Our Insights

1. CHANGES TO THE TAXATION OF NON-DOMICILED INDIVIDUALS

The new rules are complex and what follows is an overview. The non dom changes will be effective from 6 April 2025. No changes have been made to the statutory residence test (SRT) effective for UK tax purposes from tax year 2013/14 onwards (prior to then the common law determined UK residence status for tax purposes).

1.1. Who can benefit from the new 4 year FIG regime?

a. Domicile status is no longer relevant, we are looking solely at residence as a UK connecting factor for tax.

b. Residence is determined under UK domestic tax law. Being non-UK resident under a treaty is not relevant.

c. In the first qualifying year the individual must have been non-UK resident for 10 continuous prior tax years.

d. An individual can only benefit within the period of four continuous UK tax years after the first qualifying year. If the individual is non-resident at all in the four-year period, it is not extended.

e. If a tax year is a split year this will mean that the entire year of relief is utilised. In effect the relief period is likely to be much shorter than four tax years.

f. There is a special rule so individuals who have been UK resident for less than three prior tax years as of 6 April 2025 can benefit so long as the individual has been non-UK resident for 10 continuous tax years when they came to the UK in the first year. In this circumstance the maximum relief allowable is four tax years when the years the remittance basis could have been claimed are added to the years when the individual can make claims for the new relief.

1.2. What is the new special 4 year FIG regime?

a. Three relief claims can be made: (i) claim for relief on foreign income; (ii) claim for relief on foreign employment income (what was overseas workday relief); and (iii) claim for relief on foreign gains.

b. These are independent claims, so the individual can choose to make none, one, two or all three for any qualifying tax year. For the claims to be valid the amount of foreign income, foreign employment income and/or foreign gains, must be quantified and included in the relevant tax return.

c. It is possible to claim relief on some foreign income, foreign employment income or foreign gains and not all.

d. The compliance will be onerous with significant disclosure required.

e. Claims must be made on a tax return or amended return. The return deadline is twelve months after 31 January following the relevant tax year.

f. For the two income reliefs the relief is given by way of a deduction from income (so all income is included in the computation then the foreign income nominated is deducted).

g. Not all foreign income is covered by the foreign income relief (for example chargeable event gains on foreign life insurance policies are not covered).

h. For the foreign gains relief all gains are computed then the foreign gains nominated are deducted.

i. If one or more of the three claims is made for a tax year, then entitlement to the personal allowance and other income tax allowances/reliefs is lost as well as the CGT annual exemption. Entitlement to foreign income and capital losses cannot be claimed for the relevant tax year.

j. Any income with respect to which relief is claimed is not disregarded when computing adjusted net income.

k. For foreign employment income relief, a cap is placed on the relief per tax year of the lower of £300,000 and 30% of the relevant qualifying employment income.

l. After the 4 years the individual is taxed on the arising basis on worldwide income and gains.

1.3. What are the transitional provisions in relation to the new regime for foreign income and gains?

a. Rebasing of foreign assets is available as of 6 April 2017 provided specified qualifying conditions are met.

b. Three-year temporary repatriation facility (TRF).

• Untaxed remittance basis foreign income and gains can be designated by way of a designation election on the individual’s tax return for 2025/26, 2026/27 or 2027/28.
• A fixed TRF rate of tax is paid on designated amounts, which can either be remitted in the TRF period or at a later date with no further tax being due.
• For 2025/26 and 2026/27 the TRF rate of tax will be 12% and for 2027/28 the tax rate will be 15%.
• Settlors and beneficiaries of non-UK resident trusts can benefit where the offshore anti-avoidance provisions apply.
• Simplified mixed fund rules apply for TRF purposes.

c. See our Insight piece entitled “The End of the Remittance Basis and the Two Transitional Provisions” for a more detailed analysis.

1.4. What about offshore trusts set up by non-doms?

a. The trust protections for income tax and CGT do not apply from 6 April 2025.

b. Unless the individual can claim relief under the new 4 year FIG regime they will be taxed as any other UK resident on anything attributed under the offshore avoidance provisions with respect to tax years 2025/26 onwards.

c. The transitional provisions apply with respect to pre-6 April 2025 income and gains.

d. There will be some changes to the beneficiary CGT gains attribution provisions. Gains attributed to beneficiaries from non-UK resident trusts will no longer automatically form the highest part of the individual’s gains and the prohibition on offsetting personal losses against such attributed gains will be removed.

e. For settlors within the settlor CGT gains attribution provisions from 6 April 2025 they will be able to benefit from the FA 2008 transitional rule referred to as “trust rebasing” which will continue through to the computation of all gains from 6 April 2025 where a valid election has been made.

1.5. The new IHT regime for current non-UK doms:

a. Residence rather than domicile determines who is within the scope of UK IHT going forward.

b. An individual will be subject to UK IHT on worldwide assets when they have been UK resident for at least 10 of the last 20 tax years immediately preceding the tax year in which the chargeable event (including death) occurs. At that point, an individual will remain within the scope of worldwide UK IHT for at least three tax years after being non-UK resident. The number of years the individual remains within scope of UK IHT rises by one tax year for every year of UK residence after 13 years until it reaches a maximum of 10 years after 20 years of UK residence as shown by the following table:

d. For those who are 20 years old or younger, the test is whether they have been UK resident for at least 50% of the tax years since their birth.

e. There are transitional provisions for those who are non-resident in 2025/26 and not domiciled in any of the three UK jurisdictions for common law purposes as of 30 October 2024 and not deemed domiciled. Provided these individuals remain outside of the UK they will not be within worldwide IHT even if they would otherwise be caught by the 10 out of 20 year rule.

f. Individuals who were not domiciled in any of the three UK jurisdictions for common law purposes as of 30 October 2024 but were deemed domiciled can also benefit from transitional provisions. If such individuals are not UK resident in 2025/26 their UK IHT tail will be restricted to three years, regardless of what it would otherwise be based on their years of UK residence, provided they do not resume UK residence.

g. See APR and BPR changes below.

1.6. The new IHT regime for offshore trusts

a. There are different rules for qualifying interest in possession trusts (“QIIPs”) which broadly refers to trusts with a life interest either created on death or for a qualifying disabled beneficiary and trusts within the relevant property regime (all other private trusts).

b. There will be grandfathering with respect to QIIPs created prior to 30 October 2024 provided the life tenant immediately prior to 30 October 2024 either gives up their interest or dies.

c. Where grandfathering does not apply to QIIPs they will be excluded property trusts where both the settlor and the beneficiary are only subject to IHT on UK situs assets.

d. For all other trusts where the settlor has died prior to 5 April 2025 will be grandfathered meaning that if these trusts were excluded property trusts they will remain so.

e. Where grandfathering does not apply to relevant property trusts, whether their foreign property is excluded will be determined by the IHT status of the settlor in the tax year of the chargeable event (the exit charge or ten-year charge). If the settlor is dead, it will be their IHT status in the year they died.

• This means that foreign assets may come in and out of the relevant property regime (see the table below).
• Where the settlor was subject to worldwide UK IHT and is subsequently only subject to IHT on UK assets this means that foreign situs assets will cease to be relevant property and there will be an immediate trust exit charge (maximum rate of 6%).

f. Where a settlor retains an interest in the trust there is a gift with reservation of benefit meaning that the value of the trust property is deemed to stay within the death estate for IHT purposes- this rule has historically not applied to excluded property.

• Provided certain conditions continue to be met, for trusts created prior to 30 October 2024, there are transitional provisions protecting non-UK domiciled settlors of excluded property trusts from the GROB charge.
• Otherwise under the new regime the GROB will only be excluded if the settlor is not with the scope of worldwide IHT.

2. CALL FOR EVIDENCE ON THE CHANGES TO THE OFFSHORE ANTI-AVOIDANCE PROVISIONS

2.1. There will be a review to examine:

a. the settlements’ legislation;

b. the transfer of assets abroad legislation; and

c. the CGT legislation in this context.

2.2. The call for evidence closes on 19 February 2025 and poses 5 questions.

2.3. A formal consultation is expected in 2025.

2.4. Legislative change is not expected to be effective any earlier than 2026/27 (so Finance Act 2026).

2.5. See our Insight piece entitled “Review of the Anti-Avoidance Provisions” for a more detailed analysis.

3. OTHER INHERITANCE TAX CHANGES: APR AND BPR

3.1. The scope of APR will be extended from 6 April 2025 to land managed under an environmental agreement with, or on behalf of, the UK government, devolved governments, public bodies, local authorities, or approved responsible bodies.

3.2. From 6 April 2026 the rate of BPR available for shares designated as ‘not listed’ on the markets of recognised stock exchanges, such as on AIM, will be reduced to 50%. A full list of recognised stock exchanges can be found here.

3.3. For other assets where 100% relief was available, effective from 6 April 2026, there will be a material reduction in the relief available under Agricultural Property Relief (APR) and Business Property Relief (BPR):

a. For individuals:

• The existing 100% of relief will be restricted to the first £1m of combined APR and BPR.
• Thereafter relief will be available at 50%.

b. For trusts in existence prior to 30 October:

• Each trust will have its own £1 million allowance for the 100% relief.
• Thereafter relief is available at 50%.

c. For trusts created on or after 30 October 2024 - the £1 million allowance will be divided up between trusts created on or after 30 October 2024.

3.4. The government is committed to publishing a technical consultation in early 2025.

4. INHERITANCE TAX – PENSION CHANGES

Unused pension funds and death benefits, which have previously been exempt from IHT, will be brought into the scope of IHT from 6 April 2027. The implementation of these changes is still being consulted on. The scheme administrator will be responsible for the necessary IHT reporting and paying any IHT due.

5. INHERITANCE TAX – FURTHER FREEZING OF BANDS

The IHT nil rate band (£325K) and residence nil-rate band (£175k) are frozen until at least April 2030.

6. CARRIED INTEREST

6.1. Basic and higher rates of CGT applicable to carried interest are increased from 18% and 28% to a single rate of 32% from 6 April 2025.

6.2. Revised tax regime to be introduced for carried interest from 6 April 2026:

a. This will sit within the income tax framework.

b. Broadly, all carried interest will be treated as profits of a deemed trade and subject to income tax and Class 4 national insurance contributions, with a 72.5% multiplier applied to qualifying carried interest brought within the charge.

7. CAPITAL GAINS TAX

7.1. Standard CGT rates have been increased from 10 and 20% to 18% and 24% for disposals on or after 30 October 2024.

7.2. No changes to the18% and 24% tax rates on chargeable gains realised on residential property.

7.3. The rate of CGT that applies to assets qualifying for Business Asset Disposal Relief (previously Entrepreneurs’ Relief) has been increased from 10% to 14% from 6 April 2025 with a further increase to 18% from 6 April 2026 (matching the lower main rate).

7.4. The lifetime limit for Investor’s Relief is reduced from £10m to £1m. The rates are increased in the same way as the Business Asset Disposal Relief rates.

8. INCOME TAX AND NATIONAL INSURANCE THRESHOLDS

The previous government froze the income tax and national insurance thresholds until April 2028. It was announced that from April 2028 the personal thresholds would be uprated in line with inflation.

9. STAMP DUTY LAND TAX

9.1. The higher rate surcharge of SDLT applicable to purchases of additional residential properties has been increased from 3% to 5% above the standard residential rates of SDLT. The highest rate of SDLT will now be 17% on consideration above £1.5m.

9.2. The single rate of SDLT payable by companies and other non-natural persons on residential properties over £500k has increased from 15% to 17%.

9.3. Increased rates come into effect for transactions which complete, or which are substantially performed on or after 31 October 2024 (the day after the announcement).

10. VAT ON PRIVATE SCHOOL FEES

As announced in July 2024, all education and boarding services will be subject to the standard rate of VAT. This legislation will come into force from 30 October 2024 (it is contained in Finance Bill 2025 which is currently passing through Parliament) but applies to services provided on or after 1 January 2025.

11. HMRC POWERS AND TAX ADMINISTRATION

11.1. The government will invest £1.7bn over the next 5 years to recruit an additional 5000 HMRC compliance staff plus 1800 HMRC debt management personnel.

11.2. Various ongoing consultations and consultations still planned for 2025. Response documents so far have been published on:

a. the regulatory framework in the tax adviser market.

b. the call for evidence on HMRC powers, penalties and safeguards

11.3. From 6 April 2025 the late payment interest rate for tax will rise by 1.5% (currently set at base rate plus 2.5%). Note this will increase the difference between the lower rate paid to taxpayers and received by HMRC (currently the late payment interest rate HMRC receives is 7.5% whereas taxpayers only receive 4%).

12. FURTHER PROVISIONS AIMED AT PREVENTING PERCEIVED ABUSE/TAX AVOIDANCE

12.1. To take effect from 30 October 2024:

a. Changes to the tax rules on liquidations of LLPs.

b. Changes to the close company loans to participators rules.

c. Reducing tax-free overseas transfers of tax relieved UK pensions.

d. Changes to the taxation of Employee Ownership Trust and Employee Benefit Trust.

12.2. To take effect from 6 April 2026:

a. Tackling schemes with respect to car ownership that are felt to have been developed to avoid the benefit in kind rules.

b. Prevent abuse of the charity tax rules.

c. Given the various high-profile cases in this context the government will make recruitment agencies responsible for accounting for PAYE on payment made to workers supplied by an umbrella company. Where there is no agency, the responsibility will fall to the end client business.

12.3. Additional HMRC resources to be committed to tackle perceived offshore non-compliance by the wealthy and intermediaries and corporates they control and other connected entities. The government is also looking to:

a. Increase collaboration between HMRC Companies House and the Insolvency Service to tackle what it refers to as “phoenixism” to evade tax;

b. Expand HMRC’s counter-fraud capability to address high value and high harm tax fraud.

c. Strengthen HMRC’s scheme for rewarding informants.

12.4. There will be a further consultation published in 2025 on new ways for HMRC to tackle non-compliance particularly with respect to promoters of marketed tax avoidance.

13. DIGITILISATION

13.1. There will be a commitment to making tax digital for income tax self-assessment (MTD for ITSA) and an aim to expand the MTD rollout to those with incomes over £20,000 by the end of the Parliament. Precise timetable to be set out at a future fiscal event.

13.2. IHT reporting will be digitalised by 2027/28.

14. ANNOUNCED IN SPRING 2024 AND LEGISLATED IN FINANCE BILL 2025

14.1. The Furnished Holiday Lettings tax regime will be abolished from 6 April 2025. There is an anti-forestalling rule, effective from 6 March 2024, to “prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rule”.

RELEVANT PROPERTY TRUSTS SOME EXAMPLES OF THE NEW IHT REGIME (see 1.6 above)

SETTLOR NEITHER UK DOMICILED NOR DEEMED DOMICILED WHEN THE TRUST WAS SETTLED