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In the Spring Budget 2024, the previous government unexpectedly announced their plans to “abolish the concept of domicile”. They proposed a new regime for Foreign Income and Gains (FIGs), to replace the current remittance basis regime from 6 April 2025. They also announced their intention to change the existing inheritance tax rules to a residence-based regime.
Whilst we have had a change of government since the Spring Budget, these proposals represent ideas that were originally put forward by the Labour Party. On 29 July 2024, the current Labour government published a policy summary making clear that by and large they have adopted the plans announced by the last government; with some important distinctions, and some points yet to be decided.
Foreign income and gains (FIGs)
The policy paper confirms that with effect from 6 April 2025 Labour will remove the concept of domicile status from the tax system and implement the new residence-based the 4-year FIGs regime. The key points are as follows:
- Relief from tax on FIGs for new arrivals – As announced by the previous government there will be 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. This means offshore funds can be freely used and brought into the UK during this initial period, without being subject to UK taxation.
- Removal of protected trust status – From 6 April 2025, the protection from UK tax on FIGs arising within UK settlor-interested trusts will no longer be available for non-dom and deemed dom individuals who do not qualify for the 4-year FIGs regime.
- Rebasing for CGT – Transitionally, for CGT purposes, current and past remittance basis users will be able to rebase their foreign capital assets to their value at a yet to be confirmed rebasing date; this will be set out at the Budget in October. The previous government had provided for an April 2019 rebasing date.
- No transitional 50% reduction on income – The government will not introduce the previously announced 50% reduction in foreign income subject to tax for individuals who lose access to the remittance basis in the first year of the regime (i.e. 2025/26).
- Pre-6 April 2025 FIGs
- Any FIGs that arose before 6 April 2025, while an individual was taxed under the remittance basis, will continue to only be taxed when remitted to the UK, as under the current rules. This includes remittances for those who are already resident but still eligible for the new 4-year FIG regime.
- The previously announced Temporary Repatriation Facility (TRF) will be available for individuals who have been taxed on the remittance basis. They will be able to remit FIGs that arose prior to 6 April 2025 and pay a reduced tax rate on the remittance for a limited period after the remittance basis has ended. The rate and the length of time of the TRF will be set to make use “as attractive as possible”. The previous government had said the TRF rate would be 12% for the 2025/26 and 2026/27 tax years.
Inheritance tax (IHT)
The new government will proceed with moving IHT to a residence-based regime. The paper confirms that the basic test for whether non-UK assets are in scope for IHT from 6 April 2025 will be whether a person has been resident in the UK for 10 years prior to the tax year in which the chargeable event (i.e. death, a gift, or settlement of a trust) arises, with provision to keep a person in scope for 10 years after leaving the UK. This will undoubtedly cause some individuals to accelerate their plans to leave the UK to avoid having such a long period during which their worldwide estate is potentially subject to IHT.
Under current rules, where a non-domiciled individual settles non-UK assets onto an offshore trust, those assets remain outside the scope of IHT, even if the settlor subsequently becomes UK domiciled/deemed domiciled. These trusts are referred to as excluded property trusts.
The policy summary confirms that the use of excluded property trusts will end from 6 April 2025 but stops short of confirming what will happen to those trusts established prior to that date. Disappointingly, the government will not carry out a formal consultation on the IHT changes but has stated there will be further external engagement over the summer.
What to do next
It is clear that non-doms and trustees have a hard deadline of April 2025 before these dramatic new changes are implemented. It is important that advice is taken as soon as possible on what options are available, including on how to optimise existing structures.
It looks like we will have to wait until the Autumn Budget on 30 October 2024 for clarity on the points left unconfirmed in the policy paper, which means time is of the essence for clients to put themselves in the best position possible going forwards. The Chancellor has also signalled the need for tax increases, so many clients will be looking to take advantage of the current CGT rates and generous IHT reliefs. Please see our previously published Non-Dom Checklist for further information: What does the 4 July Election mean for Non-Doms? – Michelmores
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