Bumper budget bonanza of bamboozlement

Well what a Budget!? Not only did Rachel Reeves give one of the longest Budget speeches in recent history, she also seems to have produced one of the biggest crops of detailed changes (at least in the Private Client world).? In the non-dom space, we finally have a lot more meat on the bones of the policies and an awful lot of detail to digest – including 103 pages of legislation! Even the technical note runs to 34 dense pages of policy description.? On this basis, we don’t even attempt to cover the many other announcements in the Budget which will impact individual taxpayers and their advisers and instead, here is a “whistle stop tour” of the main highlights of the policy paper on the changes to the remittance basis and the domicile basis of taxation.? Look out for future blogs which will give more detailed thought to individual topics once the devil begins to emerge from the detail of the legislation.

So, what are the headlines?? Yes, as expected, the non-dom reforms are going ahead and, as it turns out, any rumours of delay or watering down were greatly exaggerated.? It’s fair to say that there are no great surprises in the Budget ?announcements – at least none that jump out of the pages that have been published. That doesn’t mean some of the detail isn’t very interesting, however.

So, beginning with the basics, which we already knew, the remittance basis will come to an end for income and gains arising after 5 April 2025.? There will be a 4-year ?FIG (foreign income and gains) regime available for those who come to the UK after 10 years of non-residence. There will be a Temporary Repatriation Facility (TRF) and there will be some rebasing for capital gains.? In addition, as previously announced, Inheritance Tax (IHT) will become a residence based system with effect from 6 April 2025 and domicile will become a largely irrelevant concept in the tax world (bar some transitional provisions and perhaps for the purpose of some estate tax treaties).? So that’s the headlines, let’s have a peer at some of the detail (a kind of helicopter view at this stage in most cases, for reasons of space).

The 4-year FIG regime

The 4-year FIG regime will be available to those who come to the UK after a period of 10 consecutive years of non-residence and will apply from 6 April 2025.? It will be available for the first 4 tax years of residence and, for this purpose, split years and years of treaty non-residence will count.? It will only be available for a maximum of 4 consecutive years from the first year of residence.

An individual can claim only for income, only for gains or for both. They will need to make a claim for each source of income and/or gain on which relief is being sought and will need to include amounts on their tax return.? Individuals who claim relief under the 4-year FIG regime will lose entitlement to the personal allowance for income tax and the annual exempt amount for capital gains tax (CGT).? The technical note contains a long list of the income and gains that will qualify (or not) for the regime.? Offshore income gains are included in the list of qualifying income but, perhaps unsurprisingly, gains from offshore life insurance policies will not qualify.

There are special (and complex) rules dealing with benefits from offshore trusts and income subject to transfer of assets abroad rules in respect of the FIG regime.? In most cases benefits received by a qualifying individual in this period won’t be matched to income and gains and won’t be taxable, but neither will they reduce the income and gains available to be matched. However, there is some complexity around this including a proposal to amend the already fiendishly complicated onward gifting and close family members rule for those receiving amounts while in the 4-year FIG regime.

CGT rebasing

The policy document published confirms that there will be rebasing for personally held assets for current and past remittance users for disposals after 6 April 2025.? To qualify, individuals cannot have been either UK domiciled or deemed domiciled at any time before tax year 2025/26 and they must have claimed the remittance basis in one of the tax years 2017/18 to 2024/25 (meaning that for those that would not otherwise qualify there is still time to make a claim). ?However, assets will be rebased to their market value as at 5 April 2017 (rather than the original 2019 proposal) which was the date of rebasing which applied automatically to those becoming deemed domiciled for the first time on 6 April 2017.? Those individuals will be able to continue to benefit from that rebasing provided they continue to meet the relevant conditions up to the end of 2024/25.

Assets held in settlements, which previously benefitted from rebasing (to market value 5 April 2008) will not qualify for any further rebasing.? At present, however, this rebasing only applies to gains matched to benefits paid to the settlor or other beneficiary.? From 6 April 2025, when many settlors will become taxable on gains as they arise, this 2008 rebased value can be used.? This means effectively any trust set up in the last 16 years will not benefit from any rebasing and that for gains coming into charge on the settlor on an arising basis for the first time, there is no relief for any growth in value over the last 16 years.? This may impact the decisions of settlors and trustees about when and how they want to crystalise unrealised gains, sell assets and take benefits out of existing trusts.

Overseas workday relief

As previously announced, overseas workday relief will be retained and will still be based on income which relates to overseas duties determined on just and reasonable basis.? Eligibility will be primarily based on meeting the conditions for the 4-year FIG regime and relief will apply for the 4 year period regardless of whether earnings are brought to the UK.? A number of very detailed rules (and draft legislation) have been published with the Budget papers, but this level of detail is beyond the scope of this blog.

Temporary repatriation facility (TRF)

The TRF will be introduced from 6 April 2025 and will be available for 3 years.? “Designated amounts” (see below) will be subject to a tax rate of 12% in the first 2 tax years (2025/26 and 2026/27) and then 15% for 2027/28, the final year.?

Individuals will be able to designate amounts which either are or derive from foreign income and gains (FIG) arising prior to 6 April 2025.? Amounts designated will need to be included on tax returns and any tax will be payable in that year.? These amounts can then be remitted to the UK at any time without further tax and without any report made to HMRC,

Individuals can nominate amounts which are both liquid (i.e. cash) or illiquid – in the form of, say, a painting, a house, or perhaps a share portfolio.? It is also possible to make a partial designation for a mixed account.? Where foreign tax has been paid on amounts, this is not deductible, but it is the net amount which is designated (and taxed).

It is possible to designate all or part of an account or asset and HMRC also suggest it is possible to designate amounts of uncertain origin where an individual no longer has records to confirm original source (we would not be surprised if they might be looking more closely for this evidence in the future?).

There are some complex rules around mixed funds, but, essentially, designated amounts will leave these accounts first for remittance basis purposes (which remains a relevant concept here), but the continuing application of the offshore transfer rule means this may not always be straightforward.? There are also some complex rules around Business Investment Relief (BIR). ?Those with BIR investments may want to speak to their advisor about the impact of these rules and possible options when an investment ceases to qualify.

There are also rules allowing individuals to designate unremitted FIG in offshore trusts and other offshore entities that they have received or has been attributed to them before 6 April 2025, including amounts which arose prior to 6 April 2025, but which are matched to benefits they receive during the 3 year TRF period.

Inheritance tax

The inheritance tax rules will change with effect from 6 April 2025, as originally announced – with a move away from domicile to “long-term residence” to determine liability.? However, there have been some changes to the way “long-term residence” will be calculated and we have a little more detail around how the new rules will apply to trusts.

The very high-level headlines here are that an individual will now be long-term resident where they have been resident in the UK for 10 out of the 20 years immediately preceding the tax year in which any transfer occurs. The 10-year tail will be shortened for those resident in the UK for less than 20 years and there will be some grandfathering, with the old rules of deemed domicile applying to determine long term residence for those who are non-UK resident in 2025/26.

The application of UK IHT to non-UK assets in relevant property trusts will be dependent on the long-term residence status of the settlor at the time of any charge. However, 10 year and exit charges will be reduced to reflect the amount of time property has been excluded property. For qualifying interest in possession trusts, the long-term residence status of both the settlor and the life tenant will be relevant.

For trusts where the settlor is already dead or died before 6 April 2025, the excluded property regime will continue to apply under the existing rules.? Where settlor’s die after 6 April 2025, the excluded property status of the trust will depend on the settlor’s long-term residence status at the time of their death.? There is also some grandfathering for excluded property in existence prior to 30 October 2024, including qualifying interest in possession trusts. However, for UK domiciled settlors who are not UK resident, or for those moving out of the long-term residence regime, there will be an exit charge on foreign property as it becomes excluded property.

There are many many more points of detail on inheritance tax, but surely even the most interested reader has heard enough at this point.? Look out, therefore, for more blogs in the near future giving more detail on each of the measures, particularly as we wade through the legislation.? First up will be a dedicated inheritance tax blog – including the impact on trusts – so look out for that very soon.? In the meantime, congratulations if you are still reading, and happy Budget contemplations!