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Rachel Reeves, Chancellor of the Exchequer, delivered a statement to the House of Commons on 29 July 2024. In her statement, Ms Reeves announced the Treasury is facing an overspend of £22bn this year.
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Labour pledged to not increase National Insurance, Income Tax or VAT, but tax changes are expected in other areas in an effort to overcome the deficit. A full Budget will be announced on 30 October 2024 however, in the interim, the Government has published a policy paper setting out how non-domiciled individuals will be impacted.
Income Tax & Capital Gains Tax
Under the current regime, many non-domiciled individuals can choose to be taxed under either of the arising or the remittance basis.
Under the arising basis, an individual is taxable on their worldwide income and gains and this is the basis on which all UK resident and domiciled individuals are taxed.
Non-domiciled individuals can elect to be taxed using the remittance basis, which means that their foreign income and gains will only be taxed to the extent that they are brought into the UK. As long as foreign income and gains are held outside of the UK, HMRC will not assess tax on them.
From April 6 2025, the remittance basis regime will be abolished. After this date, the UK will shift to a new system where liability to tax on foreign income and gains will be based on taxpayer residence. In an effort to keep attracting foreign investment, the Government will allow new arrivals to the UK to receive foreign income and gains (FIG) tax free for their first four tax years of UK residence, provided they have not been resident in any of the ten years before their arrival.
The previous Government had intended that individuals who would be shifting from the remittance basis to the arising basis from 6 April 2025 and are beyond their first four years, would pay tax on only 50% or their foreign income arising during the tax year 2025/26. Ms Reeves has clarified that Labour will not be introducing this policy.
Former remittance basis users will however be eligible for the Temporary Repatriation Facility (TRF), allowing them to remit FIG to the UK and pay a reduced tax rate. The rate of tax and period to which the TRF will apply will be announced on 30 October 2024.
In addition, although the detail hasn’t yet been provided, it is expected that some individuals (in particular those who have previously used the remittance basis), will be able to rebase i.e. uplift the base cost of foreign assets they dispose of while they are UK resident, potentially reducing any capital gain.
Inheritance Tax
Currently, the estate of a non-domiciled individual will only be chargeable to UK Inheritance Tax (IHT) on UK situated assets; whereas a domiciled individual will be chargeable on their worldwide assets. Subject to the Government engaging with relevant parties, it is expected that from 6 April 2025 IHT will be charged on the basis of residence and, where an individual has been UK resident for ten years, their worldwide assets will become subject to IHT.
It is also expected that an individual’s worldwide estate will remain within the charge to IHT for ten years after departing from the UK. For individuals with foreign assets, this could mean that their worldwide estate is assessed in two jurisdictions. This proposed change to IHT could significantly alter estate planning for non-domiciled individuals.
Excluded Property Trusts
Where a non-domiciled individual has created a trust and settled foreign assets, this is known as an Excluded Property Trust (EPT). These trusts are currently not chargeable to IHT however from 6 April 2025, it is expected that this beneficial treatment will come to an end.
For any EPTs created prior to 6 April 2025, there will be transitional arrangements in place. Ms Reeves will provide further details on these when she delivers the Budget.
Next Steps
Those who think they may be affected by the above should speak to their advisors in order to be clear on the impact the new rules will have on them and to consider any appropriate mitigation strategies.
We will provide further information following the Budget on 30 October 2024. If you would like to discuss any of the above matters in the meantime, please get in touch.