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08 Mar 2024

Budget 2024: The end of the non-dom regime and other key changes for individuals with a UK connection

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The Chancellor has delivered his last Budget before the next General Election and, as widely anticipated, has announced a significant overhaul in the UK's taxation regime for UK resident non-domiciled individuals ("non-doms").

The existing regime will be abolished, and a new "modern, simpler and fairer residency-based system" will be introduced.  This is aimed at keeping the UK competitive with other jurisdictions and indeed the proposals draw heavily on the regimes in place in Italy and New Zealand.

The new four-year regime for income and capital gains

From 6 April 2025, the current remittance basis of taxation will be abolished for UK resident non-doms. Please see box below for a brief summary of the current remittance basis regime for UK resident non-doms.

This will be replaced with a new four-year foreign income and gains (FIG) regime for individuals who become UK tax resident after a period of ten tax years of non-UK residence. Individuals who meet the conditions will not pay tax on FIG arising in the first four tax years after becoming UK tax resident and will be able to remit these funds into the UK free from any additional charges. In addition, they will not pay tax on distributions from non-resident trusts. They will, as currently, pay tax on UK income and gains.

The Statutory Residence Test will be used to determine tax residence, ignoring treaty residence or non-residence, and split years. It will be necessary to make a claim for each year the four-year FIG regime is to apply.

Individuals who make a claim for the new regime to apply will lose their entitlement to personal allowances and the capital gains tax annual exempt amount. This is the same as currently for remittance basis users.

Individuals who have been tax resident for less than four years on 5 April 2025 (and who were non-resident for a period of ten years before that) can use the new regime while they are UK resident for the remainder of the four-year period.

Example: Pierre who became resident in the UK in 2022-23, after a ten-year period of non-UK residence, will have been resident in the UK for up to three tax years on 6 April 2025. He will be able to claim under the new 4-year FIG regime for 2025-26 because this is his fourth year following a period of 10 years of non-UK tax residence.

Formerly domiciled residents

It would seem that the unfavourable regime for so called 'formerly domiciled residents' ie, those who were born in the UK with a UK domicile of origin (FDR) will be also abolished, as domicile will no longer be the connecting factor for these purposes. Based on the information thus far, they will fall within the new four-year regime (provided that they meet the ten-year non-resident requirement). Under current rules an FDR will be subject to tax on their worldwide income and gains from the first year of tax residence in the UK.

Reduced amount of foreign income subject to tax

There will be a one-year reduction in the amount of foreign income that will be subject to tax, for individuals who move from the remittance basis to the arising basis from 6 April 2025 and who are not eligible for the new four-year FIG regime.

For these individuals only 50% of the foreign income arising in the tax year 2025/26 will be subject to tax. This reduction is only for foreign income and will not apply to foreign chargeable gains.

Ending the remittance basis

The tax year 2024/25 will be the last year in which a remittance basis claim can be made. From 6 April 2025, an individual who is not at that time, or who later ceases to be, eligible for the new four-year FIG regime will be taxed on foreign income and gains in the normal way. Any FIG arising to a remittance basis user prior to 6 April 2025 will be taxed if it is remitted to the UK on or after 6 April 2025.

There are some transitional provisions:

Capital Gains Tax rebasing

If, on or after 6 April 2025, individuals who have claimed the remittance basis and are neither UK domiciled nor UK deemed domiciled by 5 April 2025 dispose of foreign assets that they personally held at 5 April 2019, they will be able to elect to rebase those assets to their value as at 5 April 2019. Conditions will apply and more detail is to follow on this.

Temporary Repatriation Facility (TRF)

In a bid to encourage non-doms to bring wealth earned overseas to the UK for both spending and investment, a new 12% rate of tax will be introduced for remittances of FIG made in tax years 2025/26 and 2026/27 in certain circumstances. This will apply where the FIG arose to the individual personally in a year when they were taxed on the remittance basis and the individual is UK resident in the relevant tax year. From 2027/28 remittances of pre-6 April 2025 FIG will be taxed at normal tax rates.

There will be some relaxation of the mixed fund ordering rules to make it easier for individuals to take advantage of this lower rate.

Overseas Workday Relief

Relief is currently available on earnings for employment duties performed outside the UK and this will continue to be available for employees who opt to use the new four-year FIG regime. The new Overseas Workday Relief (OWR) will be available for the first three tax years of UK residence. Employees who are eligible for OWR in 2023/24 for their first year since returning to the UK should still be able to claim OWR for the full three years. However, those re-entering from 2025-26 will not be able to claim OWR, if they are not eligible for the FIG regime.

The new OWR will provide relief from income tax whether or not these earnings are brought to the UK. As under the current rules, the new OWR will not provide relief from National Insurance contributions on earnings which will be determined as usual.

Protected trusts

Once an individual no longer qualifies for the four-year FIG regime, they will be taxed in the same way as a UK resident domiciled person. This includes in relation to income and gains arising within a trust settled by them, so that all such foreign income and gains would be potentially taxed in their hands as it arises.

Pre-6 April 2025 foreign income and gains within protected trusts will continue to be protected, and it appears that foreign income and gains arising in a trust during the settlor's FIG period will similarly be protected, although the exact mechanism is not clear.

Inheritance Tax

Domicile is the primary connecting factor when it comes to determining a person’s liability to IHT. The basic rule is that, if a person is either UK domiciled or deemed domiciled, they will be subject to IHT on their worldwide estate (subject to any exemptions and reliefs that may apply). A person who is neither UK domiciled nor deemed domiciled is generally only liable to IHT in respect of property situated in the UK. There are special rules however which bring certain non-UK assets within the scope of IHT if they derive their value from UK residential property.

Again, the government intends to move to a residence-based system from 6 April 2025. This will be the subject of a consultation, however, we have some general proposals. Where a person meets the 'residence criteria' i.e., they have been resident in the UK for ten years they will be subject to IHT on their personally owned worldwide assets.

There is to be a 'tail' provision to keep a person within the scope of IHT for ten years after leaving the UK. This would be a significant extension of the current domicile-based regime where a person continues to be deemed domiciled for IHT purposes for the first three years of non-residence. As such, they are only subject to IHT on their worldwide estate until the start of their fourth year of non-UK residence.

Settled property

The Technical Note states that the current IHT treatment will continue for non-UK property settled by a non-UK domiciled settlor prior to 6 April 2025. So planning over the next year for non-doms who are currently in the UK or planning to come to the UK in the near future will be crucial.

New trusts settled on or after 6 April 2025 by non-UK dom settlors will be subject to the new residence-based rules. This is subject to consultation, but it is proposed that chargeability of trust assets will depend on whether the settlor meets the residence criteria or is within the ten year tail provision at the time assets are settled and/or when a charge arises e.g. the ten-year anniversary or exit charges apply.

The IHT treatment of non-UK property comprised in a settlement where the settlor is a formerly domiciled resident is to be subject to consultation. Currently such property comes back into the scope of IHT from the second year of a settlor's tax residence in the UK -there is a one-year grace period.

Additions to a pre-6 April 2025 settlement made after that date will be subject to the new residence-based rules so that any such additions would be relevant property for IHT purposes.

For now, we only have the brief technical notes issued by the Treasury and HMRC to go on and we need to see the legislation before giving detailed advice. In addition, we need to see the outcome on the consultation on IHT. It is worth noting of course that the outcome of this year's election may also result in amendments to the proposals if the Labour party come into power. We will be following progress closely.

Other key changes for individuals with a UK connection

For international individuals the non-dom changes are certainly the headline grabbing news but some other changes of interest to individuals were announced as follows:

Transfer of Assets Abroad

The Transfer of Assets Abroad (TOAA) code creates UK tax liabilities for UK tax resident individuals who transfer assets so that income arises to a person abroad not subject to UK tax.

The government has acted to close a gap in the legislation exposed by the recent Supreme Court decision in the Fisher case where it was held that the TOAA rules only applied to an individual making a transfer and not where a UK company (albeit owned by one family) made the transfer abroad. The TOAA legislation will be amended so that individuals who are participators in a close company, or a non-resident company that would be close if it were UK resident, will be deemed to be transferors to address situations where transfers are made by such companies. As currently provided in the legislation, this change will not impact transactions where there is no tax avoidance purpose or where the transactions are genuine commercial transactions.

Reduction in CGT rate for residential property

Gains on disposals of residential property that does not quality for private residence relief are taxed at 18% or 28% (depending on how much of the individual's basic rate income tax band is left). With effect from 6 April 2024 the higher CGT rate will be cut from 28% to 24%.

The lower rate of 18% will remain the same and Private Residence Relief will continue to apply.

Gains for disposals of relevant residential property are currently taxed at a flat rate of 28% for settlements and personal representatives and this will also be reduced to 24%.

SDLT on multiple dwellings

Multiple Dwellings Relief (MDR) is to be abolished from 1 June 2024. This relief currently applies to people purchasing more than one dwelling in a transaction (or in a number of linked transactions). It allows the purchaser to calculate the tax based on the average value of the dwellings purchased as opposed to their aggregate value.

Property transactions with contracts exchanged on or before 6 March 2024 will continue to benefit from MDR (even if the contracts complete after that date). Property transactions that complete prior to 1 June 2024 will also still benefit from MDR.

VAT registration threshold

From 1 April 2024 the VAT registration threshold will be increased from £85,000 to £90,000. The deregistration VAT threshold will be increased to £88,000.

Income tax and capital gains tax for UK resident non-doms: current regime

A person who is non-UK tax resident is only chargeable to UK tax in very limited circumstances. For income tax purposes, this broadly only applies to UK rental income or trading income. Whilst for CGT purposes, a non-UK resident person is only charged on the disposal of UK real estate (or shares of a company which derives its value from UK real estate).

A person who is UK tax resident will usually be charged to UK income tax and CGT on their worldwide estate on the 'arising basis'. However, where an individual is UK resident and non-UK domiciled and has not become deemed domiciled, they can benefit from the 'remittance basis of taxation'.

They will be taxed on their UK income and chargeable gains on the arising basis however, they will only be taxed on their foreign income and chargeable gains which are brought to, used in or 'remitted' to the UK.

It is necessary to elect for the remittance basis to apply. For those who are resident in the UK for a longer period of time, a remittance basis charge must be paid. This is set at £30,000 for individuals who have been UK resident in seven or more of the nine tax years before the year of claim, increasing to £60,000 for individuals who have been UK resident in 12 or more of the 14 tax years before the year of claim.

Once an individual has been resident for 15 out of the previous 20 tax years they will become deemed domiciled and will no longer be able to take advantage of the remittance basis.

 
Information contained in this note is current as at the date of first publication and is for general information only. It is not intended to provide legal or tax advice.

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