Changes to the taxation of non-UK domiciled individuals

The paper mainly confirms the policies supported by Labour prior to the election:

• The rules will change from 6 April 2025, as originally anticipated.
• The remittance basis will be abolished and replaced with a new foreign income and gain (“FIG”) regime that will be limited to 4 years and available to those who have not been resident in any of the previous 10 years.  (There is no indication that the Government will look at a longer period or that the regime will be extended to UK income/gains as the Labour party had previously hinted.)
• The protected trust regime (which is relevant to income tax/capital gains tax) will be abolished (other than for those who qualify for the 4-year FIG regime).
• FIGs taxed on the remittance basis before 6 April 2025 will retain that status and be taxable if and when remitted, subject to a “temporary repatriation facility” (“TRF”).  There will also be a rebasing opportunity for previous remittance basis users.  But there will not be any special reduction in income tax for 2025/2026 (which was proposed by the previous government and rejected by Labour prior to the election as a “loophole”).
• IHT for individuals will be based on a new 10-year residence test, with provision “to keep a person in scope for 10 years after leaving the UK” (previously referred to a “10-year tail”).
• The excluded property regime (which is relevant to IHT) for trusts will be abolished.

But there are also some important new details:

• On the transitional rules:
  • The TRF may be more generous than originally anticipated:  the Government will look at the length of time it is available for and the rate of tax which will apply (the previous Government proposed 12% for two years).  They are also exploring ways to expand the scope, including to stockpiled income and gains within overseas structures, which would be very sensible.
  • The rebasing opportunity will not use 6 April 2019 as the rebasing date:  the date will be announced at the Budget.

• There will be a review of the offshore anti-avoidance regimes.  We assume that this will encompass the income tax and capital gains tax rules as they apply to both trusts and companies, but the scope remains to be seen.  This is to be welcomed, but it is disappointing that the paper expressly says that this review will not result in any changes before 6 April 2026.  This seems to mean that there will be at least one full tax year (2025/2026) when the existing anti-avoidance rules will apply to trusts that are losing the benefit of the protected trust regime.
• The position in relation to the IHT treatment of trusts remains very vague and although the policy paper implies that this will be linked to the residence status of the settlor, it does not say how this would actually work (unlike the previous Government’s proposals which expressly referred to the settlor’s residence status at the time the assets are settled and/or on the occurrence of a taxable event).  There is also a surprise recognition that they need to consider how the changes can be introduced in a manner that allows for appropriate adjustment of existing trust arrangements.  We think that this is highly unlikely to mean that there will be any form of “grandfathering” for existing trusts (unlike the previous Government’s position on trusts settled before 6 April 2025, which Labour dismissed as a “loophole”), but it might suggest that the door is open to some form of transitional arrangements to allow restructuring without immediate IHT charges.

What happens now?

The Government has confirmed that the Budget will take place on 30 October, when further details will be provided.  It is not clear whether draft legislation will be available by then.

In the meantime, there will not be a formal policy consultation on the new rules.  The government will instead review stakeholder feedback provided prior to the election (which was mainly on the income tax/capital gains tax rules) and “carry out further external engagement over the summer on IHT policy design”.  As a firm, we have participated in all “external engagement” opportunities to date and will continue to do so.  We are committed to helping the Government understand that they are wrong to believe that the regime set out in their policy can be considered “internationally competitive and focused on attracting the best talent and investment to the UK”.

If you have any questions, please speak to Claire Weeks or your usual contact at Maurice Turnor Gardner LLP.  These notes do not contain or constitute legal advice and no reliance should be placed on them.