UK tax changes for non-doms, trusts and IHT. What do we know and when we will know more?
Nobody likes living in limbo – so there was some relief on 29 July when the new UK Government announced that the Budget will be on 30 October. Along with that announcement, a policy paper was released providing an indication of how the new Government intends to implement major changes to the taxation of non-UK domiciliaries, trusts and inheritance tax (IHT).
International families with UK connections are braced for big changes to the UK tax rules. Below we consider what this might mean for those who are coming to the UK or those already living there.
What do we know so far for new arrivers re income and gains tax?
It has been confirmed that the 4 year ‘foreign income and gains’ (FIG) regime announced by the previous Government will be introduced from the start of the next tax year on 6 April 2025. This will mean that individuals moving to the UK will pay no UK tax on their foreign income and gains for the first four years of UK residence (assuming the person was not UK resident in any of the previous 10 tax years). However, after those first four years, the arrivers would be subject to UK tax on all their income and gains in the same way as an ordinary UK taxpayer (subject presumably to double tax treaties and other reliefs).
The ‘overseas workday relief’ which allows an employee to pay UK tax in relation to work days in the UK only will be retained but revised.
What do we know so far for those in the UK already re income and gains tax?
For those in the UK already using the remittance basis, it now seems certain that the current tax year will be the last year of this regime (which exempts your non-UK income and gains from UK tax provided you don’t use such income and gains in the UK). The new rules will scrap this regime going forwards, but the rules will remain in place in respect of income or gains arising before 6 April 2025 which has not been remitted to the UK. This means that if a remittance basis user receives foreign income now and keeps it outside the UK during the current tax year it will not trigger UK tax unless/until it is brought to the UK. Once brought to the UK, it will (by default) be subject to tax at the UK income tax rates (up to 45% currently).
However, there will be some transitional reliefs to encourage former remittance basis users to bring previously untaxed income and gains to the UK under the new regime. In March we were told that remittances of such previously untaxed income and gains would be taxed at 12% (rather than up to 45% for income and 20% for gains) during a 2 year period from 6 April 2025, but the July announcements have not committed to a tax rate or to how long this relief will be available for. The policy paper says the Government is exploring ways to extend this transitional relief to income and gains within overseas structures and more details will be announced in the Budget so it will be interesting to see whether this unlocks much needed tax revenues for the Government from historic offshore wealth structures.
There will also be a ‘rebasing relief’ to limit the capital gains tax exposure for current and past remittance basis users. This will limit the taxable gain on the disposal of a non-UK asset to the increase in value from a certain date. For example, the sale of a non-UK asset which was owned for 20 years by a UK resident (not under the 4 year FIG regime), may only be taxable in respect of gains attributable to the last 5 years, if the rebasing date was, say, April 2019. However, the ‘rebasing date’ has not yet been confirmed – we have to wait for the Budget in October for the relevant date to be announced.
What do we know so far about inheritance tax?
In March 2024, the then Conservative Government announced that once you have been UK resident for 10 years, your worldwide assets will come within the scope of UK inheritance tax (IHT) and that this would have a ’10 year tail’, meaning you would have to be non-UK resident for 10 years before your estate will cease to be exposed to UK IHT on worldwide assets. Broadly speaking, this could mean that if you left the UK but died within 10 years of leaving, your worldwide assets may subject to IHT at 40% unless they pass to a spouse or UK charity. Not surprisingly, this measure alarmed international families who often come from jurisdictions in which there is little or no tax when assets pass to direct descendants on death. The new policy paper confirms that the new Government does intend to bring this in as announced. A 10 year tail is longer than many would like. The policy paper says the Government will ‘engage further with stakeholders on the operation of the new test, so any refinements can be considered fully’ but it might be wishful thinking to interpret this as meaning the period in which a person’s estate will be exposed to UK IHT will be shortened.
What about trusts?
We expect major changes to the tax treatment of trusts, regarding both income/gains and also IHT.
In terms of income and gains, unless the 4 year FIG regime applies, it appears that the issue of whether income and gains of a non-resident trust structure will be attributed to the trust’s settlor for UK tax purposes will depend on the application of the existing rules. In some cases there may be scope to take the position that there is no tax for the settlor, either because the settlor (and any spouse) are excluded, or because a “motive” defence applies. This will be fact-sensitive and will need to be looked at on a case by case basis.
Regarding IHT, the Government have announced they will ‘end the use of Excluded Property Trusts to keep assets out of the scope of IHT’. Previously, it was possible for a foreign domiciled individual who lived in the UK to put non-UK assets into trust before they became deemed domiciled (when they had been resident for 15 out of 20 years), and provided those assets remained outside the UK they would not be in the scope of IHT on the settlor’s death, even if the settlor’s personally owned worldwide assets were subject to IHT.
Changing these rules might mean once the settlor has been UK resident for 10 years, then
- if the settlor could benefit from the trust its assets may be taxed as being within the settlor’s estate on the death of the settlor (ie, up to 40% IHT on the death of the settlor) or
- if the settlor cannot benefit from the trust the trust assets will be taxed under the UK’s ‘relevant property rules’ which charge IHT at up to 6% on 10th anniversaries and exits of capital from the trust, or
- both of these would apply where the settlor is able to benefit from the trust, so that the relevant property charges would apply and the trust fund would also be taxed on the death of the settlor.
The comments made in the policy paper were sufficiently cryptic that we cannot be certain and indeed give the Government some wriggle room to consult and amend their proposals.
We understand there will be transitional reliefs, but there is as yet no comment on what those will be.
When will we know more?
Details of the new rules will be announced at the Budget on 30 October and it is hoped that draft legislation will be available soon afterwards. The Government has committed to bringing in the 4 year FIG regime and changes to the IHT rules from 6 April 2025, but also mentioned that there will be a review of the specific anti-avoidance rules (the ‘Transfer of Assets Abroad’ rules and ‘Settlements legislation’) which are intimately connected with the taxation of trusts, and that changes to these are not likely to be brought in until the next tax year – so we may see a two-stage approach to the overhaul of this complex area of taxation.
