Blog – 5 August 2024

The Chancellor’s Statement on Public Expenditure inheritance

Om 29 July the Chancellor announced next steps and draft legislation on priority tax commitments ahead of a full announcement and costing at the Budget, which is now due to be held on 30 October 2024. ?

A summary of two of the six measures announced concern the provisions for non-UK domiciled individuals and furnished holiday lettings.

Changes to the taxation of non-UK domiciled individuals - updated 31 July 2024

As announced by the previous Government in the 2024 Spring Budget the concept of domicile status will be removed and a new residence-based regime will be implicated. The government will implement the 4-year foreign income and gains (FIG) regime announced by the previous government However, as Labour stated at the time the Conservative’s proposals left several advantages for existing non-doms, which Labour is committed to ending. It will also review some other key areas of the previously announced reforms to ensure the new regime is both fair and as competitive as possible.

Also as already announced the Government will remove preferential tax treatment based on domicile status for all new foreign income and gains (FIG) that arise from 6 April 2025. To replace the remittance basis of tax, the government will introduce a residence-based regime, providing 100% relief on?FIG?for new arrivals to the UK 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. ?

From 6 April 2025, the protection from tax on income and gains arising within settlor-interested trust structures will no longer be available for non-domiciled and deemed domiciled individuals who do not qualify for the 4-year?FIG?regime.

The government intends to conduct a review of offshore anti-avoidance legislation, including the Transfer of Assets Abroad and Settlements legislation, to modernise the rules and ensure they are fit for purpose. The intention for this review will be to remove ambiguity and uncertainty in the legislation, make the rules simpler to apply in practice and ensure these anti-avoidance provisions are effective. It is not anticipated that this review will result in any changes before the start of the 2026/27 tax year.

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Transitional arrangements for affected non-UK domiciled individuals

The policy announced by the previous government, providing a 50% reduction in foreign income subject to tax for individuals who lose access to the remittance basis in the first year of the new regime, will not be introduced.

UK resident individuals who are ineligible for the 4-year?FIG?regime (or who choose not to make a claim for a tax year) will be subject to Capital Gains Tax (CGT) on foreign gains in the normal way. Transitionally, for?CGT?purposes, current and past remittance basis users will be able to rebase foreign capital assets they hold to their value at the rebasing date when they dispose of them. The government is considering the appropriate rebasing date and will set this out at the Budget. The Conservatives proposed that transitional rules would apply for individuals who have claimed the remittance basis and are neither UK domiciled, nor UK deemed domiciled by 5 April 2025. ?The intention was if on or after 6 April 2025 they dispose of an asset, they personally held on 5 April 2019 they would have been able to elect to rebase that asset to its value on 5 April 2019.

Any?FIG?that arose before 6 April 2025, while an individual was taxed under the remittance basis, will continue to be taxed when remitted to the UK, as is the case under the current rules. This includes remittances of pre-6 April 2025?FIG?for those who are eligible for the new 4-year?FIG?regime.

A new Temporary Repatriation Facility (TRF) will be available for individuals who have been taxed on the remittance basis. Individuals that have previously claimed the remittance basis will be able to remit?FIG?that arose prior to 6 April 2025 and pay a reduced tax rate on the remittance for a limited time period after the remittance basis has ended. The rate and the length of time that the?TRF?will be available will be set to make use as attractive as possible.

The government is also exploring ways to expand the scope of the?TRF, including to stockpiled income and gains within overseas structures, and will confirm further details at the Budget.

New residence-based regime for Inheritance Tax

Inheritance tax (IHT) is currently a domicile-based system. The government intends to implement the Conservative’s proposals and replace this with a new residence-based system from 6 April 2025.This will affect the scope of property brought into UK IHT for individuals and trusts.

The government envisages 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 (including death) arises, with provision to keep a person in scope for 10 years after leaving the UK. The government will engage further with stakeholders on the operation of the new test, so that any refinements can be considered fully. IHT charges arising on deaths occurring before 6 April 2025 will be unaffected by these changes and will be charged according to the existing rules.

The government will end the use of Excluded Property Trusts to keep assets out of the scope of IHT. The government intends to change the way IHT is charged on non-UK assets which are held in such trusts, so that everyone who is in scope of UK IHT pays their taxes here. Confirmation of these new rules and their detailed application, including transitional arrangements for affected settlors, will be published at Budget, following external engagement.?

The Conservatives proposed a Consultation around a newly proposed IHT system. Labour will not carry out a formal policy consultation on moving to a residence-based system for IHT. Instead, it will review stakeholder feedback provided following the Spring Budget and officials will carry out further external engagement over the summer on IHT policy design.

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Furnished Holiday Lettings (FHL) abolition – Policy paper 29 July 2024

The current rules provide beneficial tax treatment for furnished holiday lettings compared to other property businesses in broadly four key areas:

• exemption from finance cost restriction rules (which restrict loan interest to the basic rate of Income Tax for other landlords)
• more beneficial capital allowances rules
• access to reliefs from taxes on chargeable gains for trading business assets
• inclusion as relevant UK earnings when calculating maximum pension relief

To qualify as a furnished holiday let, properties:

• must be available for short-term letting to the public for 210 days and actually let for 105 days or more in each tax year
• should not be used as a long-term let of over 31 days for significant periods

The distinction for a furnished holiday let was introduced in 1984 and provided different and more beneficial tax treatment for short-term lettings within the property investment sector. Repealing the beneficial tax treatment for furnished holiday lettings promotes fairness by removing the tax advantages that furnished holiday let landlords have over other residential property landlords.

This change will remove the tax advantages that current furnished holiday let landlords have received over other property businesses in 4 key areas by:

• applying the finance cost restriction rules so that loan interest will be restricted to basic rate for Income Tax
• removing capital allowances rules for new expenditure and allowing replacement of domestic items relief
• withdrawing access to reliefs from taxes on chargeable gains for trading business assets
• no longer including this income within relevant UK earnings when calculating maximum pension relief

After repeal, former furnished holiday let properties will form part of the person’s UK or overseas property business and be subject to the same rules as non-furnished holiday let property businesses.

The following specific transitional rules will apply:

• businesses with?FHL?properties will no longer be eligible for more beneficial capital allowances treatment but will instead be eligible for ‘replacement of domestic items relief’ in line with other property businesses — where an existing?FHL?business has an ongoing capital allowances pool of expenditure, they can continue to claim writing-down allowances on that pool — any new expenditure incurred on or after the operative date must be considered under the property business rules
• under current rules a loss generated from a?FHL?property business can only be carried forward and utilised against future profits of that same?FHL?business — after the changes, former?FHL?properties will be part of the person’s UK or overseas property business as appropriate — that property business will then include the amalgamated profits and losses of all the properties in that business
• persons may have losses to carry forward from their?FHL?business after repeal — losses generated from this?FHL?business will be permitted to be carried forward and be available for set off against future years’ profits of either the UK or overseas property business as appropriate
• under current rules?FHL?properties are eligible for roll-over relief, business asset disposal relief, gift relief, relief for loans to traders, and exemptions for disposals by companies with substantial shareholdings — after the changes eligibility for the reliefs will cease — however, where criteria for relief includes conditions that apply in a future year these specific rules will not be disturbed where the?FHL?conditions are satisfied before repeal
• in relation to business asset disposal relief, where the?FHL?conditions are satisfied in relation to a business that ceased prior to the commencement date, relief may continue to apply to a disposal that occurs within the normal 3-year period following cessation
• there is also an anti-forestalling rule — this will prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current?FHL?rules — this rule applies from 6 March 2024

Summary

As mentioned, both of these measures were introduced in the Conservative’s last Budget, but the Chancellor has since announced next steps and draft legislation on these priority tax commitments ahead of a full announcement and costing at the Budget, which is now due to be held on 30 October 2024.

On 29 July, the Chancellor also announced a number of spending cuts amid claims of a ￡22 billion hole in the public finances. These include scrapping Winter Fuel Payments for around 10 million pensioners, scrapping a cap on the amount people pay for social care and stopping "non-essential" government spending on consultants.

The Autumn Budget certainly looks to be a tax raising one.