Tweaking the Temporary Repatriation Facility

Various papers today are reporting comments of Rachel Reeves at Davos that she is considering tweaks to the Temporary Repatriation Facility (TRF).

Rachel Reeves to soften changes to non-dom tax regime after hearing ‘concerns’ | Rachel Reeves | The Guardian

The TRF (in case you didn't know) is an ability for non-doms to clean up past income and gains that have benefitted from the remittance basis by paying a flat rate of 12% in 2025/26 or 2026/27 or 15% in 2027/28. Once cleaned, it can then be remitted to the UK without triggering any further tax charges on that remittance.

The TRF was first announced by Jeremy Hunt in the March 2024 Budget. Labour's Autumn Budget broadly followed the Conservative's original suggestions, but made some refinements - the most significant of which was extending the TRF to the income and gains of trusts that were later matched with capital benefits to UK. This extension to trusts is, conceptually, slightly different to the main TRF and was originally conceived as a "Trust Scrappage Scheme" - but it has now been amalgamated into a single regime. It is, however, probably helpful to think of the regime as being in two parts: the Main TRF and the Trust TRF as they have slightly different rules.

Labour's refinements to the TRF appear to have taken on board detailed technical comments that the Chartered Institute of Taxation made - see Temporary Repatriation Facility and Mixed Funds HMT HMRC.pdf - a paper that I had a large hand in drafting - and were broadly sensible - including, in particular, detailed thought as to who the TRF would work when foreign income and gains (FIG) is held in a mixed fund.

Slightly worryingly (and in my view extremely optimistically), these TRF changes were slated by the OBR to raise an additional ￡10.6bn over the TRF period (this is on top of the ￡21bn forecast in Spring 2024. See https://obr.uk/efo/economic-and-fiscal-outlook-october-2024/#chapter-3 outlook – October 2024 - Office for Budget Responsibility

Rachel Reeves is now reported to be considering further tweaks. But what might these be?

Government amendments already tabled

I was initially hopeful this morning when I saw that James Murray had already tabled one amendment to the TRF - see Gov Amendment 58 at finance_rm_pbc_0123

However, this is a very minor technical changes to correct a mistaken cross-reference. Hopefully this isn't what Rachel Reeves is bigging up at Davos!

Sensible further amendments

Here is my guess at what further tweaks could sensibly be made:

1. At present the TRF only applies to UK residents. But non-residents may also have unremitted income and gains from previous residence periods (and might be concerned about them if they later resume UK residence). There seems no reason why we wouldn't voluntarily accept 12% (or 15%) tax from non-residents. This seems an easy tweak to make.
2. Similarly, the Trust TRF only applies to offshore trusts. But there are some onshore trusts (that were formerly offshore) that may have the same issue. Again, why wouldn't we allow such trusts to benefit from the same ability to clean up the past?
3. Perhaps the biggest issue at the moment is that, alongside abolishing the remittance basis, the Finance Bill (schedule 9 paragraph 5) then amends the definition of "remittance" for the future! This seems entirely counter-intuitive. Presumably one reason for this is to encourage people to use the TRF (a stick as well as a carrot) for fear that they could otherwise trip up on the much stricter definition that will apply in the future. However, the changes are badly thought through and badly drafted. As currently drafted merely having money in an offshore bank account...could itself amount to a remittance to the UK! The government should withdraw schedule 9 paragraph 5 and, if they wish, announce a consultation over the next year to get a more sensible definition drafted. The deterrent effect of a consultation would be just as strong a stick as the rushed changes here.
4. The current drafting also leaves a couple of gaps in situations where the same FIG exists in more than one place at the same time (I sometimes refer to this as Quantum FIG). Or, the opposite situation, where a particular asset or sum of money derives from more than one source of FIG. The rules here get into something approaching Alice-in-Wonderland territory (see the CIOT submission if you want all the gory details). But, ignoring the detail, what is needed is simply a recognition that 12% is a rough-and-ready measure in any event - and if you pay it, it should clean up the past in full.

Other items on the wish-list

Slightly more optimistically, the government could consider the following:

5. Allowing people to use unremitted funds to pay the 12% without that itself constituting a remittance. This is currently the case for the ￡30,000 or ￡60,000 remittance basis charge. It would make the TRF considerably more attractive.

6. Extend the Trust TRF to all beneficiaries - not just to beneficiaries who have in the past qualified for the remittance basis personally. There are still quite a few trusts for UK domiciliaries - many of them dating from before 1991 - which would readily be wound-up but for the very significant CGT cost of doing so. Extending the Trust TRF so that all trusts could be wound-up would be a very sensible relaxation.

7. Reduce 12% to 10%. It isn't entirely clear where 12% comes from, but - psychologically - it feels like a number that you have to think about - whereas 10% (being a round number) feels like a much better deal!

What I don't think is on the table

Clearly there are other proposals on the table, including a more detailed proposal for a tiered tax regime from Foreign Investors for Britain - Foreign Investors For Britain

Sadly, while their proposals have a lot of merit, I don't sense that such a radical addition is currently being considered.

The main difficulty I see with the Tiered Tax Regime is that the sums don't - unless I'm missing something - really work.

To take a back-of-an-envelope calculation:

• FIFB proposes that someone with net wealth of (say) ￡200million would pay a Tiered Tax Charge of ￡500k p.a.
• They hope that this would encourage lots of wealthy individuals to remain in the UK (or to come)
• However, I would guess that someone with ￡200million of wealth is (conservatively) achieving a yield of say 5% on that = ￡10m p.a. If they are UK resident (for more than 4 years) they will pay income tax and/or CGT on that return. Let's assume most is capital gains, so an average tax rate of say 30% = ￡3m. So someone in this position saves ￡2.5m tax a year.
• To make the basic maths work, therefore, you would have to have 5 additional people choosing to remain in the UK (who would otherwise have left) paying ￡500,000 for each 1 individual who would have stayed anyway but who will save ￡2.5m. Or, putting the same thing the other way round, the maths only work if 86% of people in this category were going to leave but will be persuaded to stay.
• Yet all the estimates seem to assume that the levels of wealth non-doms leaving the UK are probably at or around the 25% mark.
• Obviously this basic maths ignores the wider contribution to the economy of such individuals; the overall damage to the UK's reputation; and the attractiveness to new arrivers. But - in terms of the tax yield alone - the sums do look difficult to justify.

I may well be missing something here - and I do agree that the UK could design something better than the 4 year new arrivers regime we have. But I sense that Rachel Reeves' tweaks are not going anywhere near what some people are hoping here.