in a trust. There is also an exit charge when property leaves the trust. The £1 million allowance will apply to the combined value of property qualifying for BPR and APR within the trust, on each ten-year anniversary charge and exit charge. A consultation is expected in early 2025 covering the detailed application of these changes for property held in trust.
Settlors may have set up more than one trust comprising qualifying business or agricultural property before 30 October 2024, each trust would have a £1 million allowance for 100% relief from April 2026. The Government intends to introduce rules to ensure that the allowance is divided between these trusts where a settlor sets up multiple trusts on or after 30 October 2024.
Another update to IHT is that the Government will introduce legislation to extend the existing scope of APR from 6 April 2025 to land managed under an environmental agreement with, or on behalf of, the UK Government, devolved governments, public bodies, local authorities or approved responsible bodies.
Inherited pensions
Currently, the value of most pensions is outside the scope of IHT. From April 2027, the Government will bring unused pension funds and death benefits payable from a pension into an estate for IHT purposes.
Our comment
While changes to BPR and APR were anticipated, the precise form of any changes was uncertain and did not feature in the Labour manifesto. Amid concerns that the relief could be removed entirely, it is welcome to see commitment to maintaining the relief in some form.
These changes will have a significant impact for the owners of private businesses and agricultural assets, as well as their families. Careful thought will now need to be given to how these businesses can be continued by the next generation, as well as how families will be able to meet the IHT liabilities they are now exposed to.
As an example, the estate of a qualifying trading business owner with unlisted shares valued at £11m would now have a potential exposure to IHT of £2m, potentially without other liquid assets to pay it. This could call the long-term viability of some succession plans into question, particularly if family members are faced with a decision of selling the business to settle an IHT liability.
Understanding your IHT exposure is therefore crucial, particularly if your estate includes high value business assets, agricultural land or an inherited pension fund.
What may have previously been exempt or covered by 100% relief, may now be chargeable and be exposed to IHT at 40%.
The Chancellor has announced that the current remittance basis regime for non-UK domiciled individuals will be replaced with a residence-based regime from 6 April 2025.
Summary
Under current law, a non-UK domiciled individual (broadly someone originating from outside the UK who does not intend to remain in the UK permanently) can elect to be taxed in the UK on the ‘remittance basis’, until they have been resident in the UK for 15 out of the past 20 tax years. Individuals who use the remittance basis are only taxed on non-UK income and gains that are brought to, received or used in the UK. The Government will replace this regime with one based on tax residence from 6 April 2025.
Under the new foreign income and gains regime (FIG regime), qualifying individuals will not pay tax on foreign income and gains for the first four years of UK tax residence provided they have not been UK tax resident in the ten tax years prior to their arrival, irrespective of domicile status. Taxpayers who choose to use the FIG regime will not be entitled to an income tax personal allowance or capital gains tax (CGT) annual exemption for the relevant tax year.
The following transitional arrangements will be available to existing non-UK domiciled individuals after 6 April 2025:
- an option to rebase the value of capital assets to their value on 5 April 2017 where particular conditions are met. This will be available for individuals who are currently non-UK domiciled and not deemed-UK domiciled under existing rules, who have claimed the remittance basis
- a three-year temporary repatriation facility, which will allow individuals who have previously claimed the remittance basis to remit existing pre-6 April 2025 foreign income and gains to the UK at reduced tax rates of 12% rising to 15% from 6 April 2027
From 6 April 2025, the protection from tax on foreign income and on capital gains arising within settlor-interested trusts will no longer be available. This means that the income and gains will be taxable on the settlor unless the settlor qualifies for and claims the FIG regime. There have also been updates to rules around matching trust income and gains to distributions to beneficiaries who claim the FIG regime and to rules on onward gifts and distributions to close family members of the settlor.
Overseas workday relief rules will also be revised from 6 April 2025. Under existing rules, inbound non-UK domiciled employees can benefit from an income tax exemption on income from non-UK duties for the first three years of UK residence, subject to that income not being remitted to the UK. The new rules will extend the relief to the first four years of UK residence, whilst removing the requirement to keep the income offshore. This means that the overseas element of the employment income can be brought to the UK without a tax charge. This is subject to a limit of the lower of £300,000 and 30% of an individual’s total employment income.
A new residence-based regime will be introduced for inheritance tax (IHT). There will be a ten year exemption from IHT on non-UK assets for new ‘arrivers’ and a ‘tail-provision’ to keep a taxpayer within the scope of UK IHT on worldwide assets for a period after leaving the UK. The length of the period covered by the tail provision will depend on how long the individual was UK resident for before they left. Individuals who are within the scope of UK IHT on worldwide assets will be referred to as ‘long-term residents’.
In most cases, the IHT status of assets held in trusts will depend on the long-term residence status of the settlor at the time of the chargeable event. This means that assets held in trusts might move in and out of the scope of UK IHT depending on the status of the settlor at the relevant time. These rules will apply to all trusts regardless of whether they were created before or after 6 April 2025 and regardless of the domicile, or deemed-domicile status, of the settlor at the time of the settlement. The only exception to this rule is where a settlor has died before 6 April 2025. In such cases, non-UK assets held in the trust will continue to be excluded property for IHT purposes if the settlor was neither UK domiciled nor deemed-UK domiciled when the settlement was made.
Our comment
The previous Conservative Government had already announced some of these changes, so it was well anticipated that the Labour Government would replace the non-UK domicile regime.
The Government will hope that the new rules can still attract individuals to the UK. New arrivers will not be taxed on funds that they bring to the UK, whereas existing rules charge tax on remittances of foreign income and gains that arise after an individual becomes UK resident. Longer term UK residents stand to lose out, particularly if they had anticipated using the remittance basis beyond 5 April 2025 or if they benefit from either of the existing protected trust and excluded property regimes for offshore trusts.
Individuals becoming taxed on a worldwide basis may need to give greater consideration to international tax treaties.
The IHT and trust, in particular the IHT ‘tail’ provisions, are likely to be of significant concern to non-UK domiciled individuals and the trust changes are likely to significantly increase compliance burdens.
There is now a window of just a few months, during which time affected taxpayers should take the opportunity to review their tax affairs and plan for how the new tax regime will affect them in the future.
