Spring Budget: What is the impact on non-domiciled clients?

In a stunning about-turn, Jeremy Hunt has announced the abolition of the remittance basis and apparently abandoned the century long relevance of ‘domicile’ to UK taxation. It would not be an understatement to say that he has revolutionised the basis of taxation for visitors to the UK.

There is much yet to learn, with a consultation ahead and details to be filled out but it is clear the landscape will be dramatically changed going forward. With these changes will come both pitfalls and advantages and we will be monitoring the development of the new regime closely. It remains to be seen whether this regime will be the revenue raising exercise it promises, or leave us in the international wasteland for want of a compelling and competitive system with which to attract international investors.

For now, the headlines, and who they impact, are as follows:

Post-6 April 2025 ‘arrivers’

Eligible ‘arrivers’ to the UK from 6 April 2025 will be those who have had a period of non-UK residence for the previous consecutive ten years, regardless of their domicile status. These new arrivers will not pay tax on their foreign income and gains (FIGs) in the first four tax years of UK residence, where a claim is made each year, and will be able to remit such funds to the UK free from any special charges to access the new regime. This will apply equally to funds held directly and funds distributed from trusts (regardless of who the settlor is). Such individuals will not be required to track the movement of their foreign income and gains during this time which will significantly reduce the administrative burden of monitoring mixed funds. 

After the four year period, individuals will pay UK tax on all newly arising foreign income and gains in the same way as other UK taxpayers, in the government’s bid to make UK taxation “simpler and fairer”. This will include income and gains arising to settlor-interested trusts established by the taxpayer. Trusts of which the individual is not the settlor but is a beneficiary will only be impacted to the extent that they receive distributions.

It remains to be seen how the four-year clock will operate for those arriving in the UK and who leave again within a four year window.

Current remittance basis users arriving in the UK before 6 April 2025

The remittance basis of taxation will be abolished with effect from 6 April 2025. For those who move from the remittance basis to worldwide taxation from 6 April 2025, there will be a one-year reduction in the amount of foreign income that will be subject to tax. Only 50% of an individual’s foreign income arising in the 2025-26 tax year will be subject to tax during the period. The reduction notably only applies to foreign income and will not reduce the taxation on foreign chargeable gains.

Further transitional provisions will be introduced to encourage current and previous remittance basis users to repatriate foreign income and gains to the UK at more favourable tax rates. The transition provisions include the ability for individuals to rebase the value of their capital assets to their value as at 5 April 2019, provided the asset was held at that point in time, and the individual has claimed the remittance basis and is not already deemed domiciled in the UK as at 5 April 2025.  A temporary 12% reduced rate on the transfer of foreign income and gains to the UK in the 2025-26 and 2026-27 tax years offers a short widow of opportunity for current non-doms to transfer income and capital into the UK at favourable tax rates.

It is important to note that so-called Protected Settlements will at this point lose their beneficial treatment: as above, income and gains arising to settlor-interested trusts will be taxable on an arising basis.

Inheritance tax

Hunt also announced that the government will consult on the overhaul of the current domiciled-based inheritance tax system in favour of a residence-based system. It is likely that the new rules will see inheritance tax levied on worldwide assets owned by individuals who are resident in the UK for ten years, with a ten-year tail keeping individuals within the inheritance tax net after leaving the UK. The inheritance tax treatment of UK situs property is likely to remain as it is. The new rules will provide welcome certainty for many individuals (particularly those with a UK domicile of origin) who have already left the UK, or are planning to leave the UK, and will be able to take the opportunity in future to undertake planning. 

Current inheritance tax treatment will remain the same for any non-UK property that is settled on trust by non-UK domiciled settlors before 6 April 2025, meaning there is likely to be plenty of planning opportunities in the next 12 months or so. Provided the trust assets continue to meet excluded property criteria under the current legislation, and subject to any future anti-avoidance provisions, there will be no inheritance tax on such assets. The way in which the ‘gift with reservation’ provisions and the excluded property trust rules interact will remain unchanged, meaning excluded property should not be brought into charge on the settlor’s death even if the settled assets are subject to a reservation. 

Under the new regime, inheritance tax liability on assets in trust will depend on whether a settlor meets the ten-year residence criteria or is within the ten-year tail at the time when assets are settled.

As always, the devil will be in the detail and we look forward to engaging with the consultation process once more details are available. In the meantime, those clients who will have been UK resident for four years on or before 6 April 2025 may want to take advice and consider their options as soon as possible.

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