UK and International Tax news

Proposed Changes To The Taxation of Non Domiciles

Monday 15th April 2024

In the Chancellor’s Spring 2024 Budget, he announced radical changes to the current tax regime applying to non domiciles in the UK.

Individuals who are classed as non domiciled in the UK enjoy a number of tax advantages in relation to foreign income and gains (FIG), which will only be taxed if remitted to the UK provided the individual claims the remittance basis of taxation. Some of these advantages have been restricted in recent years, but the Chancellor announced that the system will be reformed and replaced with effect from 6 April 2025.

The new FIG regime will apply to individuals who become UK tax resident after a period of 10 tax years of non-UK residence. The regime will allow qualifying individuals to not pay tax on FIG arising during their first four years of being UK tax resident. They will instead be able to ‘onshore’ their foreign income and gains free from additional tax charges.

Like the current remittance basis, individuals choosing to be taxed under the FIG regime will lose entitlement to personal allowances and the capital gains tax annual exempt amount.

Various transitional provisions are proposed:

  • Individuals who have been UK resident for less than four years on 6 April 2025 (following a period of 10 tax years of non-UK residence) will be able to use the FIG regime for the remainder of those four years.
  • Individuals moving from the remittance basis to the arising basis on 6 April 2025 and who are not eligible for the FIG regime will pay tax on 50% of their foreign income in 2025/26. However, this does not apply to foreign chargeable gains.
  • Individuals who have claimed the remittance basis will, on a disposal of an asset held personally at 5 April 2019, be able to elect to rebase that asset to its value as at that date.

There will also be a temporary repatriation facility. Individuals who have been taxed on the remittance basis will be able to elect to pay tax at a reduced rate of 12% on remittances of pre-6 April 2025 FIG in 2025/26 and 2026/27. Additionally, there will be some relaxation of the mixed fund ordering rules to make it easier for individuals to take advantage of the TRF.

Excluded property trusts settled by non doms before 6 April 2025 would retain their IHT exemption. Non UK assets settled after 6 April 2025 may be exempt if settled in the first 10 years of UK residency but this exemption would be lost if the settlor has been UK resident for more than 10 years at a 10 year anniversary of the creation of the trust.

The government also proposes to move to a residence-based regime for Inheritance Tax, and plans to publish policy and technical consultations on these changes later this year.

Last week, the shadow chancellor Rachel Reeves indicated that the Labour Party would implement further restrictions on the non dom regime proposed by the Chancellor if Labour came into power. In particular, the 50% relief in respect of foreign income arising in 25/26 for those individuals moving from the remittance basis to the arising basis on 6 April 2025 and who are not eligible for the FIG regime would be abolished.

Also announced were restrictions to the Chancellor’s proposals to exempt foreign assets held in an offshore trust [excluded property trusts] from the existing IHT exemption for trusts settled by non doms before 6 April 2026 and the exemption for non UK assets held by trusts settled after 6 April 2025 if they are settled into trust in the first 10 years of UK residency.

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

 

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