UK and International Tax news

HM Treasury Issues Policy Paper On Changes To The Taxation Of Non Doms

Tuesday 30th July 2024

HM Treasury has issued a policy summary paper on proposed changes to the taxation of non UK domiciled individuals.

HMT has confirmed in its policy paper that the government will remove the concept of domicile status from the tax system and implement a new residence-based regime intended to be internationally competitive and focused on attracting the best talent and investment to the UK.

New residence-based regime for foreign income and gains

The government will implement the four-year foreign income and gains (FIG) regime announced by the previous government in the Spring 2024 Budget with certain changes. In particular, the government will

  • remove the preferential tax treatment based on domicile status for all new FIG that arise from 6 April 2025.
  • introduce an internationally competitive 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 ten consecutive years prior to their arrival.
  • remove the protection from tax on income and gains arising within settlor-interested trust structures for non-domiciled and deemed domiciled individuals who do not qualify for the four-year FIG regime.

There will be a review of offshore anti-avoidance legislation, including the Transfer of Assets Abroad and Settlements legislation, in order to remove ambiguity and uncertainty, make the rules simpler to apply in practice and ensure these anti-avoidance provisions are effective. Further details on the review will be provided in due course and it is not anticipated that this review will result in any changes before the start of the 2026/27 tax year.

Transitional arrangements for affected non-UK domiciled individuals

The policy announced by the previous government, which would have provided 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 four year FIG regime, or who choose not to make a claim for a tax year, will be subject to 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. 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 four-year FIG regime.

A new Temporary Repatriation Facility will be available for individuals who have been taxed on the remittance basis. Individuals who 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

The government intends to replace the current system based on domicile 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 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 ten years prior to the tax year in which the chargeable event, including death, arises, with provision to keep a person in scope for ten 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 which keep assets out of the scope of IHT. It recognises however that existing have been structured to reflect the current rules, and is therefore considering how these changes can be introduced in a manner that allows for appropriate adjustment of existing trust arrangements, while ensuring that the treatment of all long-term residents of the UK is the same for IHT purposes. Confirmation of these new rules and their detailed application, including transitional arrangements for affected settlors, will be published at Budget, following external engagement.

The government has said it 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.

If you would like more information on the above, please contact Keith Rushen on 0207 486 2378.

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