On Monday (29 July 2024), the new Chancellor of the Exchequer, Rachel Reeves, gave a statement to the House of Commons, setting out the state of the public finances and confirming that some "difficult decisions" would need to be made.
Full details of those difficult decisions will be announced at the Chancellor's first Budget, now confirmed for 30 October 2024. However, in a policy paper accompanying the Chancellor's statement, some further information was provided on the proposed changes to the taxation of UK resident non-UK domiciled individuals (RNDs) (papers were also published about the Government's carried interest reforms and VAT on school fees).
Key points to note from the policy paper are as follows.
- Broadly speaking, the new Labour Government remains committed
to implementing the changes originally announced by the previous
Conservative Government in March 2024 (that is, the replacement of
the existing "non-dom" regime with a new four-year
residence-based regime with effect from 6 April 2025). However, as
previously indicated by the Labour Party in
the months leading up to the recent general election, certain
aspects of these proposals (relating to the transitional
arrangements for existing RNDs and the inheritance tax treatment of
trusts) are viewed as being overly generous.
- In particular, the proposal to give existing RNDs (who will
lose access to the remittance basis of taxation on 6 April 2025) a
50% reduction in foreign income subject to tax for the 2025-26 tax
year, is to be scrapped. However, other transitional arrangements
proposed by the previous Government – (i) an opportunity for
RNDs to remit foreign income and gains that arose before 6 April
2025 to the UK at a reduced tax rate under a "Temporary
Repatriation Facility" (TRF), and (ii) the rebasing of non-UK
assets held by current RNDs – will be adopted by the new
Government. Indeed, there is a possibility that certain aspects of
these transitional arrangements will be more generous than
previously expected. The policy paper states that "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." Under the previous
Government's plans, the TRF was to be available for two years
at a tax rate of 12%, and it was not to apply to foreign income and
gains generated within trust structures; however, the statements in
the policy paper published on Monday suggest that the new
Government may be prepared to implement a more generous scheme to
encourage former RNDs to bring their foreign income and gains to
the UK. In respect of the rebasing relief, the rebasing date
proposed by the previous Government was 5 April 2019 – it is
unclear why this date was selected; however, the policy paper
published on Monday states that "the Government is considering
the appropriate rebasing date and will set this out at the
Budget". RNDs will therefore need to wait until the Budget on
30 October to discover whether any alternative rebasing date which
is selected will be more beneficial.
- In respect of inheritance tax, it was confirmed that with
effect from 6 April 2025 this will be moving from a domicile-based
tax to a residence-based tax. This will have consequences for
long-term UK resident settlors and their trusts. The previous
Government had promised that the treatment of non-UK assets held in
trusts which were established by RNDs prior to 6 April 2025 would
not change, meaning that such assets would remain outside the scope
of UK inheritance tax. However, the Labour Party confirmed in their
election manifesto that "we will end the use of offshore
trusts to avoid inheritance tax so that everyone who makes their
home here in the UK pays their taxes here". The policy paper
published on Monday reiterates that "the Government will end
the use of Excluded Property Trusts to keep assets out of the scope
of IHT". However, it also notes that "the Government
recognises that trusts will already have been established and
structured to reflect the current rules, so [the Government] is
considering how these changes can be introduced in a manner that
allows for appropriate adjustment of existing trust
arrangements...". RNDs may well be encouraged by this
suggestion that transitional arrangements will be introduced to
assist individuals who have previously established trust structures
in reliance on the existing rules.
- The previous Government had committed to holding a formal
consultation on the inheritance tax proposals; however, this idea
has been abandoned by the new Government; instead, it intends to
"review stakeholder feedback provided following the Spring
Budget" and "carry out further external engagement...on
IHT policy design" over the summer (further details of which have since been
published by the Government). More generally, the Government
"wants to ensure that interested parties have an opportunity
to share views and feedback on the detail of legislative
provisions". However, it is unclear whether this means before
or after draft legislation is published around the Budget on 30
October.
- Finally, the policy paper announces the Government's intention to conduct a review of the UK's "offshore anti-avoidance legislation", which includes the Transfer of Assets Abroad regime and the Settlements Code, "to modernise the rules and ensure they are fit for purpose". This was unexpected and may well prove to be as significant for taxpayers with complex international affairs as the current proposed reforms. Given the key importance of the motive defences for many taxpayers in terms of their decision making as to whether to stay in the UK, whilst simplification and clarity may be welcome, further uncertainty may not be. The Government has stated that any changes are unlikely to come into force before 6 April 2026.
Overall, the policy paper emphasises that the Government wishes to ensure that any new regime is "internationally competitive and focused on attracting the best talent and investment to the UK". Some taxpayers may still conclude that the direction of travel is sufficiently clear to continue with their plans to leave the UK. Others will need to wait until the Budget on 30 October to discover what some of the more encouraging statements in the policy paper will mean for them in practice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.