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After months of speculation and uncertainty surrounding the new government’s first Budget, it has finally landed today. Chancellor Rachel Reeves says the Budget will raise taxes by £40bn aimed at plugging a “black hole” in public finances. So, what does this mean for international and HNW clients with UK interests?
Overall the tax rate increases are not as dramatic as were feared, but the changes to the taxation of non-doms, offshore trusts and Business Property Relief from inheritance tax will be disappointing to many.
First off, the headline announcements are that:
- The freezes on income tax and National Insurance thresholds will end in 2028.
- The capital gains tax (CGT) lower rate will increase from 10% to 18%, and the higher rate from 20% to 24%, from 30 October 2024. Notably, the new rates will match the residential property rates, which are not changing.
- The rates for CGT reliefs, Business Asset Disposal Relief and Investors’ Relief, will increase gradually, to 14% from 6 April 2025, and will match the main lower rate of 18% from 6 April 2026.
- The IHT thresholds freeze will be extend beyond 2028 to 2030.
- From 6 April 2026, Agricultural Property Relief and Business Property Relief (BPR) will be reformed so that the 100% rate of relief will continue for the first £1 million of combined agricultural and business assets, and will be 50% thereafter. BPR is heavily relied on by both resident and non-resident individuals and trustees. A thorough review of existing arrangements and structures will be required.
- The SDLT surcharge on additional homes will be increased from 3% to 5% from 31 October 2024.
- There will be no change to the main corporation tax rate, which still stay at 25% until the next election.
- From April 2026, carried interest will be taxed fully within the income tax framework with “bespoke rules to reflect its unique characteristics”. Ahead of this, the CGT rates applied to carried interest will be increased to 32% from April 2025.
The other main announcements concern the taxation of non-doms and non-resident trusts. Please see our previous briefing note where we summarised the government’s policy paper concerning the abolishment of the non-domicile regime and replacement with a residency-based system. There were a number of areas where we were awaiting clarity, which have now been confirmed in the dedicated technical note released alongside the Budget. This confirms that:
- The current non-dom and remittance basis regime will be replaced by a 4-year relief from foreign income and gains (FIGs) for new arrivals. This will provide for a 100% relief on FIGs for new UK arrivals in their first four years of tax residence, provided they have not been UK tax resident in any of the 10 consecutive years prior to their arrival (4-year FIG Regime).
- Like the remittance basis, the 4-year FIG Regime will need to be claimed each year, with the added requirement that individuals quantify and disclose their FIGs when making the claim in their return. Unlike the remittance basis, there will be no charge for bringing into and using FIGs in the UK.
- The protection from tax on FIGs arising within UK settlor-interested trusts will no longer be available for settlors who do not qualify for the new 4-year FIG Regime. Therefore, existing trusts (as well as new ones) will be taxed on an arising basis from 6 April 2025, but FIGs that arose prior to that date will not be taxed unless distributed to a UK resident beneficiary (just like under the current rules).
- The transitional rebasing date for CGT has been confirmed, for current and past remittance basis users. These individuals will be able to rebase their foreign assets to 5 April 2017 on a post-6 April 2025 disposal, so long as certain conditions are met.
- The Temporary Repatriation Facility (TRF) will be available to individuals who have been taxed on the remittance basis and who have untaxed FIGs. For a period of 3 years, they will be able remit pre-6 April 2025 FIGs at a rate of 12% from 2025/26 to 2026/27, which will increase to 15% for 2027/28.
- The domicile-based IHT system will also be replaced with a residence-based system, with individuals who have been resident in the UK for at least 10 out of the last 20 tax years (a ‘long-term resident’) being in the scope of IHT in respect of their worldwide estate. For individuals who then leave the UK, the IHT-tail (being the amount of time they remain in scope) will be shortened as follows:
- Where they have been resident between 10 and 13 years (out of the last 20 years) = 3-year IHT tail
- This will then increase by one tax year for each of additional residence, so:
- 14 years (out of the last 20) = 4-year IHT tail
- 15 years (out of the last 20) = 5-year IHT tail
- And so on, until at 20 years a 10-year IHT tail will apply.
- There will be transitional rules for individuals who are non-resident in the 2025/26 year and are both non-UK domiciled and non-UK deemed domiciled. We are aware of several individuals who are in this position (usually having left the UK more than 4 years ago), who will need advice on navigating the transitional rules and effectively mitigating their exposure to IHT.
- Excluded property trust status of non-UK settled assets will not be fixed at the time the assets are added to a settlement. Regardless of when the settlement is created, when a settlor is a long-term resident, any assets they have settled (even when they were not a long-term resident) will be subject to IHT.
- This means trusts with non-UK resident settlors (regardless of the status of the beneficiaries) will not automatically fall within the scope of IHT as a result of these new rules. The status of trusts with deceased settlors will continue to look at the domicile position of the settlor at the time the trust was settled.
There is still plenty to digest as we work through all the changes and technical points. We will continue to provide updates on specific taxes and planning opportunities over the course of the month. Please contact a team member for more information and formal advice.
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