It's been an eventful few months in the tax world. In March, the Government announced plans to abolish the current tax regime for non-UK domiciled individuals (non-doms) and introduce a significantly reformed residence-based regime. The following month, Labour Shadow Chancellor Rachel Reeves outlined how their plans for the new regime would differ from the Government’s, with the key difference being that there would be no grandfathering of excluded property treatment for inheritance tax (IHT) purposes for trusts established and funded by non-doms before 6 April 2025. And now, a general election has been called in July, when the draft legislation on the new income and capital gains tax (CGT) rules and a consultation on the IHT regime were due to be released in the summer. With all of this going on, and with the basic outline of the proposed new rules being summarised elsewhere, our focus is on how the new rules might impact a selection of taxpayer circumstances, and therefore what action might be taken by them.
It's worth noting upfront that the general election means that there's greater uncertainty and perhaps more likelihood of change to the proposals, but the case studies are based on the original proposals by the Government.
Luisa is planning to arrive in the UK in September 2024 to take up residence here, having not been to the UK before. She's expecting to be here for an initial five-year period with her job, with no fixed intention thereafter. She has a sizable investment portfolio held with a foreign bank. She's able to split the 2024/25 tax year into a resident and a non-resident period under the split year tests for starting work in the UK.
Luisa will be taxed under the existing regime in the 2024/25 tax year, meaning that she'll be non-UK domiciled and eligible for the remittance basis this tax year.
She could consider realising income and gains in the non-resident portion of 2024/25 to the extent this would be beneficial (taking account of foreign taxes on those items), as no UK tax charges would arise on this income and gains.
From 6 April 2025 she'll be taxed under the new regime and will be eligible for the four-year exemption from UK tax on foreign income and gains (FIG). Any income and gains deferred until on or after 6 April 2025 would be exempt from tax rather than taxable on the remittance basis.
The split year in 2024/25 will count as a year of UK residence, so she would need to bear in mind that the exemption on FIG would only last until 5 April 2028 and she'll be fully taxable in the UK thereafter.
Only her UK assets will be exposed to IHT for the first ten years of UK residence, and she can settle foreign assets into a trust at any time during that period without an IHT entry charge.
Luisa’s brother Elijah is also planning to move to the UK in September 2024, claiming split year treatment, and his circumstances are similar to his sister’s. However, Elijah was previously resident in the UK for the 2016/17 tax year, having been on secondment to his firm’s London office.
Elijah will be taxed under the existing regime in the 2024/25 tax year, meaning that he'll be non-UK domiciled and eligible for the remittance basis this tax year.
Since Elijah has been UK resident at some point in the ten tax years prior to becoming UK resident in 2024/25, the four-year exemption from tax on FIG won't be available to him from 6 April 2025.
Any foreign income and gains realised in the non-resident period of 2024/25 by Elijah though will still be outside the scope of UK tax.
Where foreign income and gains can't be realised during the non-resident part of 2024/25, to the extent they're realised before 6 April 2025, Elijah will be able to claim the remittance basis on these gains. Where these income and gains are kept offshore there would be no UK tax charge, or alternatively where they're remitted to the UK between 6 April 2025 and 5 April 2027 this will be at a 12% tax rate under the Temporary Repatriation Facility (TRF).
Only Elijah’s UK assets will be exposed to IHT initially. It remains to be seen whether his year of residence in 2016/17 will affect the date his IHT status changes – this depends on how the 10 years of residence test is framed, for example whether it's 10 consecutive years of residence (which seems unlikely) or is 10 out of the last 15 or 20 years or something similar. Presumably more detail on this will be released in the IHT consultation when it arrives.
Tim is UK-domiciled and grew up here but has been working in Asia for the last twelve years. He's planning to return to the UK this summer to settle here for the foreseeable future.
Tim will be taxed under the current rules in 2024/25, so if he were to realise any income and gains in 2024/25 (or at least in the resident portion of 2024/25 if he qualifies for split-year treatment) a UK tax charge may arise on the income and gains, subject to the foreign tax treatment and any double tax relief available.
The new regime from 6 April 2025 is great for Tim! His UK domicile is no longer relevant and he benefits from the FIG exemption just like any other long term non-resident. Any foreign income and gains realised between 6 April 2025 and 5 April 2028 will be exempt from UK tax.
While the detail of the IHT residence test is yet to be seen, provided it has some limitation on how far back it looks to identify years of residence, it's also likely that if Tim were to put foreign assets into trust while UK resident for a significant period of time, he would only be exposed to IHT on UK assets during that period.
Eva is non-UK domiciled but is UK deemed domiciled for all tax purposes. She settled a Jersey trust many years ago which is for the benefit of her, her husband and their family and consists only of foreign assets which are excluded property for IHT purposes. The trust currently benefits from the trust protections introduced in 2017.
Eva’s UK tax situation will change significantly from 6 April 2025. Under the current proposals she's going to be taxable on all income and gains of the trust as they arise from 6 April 2025.
If Labour’s proposals are adopted and the trust assets cease to be excluded property from 6 April 2025, it’s expected the trust will face relevant property charges at up to 6% every 10 years, and Eva will also have a potential 40% IHT exposure on the value of the trust assets under the gift with reservation of benefit (GWR) rules.
Eva and the trustees could consider excluding her and her husband from benefiting from the trust if they don't need access to the trust assets. This would prevent her being taxable on the trust income as it arises.
Excluding Eva would also mean that she ceases to have a GWR in the trust. Provided this was done before 6 April 2025 (when the trust assets are still excluded property) there will be no deemed potentially exempt transfer (PET) and associated seven year IHT risk when she's excluded.
It would be extremely difficult to retain a meaningful class of beneficiaries (eg, your children and grandchildren) without being in scope of the CGT attribution rules, so it's likely Eva will be taxable on trust gains going forwards. Rebasing some or all of the trust assets during the remainder of the 2024/25 tax year, for example by a transfer to a company held by the trustees or creation of a sub-fund, may mitigate the impact in the short term. Though careful thought would need to be given, while it may reduce the gains realised on an arising basis in the coming years, it will give rise to gains this year that will be matched to future benefits to UK resident beneficiaries, and the application of the supplementary charge rules could mean these benefits are taxed at higher rates than the prevailing CGT rate when they're matched.
There will certainly be winners and losers from the new regime when it arrives, and key to making the most of any opportunities or mitigating some of the downsides depending on your position will be thinking through your options in advance and being able to take action once the detail of the rules is confirmed. We would recommend that professional advice is sought at the earliest opportunity if you are affected by the changes so that any preparatory work can begin well ahead of time and a robust understanding of the position arrived at before decisions need to be made.
For more insight and guidance, get in touch with Sue Knight, Mike K Hyland.
