We are happy to announce that JHA's Tax Disputes Team has again been ranked as Band 1 by Chambers today, a ranking we have proudly achieved every year since we began in 2013. A special congratulations to our lawyers who also received individual recognition: Graham Aaronson KC (Band 1), Simon Whitehead (Band 1), Michael Anderson (Band 2) Iain MacWhannell (Band 4) and Paul Farmer (Senior Statespeople).
This is the latest successful ranking, following previous top-tier rankings in Legal 500 United Kingdom 2025 and Chambers High Net Worth Guide 2024.
There is a great deal of support for abolishing domicile as a fiscal connecting factor for tax purposes and replacing the remittance basis of taxation with a much-simplified residence-based regime. In principle, everyone can agree with Labour that the tax system should be made fairer: “If you make your home and do your business in Britain, then you should pay your taxes here too”.
However, any changes to the system need to strike a balance between “fairness” and maintaining the attractiveness of the UK to the super rich (and their incoming capital) and highly skilled individuals that the UK wants to attract for their contribution to the UK economy.
The importance of non-doms to the UK
UK resident foreign domiciled individuals pay a huge amount of tax in the UK, even if they pay their taxes on a different basis. HMRC recently estimated that at the end of the 2023 tax year there were 74,000 non-doms in the UK paying a total of £8.9 billion in tax, which is likely to be an understatement, since not all deemed domiciled taxpayers have to indicate their deemed domiciled status on their tax return.
Non-doms also contribute to the UK economy (and tax yield) in other ways: they pay VAT on expenditure, invest in UK businesses and property, employ people in the UK (PAYE and NICs), send their children to UK schools, and donate to UK cultural institutions, often through their own charitable foundations. The Rausing family alone is associated with the Arcadia Fund, the Lund Trust, The Julia and Hans Rausing Trust, the Sigrid Rausing Trust and The Alborada Trust. Migrants represent a significant percentage of the super-rich generally and also those in high income, high productivity occupations in financial and professional services in banks/hospitals alike. Research from the University of Warwick and the LSE found that 97% of non-doms were either born abroad or had lived abroad for a substantial period of time and that 23% of non-doms worked in finance. Given the importance of the financial sector to the UK, no one wants these people to leave.
Sensitivity to tax policy
Although some academics believe that tax reforms have minimal impact on migration and preferential regimes can be safely abolished without causing an exodus of HNW individuals, data from Switzerland shows that high net worth (“HNW”) individuals are in fact highly sensitive to changes in tax policy.
Between 2010 and 2014 some Swiss cantons abolished expenditure-based taxation whilst others chose to retain it (referendums were held). In a 8 February 2023 study entitled “Behavioural Responses to Special Tax Regimes for the Super-Rich: Insights from Swiss Rich Lists”, published as EU Tax Observatory Working Papers No 12, Enea Baselgia and
Isabel Z. Martinez conclude that the abolition of expenditure-based taxation resulted in a medium to long-term decline of about 30% in the stock of super-rich in reform cantons while the number of Swiss born super-rich remined the same. In addition, they concluded that their study showed for the first-time evidence of how sensitive super-rich foreigners are to tax policy when it comes to choosing where in Switzerland to reside and that the 30% decline in the cantons that abolished the preferential tax treatment was mainly driven by the new arrivals who chose to move to those cantons still offering them tax privileges.
Other studies show that tax policy drives international migration among top footballers and athletes and acts as a ‘pull’ factor to bring highly skilled expatriates back to their countries of origin. It is therefore concerning that the UK’s current proposed replacement regime offers only very short-term benefits and that the projected yields fail to account for the economic impact of those HNW individuals who will either not now come to the UK or who will leave as a result of these seismic tax changes. UK tax advisers have seen enquiries from clients wanting to come to the UK dry up. The UK will lose not only individuals’ income tax and wealth contribution, but also the indirect taxes and the taxes paid in the UK by related companies.
Non-dom telecoms entrepreneur Bassim Haidar, a Lebanese citizen, told The Guardian in May, “I am moving – that is it” and said that ‘he had formed a working group of 29 non-doms, who mostly planned to leave the UK before September so that they could secure places for their children in private schools in their new countries before the start of the academic year’. He has also cancelled his plan to list financial services company Optasia on the London Stock Exchange and pointed out he would have to make his household staff redundant on his departure. Another loss would be businessman Wafic Saïd, who we understand plans to leave for Abu Dhabi if the changes go through as proposed. His position is that it would be reasonable to charge a large forfait along Italian lines, but that the current proposals are absurd.
Approach to reform
When it comes to reforming the tax system, the government must bear in mind:
a. There is a finite tolerance level for paying more tax, but perhaps more importantly the lack of certainty and the frequent rule-changes have given rise to distrust and suspicion. According to Jon Elphick, international tax adviser at Mark Davies & Associates, “The mood among clients is disillusionment. We’ve experienced a significant uplift in clients asking about relocations – and what their tax positions would look like if they were to move.” Jon Shankland, private wealth partner and tax lawyer from national law firm Weightmans, said, “This is putting the financial best interests of our country at risk needlessly. Wealth is already leaving the country. Part of that is genuine fear that Labour’s approach will be very hard line, but for many it’s not knowing where they stand that’s causing nervousness.”
b. Extrapolations cannot be drawn safely from previous changes to the non-dom regime in the UK, because the changes now proposed are so radical. The 2017 UK changes were deliberately designed not to cause an exodus. This was why an individual could benefit from the remittance basis for 15 years, there were trust protections for income tax and CGT and the excluded property regime for trusts was retained.
c. Inheritance tax exposure is crucial to the super-rich. In the US, academic research has shown a positive correlation between a state imposing federal estate duties and a taxpayer leaving that state. One European non-dom businessman recently told the Financial Times: “The UK’s inheritance tax of 40 per cent on your global assets is a real problem. It’s the overall instability that has been the nail in the coffin for me. If there was a more balanced, less punitive inheritance tax I might have considered staying.” Instead, he is moving his family from London to Switzerland after more than a decade in the UK. Subjecting an individual with no other links to the UK to worldwide inheritance tax after being resident in the UK for just 10 years is both unfair and unworkable. The lack of grandfathering for existing excluded property trusts has caused extreme disappointment.
The UK government, before introducing changes to reform an ineffective system, needs to understand all sectors of society that the changes will impact. These changes are too important to the UK’s global economic prosperity to be used for political point scoring, especially since a new government elected with a large majority should be in a strong position to take its time to get this right.
Against a backdrop of Brexit and increasingly less favourable immigration rules, the UK tax system is fast earning a global reputation for being uncertain and unwieldy and too easily and often used as a political weapon.
A new tax regime that an individual can only benefit from for four years (at best) is not going to be attractive to the super-rich and the high-level decision makers within multinationals. For those looking for an attractive tax regime who want to stay for a reasonable period of time (to not disrupt their children’s schooling for example) the UK is no longer attractive. Other jurisdictions will be more attractive, meaning that their capital and that of the businesses they are connected with will go elsewhere too.
Given that it is UK government policy to welcome and encourage foreign direct investment, proposing a new tax regime that discourages wealthy foreigners from coming to the UK suggests a lack of joined-up government. Can the UK really be ‘the best place in the world for international investors’ (the stated ambition of the government’s Office for Investment) when international investors are “petrified” and “jumping on planes right now and leaving”? Similarly Christopher Groves, a partner at Withers, quotes a non-dom client who describes the proposals as “Arrogant and short-termist and very damaging to the UK’s image as a good place for international wealth creators” and who is now questioning their decision to expand their international business in the UK.
Global competitiveness
We need to remember that UK tax policy does not exist in a vacuum. There is active global competition to attract the wealthy, skilled and highly mobile individuals.
In Italy, super-rich migrants need only pay a flat tax of €100,000 per annum (expected to rise to €200,000 from next year – indicative of how popular the scheme has proven) to shelter foreign income, gains and assets from all Italian taxes, provided a simple one-page compliance form is filed on time and the tax paid for each year (a qualifying individual can benefit for a maximum of 15 years).
JHA clients have expressed interest in moving to jurisdictions including Monaco, the UAE and the Bahamas where they will not be subject to income tax, wealth tax, capital gains tax or inheritance tax.
Some Swiss cantons still offer an expenditure-based regime explicitly aimed to attract the super-rich). Our nearest neighbour Ireland has a remittance basis regime (applying to foreign income and gains) very similar to what the UK had prior to the April 2008 changes. Israel, Malta, Greece (where non-doms are required to invest a minimum of €500,000 into Greek real estate, bonds or stock) and Thailand also have special regimes designed to attract the wealthy.
The regimes available in other jurisdictions are more competitive – and these countries are perceived to be more politically predictable, financially appealing and above all welcoming.
Recommendations
Our firm recommendation is therefore that the proposed legislative changes should not be effective until at least 2028/29 to allow time for extensive consultations on: (i) policy, with far more consideration of the wider economic impact than has so far taken place; and (ii) the technical details of the legislation. Swiftly drafted legislation by a draftsman operating in a vacuum is not desirable.
In our opinion a system like the Italian system would be desirable. However, we feel that the UK could look to charge: £200,000 per annum in the first 5 years, £300,000 per annum in the second five years and then £500,000 per annum for the last 5 years.
We also think that to avoid the cliff edge in the Italian system where the super-rich leave after 15 years, for a charge of £1 million per annum individuals should be able to benefit indefinitely from the current trust protections with respect to income tax and CGT and for IHT excluded property status on trusts.
These individuals would therefore be paying significant UK tax but, from the research to date, not so much that they would leave. There would be a significant tax increase and the UK’s economic competitiveness would be maintained.
Joseph Hage Aaronson LLP
September 2024
To discuss this report further please contact:
Helen McGhee: HMcGhee@jha.com
Lynnette Bober: Lynnette.Bober@jha.com
We are happy to announce that JHA's Tax Disputes Team has again been ranked as Tier 1 by Legal 500 today, a ranking we have proudly achieved every year since we began in 2013. A special congratulations to Graham Aaronson KC who has again been recognised in the Hall of Fame category, Iain MacWhannell (ranked as a Leading Partner) and Mei Wong (ranked as a Leading Associate).
This is the latest successful ranking, following previous top-tier rankings in Chambers UK Legal Guide 2024 and Chambers High Net Worth Guide 2024.
Graham Aaronson, Michael Anderson and Steve Bousher provide answers to common questions on transfer pricing methods.
Pricing methods
Accepted methods
What transfer pricing methods are acceptable? What are the pros and cons of each method?
All five traditional transaction and transactional profit methods recognised by the OECD (see paragraph 2.1 of the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines (OECD TPG)) are acceptable, and the use of ‘other methods’ not described in the OECD TPG is permitted if they satisfy the arm’s-length principle and provide a better transfer pricing solution (see paragraph 2.9 of the OECD TPG). The guidance in the OECD TPG concerning the pros and cons of each method is adopted and supplemented by His Majesty’s Revenue & Customs (HMRC)’s own guidance, set out in the International Manual at INTM421000. Where a traditional transaction method and a transactional profit method can be applied in an equally reliable manner, the first type is preferable and should be applied. In broad terms, traditional transaction methods are likely to be appropriate for establishing the arm’s-length price of commodity transactions, marketing operations or transactions concerning semi-finished goods, services or long-term buy-and-supply arrangements. Transactional profit methods, on the other hand, are likely to be preferable where each of the related parties to a transaction makes unique and valuable contributions, where the parties engage in highly integrated activities or in transactions involving the transfer of intangibles or rights in intangibles.
Cost-sharing
Are cost-sharing arrangements permitted? Describe the acceptable cost-sharing pricing methods.
Cost contribution arrangements (CCAs) are permitted. There is no difference in the analytical framework for analysing transfer prices for CCAs compared to analysing other contractual arrangements (see paragraph 8.9 of the OECD TPG). Accordingly, the guidance in Chapter II (Transfer Pricing Methods) of the OECD TPG is relevant to determining the value of each participant’s contribution to the CCA, including the amount of any balancing payment required to align the value of their contributions with the value of their expected benefits, and the value of any buy-in payment or buy-out payment triggered by changes in the membership to the CCA.
Best method
What are the rules for selecting a transfer pricing method?
Given the requirement to read the legislation in a way that best secures consistency with article 9 of the OECD Model Tax Convention (OECD MC) and the OECD TPG, the United Kingdom currently follows the ‘most appropriate’ method approach set out in paragraph 2.2 of the OECD TPG (see the International Manual at INTM421010). Accordingly, the selection process should take into account:
Under paragraph 2.3 of the OECD TPG there is effectively a hierarchy of methods where one or more methods are equally reliable for the transaction in question: in such cases, a traditional transaction method is preferable to a transactional profit method, and a comparable uncontrolled price method is preferable to other traditional transaction methods.
Taxpayer-initiated adjustments
Can a taxpayer make transfer pricing adjustments?
The United Kingdom has a self-assessment system for income tax and corporation tax. The responsibility for making the assessment rests on the taxpayer and the amounts in the return are conclusive unless amended by the taxpayer or HMRC within the statutory time limits. A transfer pricing adjustment can only be made where there is a potential tax advantage for the UK taxpayer in the form of an increase to chargeable profits or a reduction of losses. Part 4 of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010) permits corresponding adjustments by claim in relation to UK–UK transactions only (see the International Manual at INTM412130). The mutual agreement procedure must be invoked in cross-border cases.
Safe harbours
Are special ‘safe harbour’ methods available for certain types of related-party transactions? What are these methods and what types of transactions do they apply to?
The United Kingdom’s transfer pricing rules do not usually apply to small or medium-sized enterprises (SME) (see section 166 of TIOPA 2010) although SMEs may elect to be subject to the rules and HMRC may direct that an SME apply them. The meaning of ‘small enterprise’ and ‘medium-size enterprise’ are based on the definition in the European recommendation 2003/361/EC (see HMRC’s International Manual at INTM412080). Transfer pricing rules will also apply to SMEs if the other affected person or a party to the transaction is a resident of a non-qualifying territory. Broadly, a territory qualifies (see section 173 of TIOPA 2010) if it is one with which the United Kingdom has a double tax treaty containing a non-discrimination provision and has been designated as such in regulations made by the Treasury.
Original article can be found here: https://www.lexology.com/r/UMhKVX4/0ac581cb62/VwcN
With much uncertainty surrounding the end to the non-domicile regime, Helen McGhee and Lynnette Bober provide a helpful summary of the (currently) anticipated changes.
Current Regime
Budget March 2024 (Conservatives)
April 2024 Labour
Policy Paper 29 July 2024 (Labour)
Who can benefit from the special regime –for income tax and CGT.
UK residents with a common law foreign domicile who are not deemed UK domiciled.
New arrivers - those who have been non-UK resident for a continuous 10-year period - in their first 4 tax years of residence.
Labour supported the changes announced at Spring Budget.
No change.
Special regime for foreign income and gains (FIG).
The remittance basis (“RB”). Foreign domiciled UK residents can claim the RB such that they are only taxable on foreign income and gains when remittances are made.
Where a claim is made the individual cannot benefit from the personal allowance or CGT annual exemption.
After specified periods of UK residence a Remittance Basis Charge – the amount determined by years of prior residence – will be payable.
The 4-year FIG regime.
Where a claim is made foreign income, and gains are exempt from UK tax regardless of whether they are remitted to the UK or not.
No charge payable to benefit from the regime. However, an individual benefitting from the regime cannot also benefit from the personal allowance and CGT annual exemption.
After the 4 years the individual is subject to worldwide tax on income and gains.
Again Labour supported the changes announced at Spring Budget.
Said they would consider a specific incentive for UK investment within the 4- year period.
Broadly, no change with respect to support for 4- year FIG regime.
Nothing further said about the incentive for investment in the UK within the 4-year period.
Did say that the government would review some other key areas of the previously announced reforms to ensure that “the new regime is both fair and as competitive as possible”.
Overseas Workday Relief (OWR)
Special regime for the first three years of residence such that an individual carrying out employment duties in the UK and overseas can claim the RB on the overseas portion of the income.
Complex rules that are poorly understood in general.
Further consultation promised. Broadly, from 2025/26 to benefit the individual would have to also be eligible for the new 4-year FIG regime.
OWR will only be available for the first three tax years. For that period OWR will provide a complete exemption from UK tax for the portion of the employment income that can be attributed to overseas duties.
Silent.
States that a form of OWR will be retained and that officials will engage with stakeholders on the design principles for this tax relief. Engagement to happen in August with an announcement in the 30 October 2024 Budget.
Budget March 2024 (Conservatives)
April 2024 Labour
Policy Paper 29 July 2024 (Labour)
Transitionalprovision1: Income tax reduction
Specific relief announced for UK resident foreign domiciled individuals who had been eligible for the RB and would be subject to tax on the worldwide basis from 2025/26.
For tax year 2025/26 only the amount of foreign income taxable was to be reduced by 50%.
Labour does not support this proposal and will not introduce it.
No change to the earlier decision to not introduce this transitional provision.
Transitionalprovision2: CGT rebasing
Available to individuals who have claimed the RB and are neither UK domiciled, nor UK deemed domiciled by 5 April 2025.
Rebasing to the 5 April 2019 value announced for assets held personally by such individuals.
Silent.
Support for rebasing for current and past RB users.
The rebasing date may not be 5 April 2019. What date would be appropriate is being considered and will be announced at the 30 October 2024 Budget.
Transitionalprovision3: Temporary Repatriation Facility (TRF)
Available to individuals where the foreign income or gains arose/accrued in a tax year when the individual was taxed on the RB and the individual was UK resident in the relevant year.
A fixed 12% rate would apply to all sums brought to the UK under this facility in tax years 2025/26 and 2026/27.
It was understood that:
a. there would be no regard paid to what the amounts traced to;
b. no credit given for any foreign tax credit; and
c. the TRF would not apply to pre-6 April 2025 FIG generated within trusts and trust structures.
Concern expressed that the two tax year period will not be long enough and that there will remain sizable, stockpiled FIG overseas and a huge disincentive to bring it to the UK.
Commitment to explore ways to encourage people to remit stockpiled FIG to the UK, so that the legacy of the RB rules can be ended.
Commitment to the TRF again made clear.
Stated that the reduced rate and length of time that the TRF will be available for will be set to make use as attractive as possible.
Commitment to consider ways to expand the scope of the TRF, such as including stockpiled income and gains within overseas structures within the remit. Details to be confirmed in the 30 October 2024 Budget.
Current Regime
Budget March 2024 (Conservatives)
April 2024 Labour
Policy Paper 29 July 2024 (Labour)
Non-UK resident trusts – the trust protections.
Provided additions are not made to the trusts, UK resident foreign domiciled settlors who could benefit from non-resident trusts are only subject to tax if they receive distributions or benefits from the trust. As such, they are not subject to the UK anti-avoidance provisions in the same way they UK resident and UK domiciled individuals are. These favourable provisions are referred to as the “trust protections”.
For income and gains arising/accruing after 5 April 2025 the trust protections will not apply.
Anyone who comes within the 4-year FIG regime will not be taxed under the anti- avoidance provisions on foreign income or any gains arising within the trust structure whilst the 4-year FIG regime applies. Equally they will not be taxed on income or capital distributions received from the non-UK resident trust in that period.
After that, or for those who do not qualify for the 4-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 and on the net trust gains each tax year.
Labour will follow the Conservative government plans.
No changes to the plans announced.
What is the IHT regime for individuals based on?
Domicile based system.
Move to a residence-based system.
Labour will follow the Conservative government plans.
No change.
What is the special IHT regime for foreign assets owned directly by individuals?
Foreign domiciled individuals – provided they are not deemed domiciled – are not subject to UK IHT with respect to their foreign situs assets.
An individual will be subject to UK IHT on foreign situs assets after ten years of UK residence.
In addition, a ten-year tail was announced. This means that any individual caught within the UK IHT net will have to be non-UK resident for ten- years to be free of its clutches.
Labour will follow the Conservative government plans.
No changes to the plans announced.
Stated that there will be further engagement with stakeholders in August.
What is the IHT system for trusts based on?
Domicile based system.
Move to a residence-based system.
Labour will follow the Conservative government plans.
No change.
Current Regime
Budget March 2024 (Conservatives)
April 2024 Labour
Policy Paper 29 July 2024 (Labour)
What is the special IHT regime for trusts?
The excluded property regime. Trust property settled whilst an individual has a foreign common law domicile and is not deemed UK domiciled is outside the scope of UK IHT provided it is foreign situs.
For trusts settled after 6 April 2025 the end of the use of excluded property trusts to keep property outside of the UK IHT net.
The IHT position of trusts under the new regime will mirror the position of the settlor. That is, it seems that when the settlor is outside the scope of IHT so is the trust and when the settlor is within the scope to IHT (including the ten-year tail period) the trust will be too.
This means that the IHT relevant property regime will apply to most trusts.
In addition the Gift with Reservation of Benefit (GROB) IHT anti-avoidance provisions will apply where the settlor is a beneficiary of the trust. This means that, if the situation continues, the value of the trust property will also be subject to tax on the death of the taxpayer.
Labour appeared to support the plans for trusts created after 5 April 2025.
The policy paper says: “The government intends to change the way IHT is charged on non-UK assets which are held in such trusts, so that everyone who is in scope of UK IHT pays their taxes here.
IHT and pre- 6 April 2025 excluded property trusts
Outside the scope of UK IHT provided it is foreign situs.
All trusts set up prior to 6 April 2025 by foreign domiciled individuals who are not UK deemed domiciled will be grandfathered for IHT purposes. That is, they would be outside the scope of UK IHT provided that when a chargeable event takes place the trust only includes excluded property. This also means that GROB will not apply, as well as the trust IHT relevant property regime - when the settlor can benefit from the trust.
Labour will include all foreign assets held in a trust within the scope of UK IHT, whenever they were settled, so that nobody living here for longer than ten years can avoid paying UK inheritance on trust property settled.
Grandfathering still appears to be ruled out. However, there is a recognition that trusts were established and structured to reflect the current rules. Stated that the government “is considering how these changes can be introduced in a manner that allows for appropriate adjustment of existing trust arrangements, while ensuring that the treatment of all long-term residents of the UK is the same for IHT purposes.”
As such, there will be transitional arrangements for affected settlors. Consultation in August and the detail will be published at the 30 October 2024 Budget.
Current Regime
Budget March 2024 (Conservatives)
April 2024 Labour
Policy Paper 29 July 2024 (Labour)
Review of anti-avoidance legislation
Not applicable.
Review of offshore anti- avoidance legislation announced.
Seems to apply to income tax and CGT anti-avoidance legislation. However, specific mention made of the Transfer of Assets Abroad and Settlements legislation.
Said to be to modernise the rules and ensure they are fit for purpose. The following are stated intentions:
a. Remove ambiguity and uncertainty in the legislation.
b. Make the rules simpler to apply in practice.
c. Ensure these anti-avoidance provisions are effective.
Not expected to result in any changes before the 2026/27 tax year.
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:
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.
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:
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:
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:
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:
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)
In this decision, the First-tier Tribunal (Tax Chamber) (“FTT”) dismissed an appeal against discovery assessments which disallowed amortisation relief claimed by the Appellant company for three types of goodwill acquired from a partnership. The decision examined the applicability of each of the circumstances set out in s882 CTA 2009 before concluding none of them had been satisfied. It also provided guidance on the meaning of carrying on a business pursuant to s884 CTA 2009. In rejecting the appeal, the FTT reached a number of key conclusions:
What are the practical implications of this case?
This decision should be a warning to partners when changing profit sharing ratios/acquiring additional businesses and companies acquiring partnerships. The key to successfully obtaining amortisation relief for goodwill is strong and independent contemporaneous evidence to support its valuation. In this case, such evidence was lacking:
What was the background?
The key issue the First-tier Tax Tribunal (“FTT”) were asked to determine was whether each of the following goodwill elements (collectively the “3 Goodwills”) fell within the provisions of the intangible fixed assets rules in Part 8 of the CTA 2009 (the “Intangibles Regime”):
A secondary issue of whether the discovery assessments for APEs 26 Jan 2015 and 26 July 2015 were valid was also determined by the FTT.
What did the tribunal decide?
The circumstances in which the Intangibles Regime will apply are set out in s882 CTA 2009 (cited at paragraph 86 of the decision). The FTT held that none of those circumstances applied to any of the 3 Goodwills.
The majority of the decision focused on the DCS Alexander Goodwill, and the FTT found:
In relation to Case B the FTT noted that “we have not seen nor has the Appellant satisfied us that there was any agreement in place between Mr Hewitt and Mr Alexander … to displace the analysis of the goodwill being partnership property”. It is therefore implied that partners can rebut the presumption that individual partners do not own the goodwill of the business by recording the same in a partnership agreement.
The FTT’s other conclusions
Original article can be found here: Warning for partnership personnel changes? (Armour Veterinary Group v HMRC) – Lexis Nexis
What’s keeping you busy at work?
As I am sure is the same for everyone in tax, the furore in the run up to 4 July. Specifically, sifting through and decoding manifesto policies combined with health checks of existing structures to try to gage the impact for clients of what we understand will be introduced.
If you could make one change to tax, what would it be?
It’s difficult to choose just one! Particularly topical is the constant tinkering of/adding to HMRC powers which has found its way into manifesto promises. Until HMRC use their existing powers more effectively (see recent £14m ball drop re our friend Baxendale Walker [P Baxendale-Walker v HMRC [2024] UKUT 154 (TCC)]), we ought not to be adding more pages to the legislation in this area.
Another perennial gripe, highlighted in recent years in the context of the IR35 regime, is what I think the economists call horizontal equity. It just doesn’t feel right that that an individual who operates as a sole trader is taxed in an entirely different way with a significantly different fiscal outcome to the same individual, operating the same business who chooses to incorporate.
Has a recent change in HMRC practice impacted your work?
The ever-evolving methodology for resolving disputes adopted by HMRC has a big impact on my day-to-day job. The current mechanism can be prohibitively linear (the matter goes from A to B to C), rather than what might be considered a more efficient strategy with A, B and C all reaching a cohesive agreement (as happens in the High-Risk Wealth Programme cohort). The length of time it takes to resolve anything is becoming very protracted.
The Failure to Correct 200% penalties are not helping with some dead lock positions. These penalty levels are giving people a reason to fight which is obstructing settlement. The rationale and driver for these penalties was great in the context of Requirement To Correct but it was perhaps only appropriate in that short time window. Maybe a new government will deliver us a neatly wrapped new disclosure facility (akin to the pragmatism we had with the Liechtenstein Disclosure Facility) with a shiny bow on top.
What do you know now that you wish you’d known at the start of your career?
Be patient. It will come. I wanted to know everything all at once and it is not until you have a few grey hairs (covered in blond!) that you appreciate that learning and building is a lifelong endeavour so enjoy the journey, don’t worry about the destination.
Are there any new rules that are causing a particular problem in practice?
The reform of the non-dom legislation is going to be seismic; one can only hope that the relevant people take their time and consult those with boots on the ground to get it right and to not squash the global competitiveness of the UK as a destination of choice for wealth and talent. The TOAA legislation (particularly the application of the motive defence) is going to take on a new dimension as a direct result of these changes.
What are clients currently asking about?
There are many questions around the future of Excluded Property Trusts and grandfathering and the ten year IHT tail which is set to drive HNWs from the UK. Oh and how to become non-UK resident.
Finally, you might not know this about me but...
I am the best lawyer and tax adviser I can be when I am given the flexibility to be the best mum I can be. I do a lot of work around retaining talent and navigating the motherhood penalty. It is something I feel very passionate about.
Helen McGhee is a Partner in the Joseph Hage Aaronson contentious tax team specialising in UK and international tax disputes. Her specialism is the taxation of nondoms but she advises on a wide range of tax issues. Helen is a member of STEP and is a CEDR accredited mediator.
Email:hmcghee@jha.com; tel: 020 7851 8879
Original article can be found here: One minute with... Helen McGhee (taxjournal.com)
Case Note: ‘The approach of the Tax Tribunal to evidential sampling in Kittel cases’
The First-tier Tribunal (Tax Chamber) has recently published a decision of Judge Dean on a sampling application by HMRC in the case of Ezy Solutions Ltd (in liquidation) and Milo Corporation Ltd (in liquidation) v HMRC [2024] UKFTT 00209 (TC). The Decision was released on 9 March 2023 but had not been published until recently.
HMRC applied for a Direction that the parties agree a sample of 50 Mini Umbrella Companies upon which the appeal would be determined. HMRC contended that the sample would limit the scope of the parties’ evidence in the appeal. HMRC argued that it would be disproportionate and “take [HMRC] an inordinate amount of time” serve the evidence in relation to all of the MUCs that had actually supplied the Appellant.
The Appellants argued that a representative sample could not be agreed until all of the evidence in relation to the MUCs had been served and that in a Kittel case HMRC are required to prove all of the fraud, tax losses, and connections upon which they relied.
Judge Dean refused HMRC’s application and stated at [38]:
“It is a fundamental principle of natural justice that a party must know the case against it. I cannot see how in circumstances where HMRC propose not to serve the evidence which formed the basis of its decisions, the Appellants could form a view as to whether any sample is representative or whether there is commonality.”
Judge Dean also stated at [41] that she considered HMRC’s argument that serving their evidence would take “an inordinate amount of time” to be insufficient to justify their application.
More recently, in a case management decision in Horizon Contracts Limited (in liquidation) & Others v HMRC (unreported), Judge Poole followed Judge Dean’s reasoning and stated that ‘sampling’ may be “an appropriate way to proceed for the purposes of the ultimate hearing” but found that this was a matter to be resolved at a later stage once “the full evidence upon which HMRC rely has been disclosed to the Appellants”.
VAT Umbrella Appeals Decision
On 27 March 2024, the Tax Tribunal released its Decision in the VAT Umbrella Appeals.
Subject to onward appeals to the Upper Tribunal, the practical consequence of the Decision is that the Lead Appellants (i) should not have had had their VAT registrations cancelled (ii) and should have their VAT registrations reinstated from the date of de-registration (iii) and were not entitled to use the FRS and EA. The Tribunal has not yet made directions in respect of the effect of the Decision on the Related Cases (which were stayed pending the Decision in the Lead Appeals).
The Tribunal decided the Lead Appeals in the following way:
In summary, the Tribunal found:
A link to the Decision can be found here.
The Lead Appellants intend to appeal the Decision.
