Autumn Budget - Reforms to non-dom taxation

 
In this article, we explore the potential impact of the new regime on globally mobile individuals. The policy paper and subsequent HM Treasury listening sessions indicate that consideration is being given to some wider changes and certain aspects of the new residence-based regime. At the time of writing, there is some reporting in the media that the Government could be considering alterations to their current plans in this area. However, in the absence of a formal statement from Government, this is currently based on speculation. We look here at the impact of the proposals for globally mobile workers on the basis they proceed as communicated by the Government to date. 

Taxation of Foreign Income and Gains (FIGs)

Key aspects of the previous announcement remain largely intact (see our article A new dawn for non-domiciled individuals? for further details). The proposals which will potentially impact globally mobile individuals are currently as follows:

• The new residence-based regime for foreign income and gains (FIG) will apply from 6 April 2025
• The four-year FIG regime will be implemented as planned, for individuals who have not been UK tax resident in any of the 10 consecutive tax years prior to their arrival
• A form of Overseas Workday Relief (OWR) will remain, although the ‘design principles’ of the relief are being reviewed
• Any FIG that arose prior to 6 April 2025 will continue to be taxed on a remittance basis post-6 April 2025 for all current and past remittance basis users
• The policy announced by the previous Government, providing 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. As such, certain individuals will be taxed in full on their FIG from April 2025
• A Temporary Repatriation Facility (TRF) will be available where individuals can remit pre-6 April 2025 FIGs, paying a reduced rate of tax for a temporary period – the rate of tax and length of time the TRF will be available are being reviewed by Government. While this may no longer be 12%, available for two years as earlier announced, the Government has stated that they wish to make the TRF as attractive as possible. We look forward to seeing what this means in practice
• The policy paper included further information on the new intended residence-based regime for Inheritance Tax and potential rebasing for Capital Gains Tax purposes at a future sale.  The previously announced rebasing date of 5 April 2019 is under consideration 
  
  

Will the FIG basis of taxation simplify matters?

Relief under the FIG regime and the replacement for overseas workdays relief will no longer be conditional on retaining relevant funds outside of the UK, a welcome and arguably long-overdue reform which simplifies qualification for the relief while also encouraging spending and investment in the UK.  

However, for those who cannot access the FIG regime, more analysis of Foreign Income and Gains will be required to determine the correct level of UK tax, with potentially complex analysis required of overseas investment income and investment structures.  
 
There will be some who come to the UK for very short periods of time who will now be taxed on a worldwide basis, but were not the intended target of the reforms and would not have been looking to restructure overseas investments given the intended short duration of work in the UK. For example, someone who previously studied in the UK in the last 10 years or was on a company graduate rotation programme being tax resident at that time may now return to work on a secondment but would be unable to access the regime. Instead, they face increased taxation while working here. 
 
Unless the 6 April 2025 timeframe is delayed, employers and affected individuals will need to respond swiftly to what is announced on 30 October. Companies, especially those who offer some form of tax equalisation to inbound individuals, should ensure they understand the impact the changes will have on the company, and their impacted inbound workforce. They also need to consider how any new guidance may differ from advice the impacted workforce has previously received.

Overseas workdays relief (OWR)

Following the publication of the policy paper on 29 July 2024, the Government set out a summer engagement plan, which confirmed they would hold a series of insight-gathering sessions enabling tax advisers and wider stakeholders to provide practical insights and feedback in the context of the design and implementation of the replacement to existing OWR. There was a constructive dialogue and openness at the engagement sessions, with consideration given to the current relief in practice, the limitations of an approach still based on the proportion of work carried out overseas and alternative approaches to expatriate tax reliefs in other countries.    
 
In our opinion there is a real opportunity to look at proposed reforms for expatriate workers, to make radical changes that simplify the relief, and make the UK a competitive place in which to work and for companies to invest.

What could more substantial reforms look like?

A system like the current one, where relief is determined based on the proportion of time spent working outside of the UK, disproportionately favours certain sectors and jobs where work is not solely undertaken in the UK ignoring many reasons why such expatriate tax regimes are offered – to attract talent that supports the growth of the UK. For example, someone undertaking research in the UK or a skilled civil engineer may have few overseas workdays, if any. 
 
If we look to other countries for inspiration:

• Some countries offer a flat rate of relief for all new arrivals
• Others target the rate of relief at key sectors of the economy aligned to investment or research
• A three-to-four-year scheme is short in comparison to those offered by other Western European countries 
• Some countries defray the cost with fees to access the beneficial tax regime 

Furthermore, if the scheme aims to compensate workers for the higher cost of living in the UK by virtue of being temporarily here with duplicate costs, some form of expanded relief targeted at assignment expenses could also be considered. Many expatriates will out of necessity use international schools while here for short periods of time, with children studying for international qualifications. Other countries recognise this, giving some form of tax relief. 
 
Whichever form the OWR of the future takes, it is to be hoped that it at the very least keeps pace with the most competitive of regimes currently attracting workers and related investment across Europe.  

What next?

October’s Budget will be one of the most keenly anticipated in recent years. It will be the new Government’s first opportunity to set out in detail its plan for fiscal stability and the UK’s economic future. 

The taxation of non-domiciled individuals is one small part of this, and these proposals are already one of the most substantial shake-ups of expatriate taxation the UK has seen in over a decade. While only a small proportion of the workforce, expatriates constitute an important part of the economy in terms of skills and investment, especially so in a world of increasingly global work. The prospect of ambitious, positive reform will hopefully not be an opportunity missed and expatriate workers will avoid being caught in the wider non-dom tax reforms aimed at those who are here for longer settled periods. One certainty is that there will be complexities to navigate.  
 
Please speak to Katy Bond or Matthew Wilson to see how Grant Thornton can assist you with the transition to the new taxation regime.