Non-dom reforms summer update ahead of the Autumn Budget

Yesterday saw Rachel Reeves announce the date of the forthcoming Autumn Budget on 30 October 2024.

Alongside this, the Chancellor mentioned difficult decisions would need to be made on tax following a spending audit. HM Treasury also released several policy papers covering future reform to the following:

1. Abolition of the furnished holiday lettings (FHL) regime from 6 April 2025 and VAT applying to private school fees from 1 January 2025. See our related commentary here
2. Carried interest – A call for evidence on the tax treatment of carried interest. See our separate analysis here.
3. Non-UK domiciled individuals – Policy Summary

Whilst uncertainty on some of the detailed specifics remain, the future tax landscape for impacted parties is becoming clearer. In this article, we focus on what we now know of the non-dom reforms. Our previous blog can be found here here.

Yesterday’s paper issued by HM Treasury does not deviate from the overriding theme of the prior announcements. The Government will remove domicile as a connecting factor to UK income tax, capital gains tax and inheritance tax. Additionally, we now know:

1. The remittance basis of taxation will be abolished from April 2025. No change from earlier announcements. Previously untaxed income and gains under the remittance basis will remain subject to tax on future remittance from April 2025, albeit some transitional rules will be introduced, see below
2. A temporary repatriation facility (TRF) will be introduced seeking to incentivise the remittance of pre-April 2025 foreign income and gains subject to the remittance basis. The rate of tax and the TRF window is uncertain, but the Government are seeking to make it as attractive as possible. This also includes extending the regime to include stockpiled income and gains within overseas structures, previously not eligible for transitionary relief. More detail to follow at the Budget.
3. A new replacement four year foreign income and gains (FIG) regime will be introduced. Individuals will be eligible for the FIG regime in their first four years of UK residence after a 10 year period of non-residence. 100% relief will apply to foreign income and gains for qualifying individuals in the FIG period. No change from earlier announcements albeit Labour had suggested an extension to encourage UK investment which is now not referenced
4. The existing protections for settlor interested trusts will fall away from April 2025. UK resident settlors will be assessed to tax on income and gains arising within trust structures. No change from earlier announcements.
5. A form of overseas workdays relief (OWR) will be retained. No material change and further details will be announced at the Budget following stakeholder engagement
6. Transitional reliefs
   1. No 50% reduction to foreign income subject to tax in 2025/26 for individuals who lose access to the remittance basis from April 2025
   2. A form of re-basing will apply to foreign capital assets for former remittance basis users. The re-basing date will be confirmed at the Budget, but it seems that the previous suggestion of 5 April 2019 may not apply
7. Inheritance Tax will be subject to a residence-based system from April 2025 rather than a domicile regime. This includes IHT chargeable in respect of both individuals and trusts. Non-UK assets are envisaged to be in the scope of UK IHT from April 2025 where the relevant person has been UK resident for 10 years prior to a chargeable event. Once within scope asset will remain subject to UK IHT for 10 years following departure from the UK. No material change from earlier announcements.

Some uncertainties remain

Despite some clarity there is limited detail and at this stage no draft legislation. Some of the reforms were originally to be put through a formal consultation process but now a more limited engagement process will be carried out over the Summer.

The announcements yesterday suggested that much of the detail will be available at the Budget. In the meantime, some of the main uncertainties in respect of offshore trusts are as follows.

• IHT – comments were made recognising that existing structures have been established under current rules and future changes are being reviewed to facilitate “appropriate adjustment” to existing structures. Also, there is mention of transitional arrangements available for ‘affected settlors’. This might mean a window of opportunity to carry out planning or adjustments in view of the future changes. Potentially this could include grandfathering existing structures, settlor exclusions or a window to wind up existing structures without any IHT exit or anniversary charges
• Loss of income / gains protections – HM Treasury announced a wider review to the ‘Transfer of Assets Aborad’ and ‘Settlements’ legislation to modernise the rules with no change expected until April 2026.  These rules have a direct impact to the UK tax status of offshore structures. On the other hand, and as mentioned above, HM Treasury announced the loss of protections for income and gains arising within settlor interested offshore trust structures from April 2025. This might mean, at least in the short term, a simpler legislative fix to remove the previously introduced trust protection legislation (from April 2017). If so, this may provide opportunity for certain impacted structures to manage the changes, even if only in the short term.

There is much to consider for individuals and offshore trusts in the context of the non-dom reforms. Whilst the landscape is becoming clearer there are fundamental uncertainties that should be borne in mind when considering what actions (or any inaction) is appropriate for impacted parties.

How we can help

Our experienced team remains available for discussions and to provide professional advice on any of these matters.

Please contact our specialist team or your usual PKF Francis Clark contact to discuss the non-dom reforms and how it may impact you or your clients.