Our Insights

Just when we thought we would have to wait for the 30 October Budget for more detail around the new non-dom tax rules, the new government published a policy paper on the changes to the taxation of UK resident foreign domiciled individuals on 29 July giving additional insight. This article is divided into two parts. The first looks at the policy paper itself and the how it adds to what we knew previously. The second part provides an overview of the anticipated new regime incorporating our newly acquired knowledge.

Some of us were clinging to the hope that a new government, without the same political forces driving it as existed at Spring Budget 2024, would take the necessary time with such important legislation and not rush to legislate. To be clear the changes announced in 2014 were not legislated until 2017 and those were less far reaching. Any such hopes were immediately crushed as this policy paper makes it clear that the changes will be effective from 6 April 2025. That is:

• 2024/25 will be the last year for which the remittance basis can be claimed.
• The new four-year FIG regime will be introduced from 6 April 2025.
• Trust protections will not apply to income arising or gains accruing within trusts from 6 April 2025 onwards.
• The new IHT regime will be effective from 6 April 2025 with everyone who has been UK resident in at least ten of the preceding tax years being subject to UK IHT on worldwide assets and a ten-year tail IHT will attach when such individuals leave the UK.
• From 6 April 2025 excluded property status will no longer be able to keep trusts outside the scope of UK IHT indefinitely.

Whilst this feels like an unnecessary haste to legislate, it seems clear that there will be no delay.

The policy paper refers to the new regime as being ‘internationally competitive and focused on attracting the best talent and investment to the UK’. The regime will be welcome to short term secondees but not the high and ultra-high net worth individuals that the UK has historically looked to

attract. The new proposed regime seems refreshingly simple but so is the Italian regime – to name but one jurisdiction with a more favourable special regime – with the Italians offering a ten-year grace period albeit with a €100k annual fee.

The policy paper generally repeats what we already knew of the changes from the Spring Budget 2024, the April 2024 Labour announcement and the June 2024 Labour Election Manifesto. There is, however, some clarification and some new details.

• It now seems clear that there will be no change of heart with respect to the April Labour statement that there will be no grandfathering of the current IHT protection provided by existing excluded property trusts. However, recognising that existing trusts were ‘established and structured to reflect the existing rules’, there will be provisions to allow for appropriate adjustment of current structures and to allow for transitional arrangements for affected settlors. We await more on this with nervous anticipation.
• It looks like the Temporary Repatriation Facility (TRF) that will be offered by this government will be more comprehensive than that previously envisaged. There is a very welcome commitment to making the TRF as attractive as possible. The TRF period could be for longer than originally announced. The policy paper also states that the government is exploring ways to expand the scope of the TRF to include stockpiled income and gains within overseas structures.
• The policy paper states that officials will engage with stakeholders on the design principles for overseas workday relief. Potentially this might mean that there will be a more comprehensive reform than previously anticipated, and it could result in much needed welcome simplification.
• The government committed itself to rebasing for current and past remittance basis users. At Spring Budget 2024 the rebasing date for this transitional provision was announced as being 5 April 2019. There was criticism of this date during the stakeholder engagement meetings earlier in the year. It appears that the current government has listened as the policy paper states that ‘the rebasing date may not be 5 April 2019. It is being considered and will be announced at the Budget’.

Inevitably the new narrative leads to further questions that we will have to wait until the Budget to have answered. In terms of advising clients now we need to go with what we have to date (see below).

The formal consultation that the previous government promised on the IHT changes has been set aside to be replaced by a review of stakeholder feedback and further external engagement over the summer. Dropping the formal consultation suggests that the government has made its mind up. The IHT aspects of the changes are causing more concern than anything else (the ten-year tail in particular), so this is especially concerning.

The government also uses the policy paper to announce that it intends to conduct a review of the offshore income tax and CGT anti-avoidance legislation, specifically the Transfer of Assets Abroad (ToAA) and Settlements legislation. The purpose of the review is said to be to modernise the rules and ensure they are fit for purpose. The following are stated intentions:

• remove ambiguity and uncertainty in the legislation;
• make the rules simpler to apply in practice; and
• ensure these anti-avoidance provisions are effective.

This could be an opportunity to simplify this highly complex legislation; however, the last sentence with respect to this announcement is somewhat concerning: ‘It is not anticipated that this review will result in any changes before the start of the 2026/27 tax year’. In addition to each regime being complex in and of itself there are a myriad of interlocking offshore anti-avoidance provisions. To review them adequately and come up with appropriately thought through amendments would take significantly longer than the year to 18 months envisaged if the review is working to a 2026/27 effective date.

Note that the current Economic Secretary to the Treasury, Tulip Siddiq MP, when she was Shadow Economic Secretary to the Treasury earlier this year, had echoed professional body concerns with the amendments made to the ToAA legislation in the light of the Supreme Court decision in HMRC v Fisher [2023] UKSC44. The concern is that any review will be more akin to a consultation on specific proposals rather than an in-depth holistic review with full consultation and any removal of ambiguity.

The new regime

The four-year FIG regime

The current tax year (2024/25) is the last year for which a remittance basis claim can be made. From tax year 2025/26 onwards a much-simplified regime based on residency will be put in place for considering whether foreign income and realised foreign capital gains will fall to be taxed in the UK. This much-simplified regime is referred to as the four-year FIG regime. The following categories of taxpayer will be eligible for the new regime:

• new arrivers (those who have been non-UK resident for a 10-year period) in the first four tax years after they arrive in the UK; and
• individuals who were resident in the UK prior to 6 April 2025 but have been here for less than four tax years and were also non-UK resident for 10 years before coming to the UK.

The statutory residence test will be used to determine tax-residence for a tax year. Crucially, and to the considerable disadvantage of taxpayers, the following will be counted as complete tax years:

• any year when the individual is resident in both the UK and another jurisdiction and is treaty resident in the other jurisdiction; and
• any year where the individual arrives or leaves the UK and is entitled to split year taxation. This will be a particular problem given our April tax year end (few individuals will be able to arrange things such that they can come to the UK on or close to 6 April).

We will not know for certain until we see the draft legislation, but it appears that it is a continuous four-year period that is looked at (rather than the first four tax years of UK residence after an absence from the UK of at least 10 years). This would mean that if the individual is not UK resident for part of the four-year period the time frame when they can benefit is reduced even more.

Provided they make the claim, qualifying individuals will not be subject to tax on FIG arising/accruing in the first four years of tax residence, regardless of what they do with the FIG. This means that individuals can remit the FIG to the UK without paying tax on the remitted funds. In addition, they will not pay tax on income distributions from non-UK resident trusts in this period and the anti-avoidance provisions attributing FIG to such individuals will be switched off.

Making the claim results in the loss of entitlement to the personal allowance and the CGT annual exemption. However, depending on the quantum of their income the individual might lose that anyway and the CGT annual exemption is now only £3,000. The choice to make the claim is on a year-by-year basis.

After the four-tax year period qualifying individuals will be taxed on income and gains on a worldwide basis in the same way as a UK resident individual domiciled in one of the three UK jurisdictions.

Transitional provisions

The government is committed to two transitional provisions for individuals.

The first is CGT rebasing for current and past remittance basis users. There will be specific qualifying conditions within the draft legislation. It is likely that a qualifying asset will be defined as an asset that was situated outside the UK at a specified date.

Where eligible individuals dispose of a personally held qualifying foreign asset on or after 6 April 2025, they will be able to elect to rebase the value of that asset to its value as at whatever date is specified at the time of the Budget (this was originally said to be 5 April 2019, but the current government is reconsidering).

The second transitional provision is the TRF. The TRF was announced as an attempt to deal with the legacy of unremitted FIGs that have over the years been kept out of the UK and sheltered by the remittance basis. At Spring Budget 2024, the reduced fixed rate was announced as 12% and the facility was to exist for two tax years (2025/26 and 2026/27). The policy paper states that the reduced tax rate and length of time that the TRF will be available for will be set to make use as attractive as possible. It may be, therefore, that the length of time will be longer than the original two years. As stated in the policy document the government gave a commitment to explore ways to expand the TRF to include stockpiled income and gains within overseas structures. Further details of the reduced tax rate, TRF period and scope will be provided at the time of the Budget.

Overseas Workday Relief (OWR)

Eligibility for OWR is expected to be reformed in line with the new regime. Only individuals arriving in the UK from 2025/26 onwards who are eligible for the new four-year FIG regime will be able to access OWR. OWR will only be available for the first three tax years. For that period, OWR will continue to provide income tax relief for earnings relating to overseas duties where there is a mixed UK/overseas employment contract. In contrast to the current regime, these earnings will be able to be remitted to the UK without any tax charge.

It may be that OWR is reformed more fundamentally given the comment in the policy paper that officials will consult on the design principles for this tax relief. Consultation will take place in stakeholder meetings over the summer with an announcement in the Budget.

Trusts

FIGs that arose in protected non-UK resident trusts before 6 April 2025 will not be taxed unless matched to distributions or benefits (whether UK or foreign) paid to UK residents. The new four-year FIG regime will prevent a tax charge arising in such circumstances. However, in this circumstance, the legislation will not view the payment/benefit as giving rise to a matching event so the trust income and/or gains pools will not be reduced. The onwards gifts rules are to be modified.

For income and gains arising/accruing after 5 April 2025, the trust protections will not apply. Anyone who comes within the four-year FIG regime will not be taxed on distributions or benefits in the tax years to which the four-year FIG regime applies. After that or for those who do not qualify for the four-year FIG regime, they will be subject to the full rigour of the anti-avoidance provisions. If they can benefit from the trust, this means being subject to tax on all trust income on the worldwide basis (the settlements regime) and on the net trust gains each tax year (TCGA 1992 s 86).

The trust protections, when coupled with the IHT protection for foreign situs property within excluded property trusts, were the main reason why the changes in 2017 did not result in significant numbers of UK resident foreign domiciled individuals leaving the UK. However, removing the trust protections at the same time as reducing the favourable tax period and (most drastically) removing IHT protection is a very different proposition.

Settlors could avoid being subject to the income tax and CGT anti-avoidance provisions by having trust deeds amended prior to 6 April 2025 to exclude individuals that would trigger attribution of income and/or gains. This is easier with the income tax provisions as just the settlor and their spouse/civil partner need to be excluded from benefitting (though the spouse/civil partner only has to be irrevocably excluded whilst the settlor is alive and can be added after the settlor is dead).

The CGT anti-avoidance provisions ensure that the range of beneficiary that will result in attribution of gains to the settlor is so wide as to include all immediate family members (i.e. virtually everyone that most settlors would want to benefit). Amending the trust deed such that the provisions would not be applicable is unlikely to be palatable in most cases.

It has long been anomalous that the CGT settlor charge is wide in its scope. Aligning it with the income tax anti-avoidance provisions for trusts (the settlements regime) would be sensible, such that:

• the attribution of gains on the arising basis is only triggered if the settlor and (whilst the settlor lives) his spouse/civil partner can benefit have the power to benefit; and
• there are attribution provisions to a UK resident settlor of any gain matched where a capital payment is made to their minor child.

No rebasing is proposed with respect to pregnant gains within trusts which is somewhat incongruous and ideally this will be re-visited as trust rebasing for the purposes of the CGT settlor charge could be introduced for all assets within trust structures. In 2008, there was such similar rebasing with respect to the CGT beneficiary charge when it was extended to UK resident foreign domiciled individuals and extending the CGT settlor charge to UK resident foreign domiciled individuals is more significant in terms of the penal nature of the provisions.

IHT: individuals

From 2025/26, the UK will move to a residence-based regime for IHT. An individual will be subject to UK IHT on foreign situs assets after ten years of UK residence. In addition, once an individual is caught within the UK IHT net, unless an Estate Treaty provides relief, they will have to be non-UK resident for ten-years to be free of its clutches. This ten-year tail is particularly contentious and will result in many individuals leaving the UK earlier than they might otherwise have done.

IHT: trusts

Although not entirely clear, it is understood that, regardless of when the trust was created, the UK IHT treatment will mirror that of the settlor. That is, when the settlor is outside the scope of IHT so is the trust and when the settlor is within the scope of IHT (including the ten-year tail period) the trust will be too. There is no grandfathering for current excluded property trusts.

We do not have the details, but as mentioned above the policy paper states that the government recognises that these trusts ‘will already have been established and structured to reflect the existing rules’. Consideration is being given to how the changes can be introduced in a way that allows for appropriate adjustment of current structures and transitional arrangements for affected settlors. There is to be external engagement over the summer and details will again be published in the Budget.

What next?

There are to be ‘engagement sessions’ on IHT and OWR over the summer (August/September). These would seem very similar to the ‘listening events’ that happened earlier in the year, so they are likely to be a chance to express views rather than find out anything new. Details of these will go up on the Gov.uk website in the same way as the May listening events were. Decisions will be published as part of the Budget on 30 October.

There is an intention to release the draft legislation for scrutiny. Details will again be published on the gov.uk website in due course.

Original article can be found here: Much ado about non-doms: the new policy paper (taxjournal.com)