While she was speaking, her colleagues at the Treasury published a policy paper providing an update on the planned changes to the UK’s taxation of so-called non-doms.
As a reminder, the remittance basis of taxation currently gives UK tax resident non-doms (i.e. individuals living in the UK but who have not decided to live here permanently or indefinitely) the ability to choose to pay UK income tax and CGT only on income and gains generated in the UK or brought to the UK. Non-UK income and gains are not subject to UK tax provided they remain outside the UK. From an inheritance tax (IHT) perspective, only assets owned by non-UK doms that are situated in the UK are within the scope of IHT.
The policy papers confirmed that the Government is committed to abolishing the non-doms remittance basis of taxation from 6 April 2025 and that they intend to replace it with a foreign income and gains regime. This was not a surprise as it had been announced before the election but it does leave only 8 months for taxpayers to consider the position and take any action.
In respect of income tax and CGT, the policy papers also set out that:
- The 50% reduction on foreign income arising in the 2025/26 tax year for those who lose access to the remittance basis (proposed by the outgoing Government), will not be introduced. The Labour Party also indicated that this would not be included as part of the election manifesto so this is again not a surprise.
- There will be a Temporary Repatriation Facility (TRF) for pre-6 April 2025 unremitted income and gains, but the rate and length of the facility will be announced as part of the Budget (the Conservative Government proposed a two year window at a tax rate of 12%. The expectation is that the TRF rate will now be higher).
- The proposal by the previous Government was for non-UK doms to be able to rebase their assets to 5 April 2019. Whilst the new Government has confirmed that there will be rebasing for past and current remittance basis users on their foreign assets, the date of the rebasing will be reviewed and announced as part of the Budget.
- The application of anti-avoidance legislation to non-UK structures held by UK resident individuals will be reviewed and consulted on. Changes will then be implemented from 6 April 2026. The expectation is that HMRC will look closely at how they can better apply the so-called ‘motive defence’ to non-UK structures.
The policy papers also confirmed that the IHT regime will move from a domicile-based system to be replaced with a residence-based test from 6 April 2025. We have addressed these changes in detail previously and articles can be found on our website and in our June newsletter. As a brief recap:
- An individual’s IHT liability in the future will depend on the individual’s residence rather than the domicile. Whether the assets are UK or non-UK sited will therefore be irrelevant going forward. Broadly it is proposed that, regardless of an individual’s domicile position, if they have 10 years of UK tax residence, the individuals will be subject to UK IHT on their worldwide assets. This will be a significant change for UK based non-doms who don’t currently have their non-UK assets exposed to UK IHT.
- An individual will now continue to have their worldwide assets within the scope of UK IHT for the first 10 years after leaving the UK – an exposure to UK IHT that doesn’t currently exist.
- Trusts created after 6 April 2025 will be brought within the new residence-based regime. The policy papers indicated that individuals within the scope of UK IHT will pay IHT in relation to non-UK assets held in the trust (possibly through 10 year and exit charges as set out in the existing UK domiciled trust regime).
The policy papers also confirmed that there is no longer an intention for there to be a full consultation on the new IHT regime; instead the Treasury will review stakeholder feedback received since the proposals were originally announced in the 2024 Spring Budget and use this to guide their way forward.
We still await the full legislation which is expected around the time of the Budget so there is still some uncertainty. The proposed changes are significant though and their implementation is not far away. Advice should therefore be taken sooner rather than later to determine the potential impact.
Given the complexities of the changes there may be a temptation to leave the UK and break UK residency before 6 April 2025. The UK’s tax residency regime is also complex however and care and expert advice should be taken if breaking UK tax residency is something being considered.
If you would like to discuss the proposals or your current and future residency position, please contact Diane Nettleton on 01633 653167 or Diane.Nettleton@kilsbywilliams.com. Alternatively, please contact your usual advisor on 01633 810081 or email info@kilsbywilliams.com
