Budget 2024 - Labour’s Love Lost (for Non Doms) – Confirmed
Andy Wood • October 31, 2024
Labour’s Love Lost (for Non Doms) – Confirmed
Introduction
In it, the King and three of his best pals vow to avoid women. In true Shakespearean comedy, there is then a knock on the courtly door, and four women appear, and they fall in love.
Oh, the japes.
It seemed that after declaring their lack of affection for non-doms (following on from the Tories introduction of the destruction of the regime, lest we forget) might be softening in recent comment pieces. It was hardly becoming a love-in, but it seemed to be softening as the real financial impact of the changes.
But, as Shakespeare himself said on Radio 5 Live yesterday, “Alas, t’was not to be”.
You want to hear about the changes? Ok.
Abolition of the Remittance Basis
The main theme of the changes is the abolition of the UK’s long-standing remittance basis of taxation for non-doms.
An early form of this was first introduced by William Pitt the Younger in 1799.
If you think the remittance basis was an odd tax measure, it is worth knowing that Pitt also introduced taxes on servants, horses, non-working dogs, clocks and watches and hair powder.
However, in sum, the current remittance basis of taxation allows those who are non-UK domiciled (under general law) the privilege of leaving their foreign income and gains offshore without paying tax. As soon as they use or otherwise enjoy them in the UK, they then will pay tax on that amount.
Broadly speaking, domicile is a connection with a place which transcends physical presence (which, broadly, is residence). It is often described as the person’s ‘permanent’ home and is usually inherited from one’s father. It is difficult to ‘lose’.
Whether this is unfair or anachronistic is one point. But another is that it could be argued it has been highly successful in bringing internationally mobile wealth to the UK.
However, every dog has its day (or centuries) and it will be scrapped from 6 April 2025.
The New 4 Year FIG Regime
Thrust into this vacuum will be a new regime freshly drafted by the government. This will be a residence-based regime and will take effect from 6 April 2025.
Individuals who elect for this regime will not pay UK tax on foreign income and gains (FIG) for the first 4 years of tax residence.
It should be noted that this will only apply to those who are coming to the UK for the first time or have not been resident in the UK in any of the previous 10 tax years.
For those who became resident for tax purposes in 2022/23, 2023/24 and 2024/25 tax years (ie less than 4 years) they will be allowed to benefit for the regime until they have been resident for the balance of their first four years.
There is no separate charge on bringing those funds to the UK.
This means that those with significant, profitable overseas businesses (such that there wealth and income is outside of the UK) might find they have an opportunity to come to the UK for a period, be quite relaxed about whether they are UK resident and be quite relaxed about what they are bringing into the UK.
However, it should not be forgotten that this will be for a fixed four-year period only.
On the face of it, this looks particularly attractive, for example, footballers, sports persons and entertainers coming to the UK, with significant overseas income from endorsements and image rights. However, one should consider the scope of Draft 854H and “performance income”.
Inheritance Tax (IHT)
As we were told way back in the spring, the intention was not just to the abolition the remittance basis for income tax and CGT.
But also, to break the nexus between IHT and domicile.
This is perhaps a more surgical procedure, as IHT’s main connecting factor is domicile. So, what has the government come up with when it comes to the practical exercise of achieving this?
The appropriate nexus, replacing domicile, will be whether the person is “long term UK resident”.
The definition of a “long term UK resident” is if they have been resident in the UK for 10 out of the previous 20 tax years. For those under 20 years, the definition is slightly different.
As such, there are some advantages in not being such a person. I can hear the expats ears pricking as I write this. So, let’s have a look, eh?
If I have been living in, say, the UAE for over 10 tax years then I know I am not a long-term resident of the UK.
This means that I will only have a UK IHT exposure on my UK assets. Any foreign situs assets will be outside of the scope of UK IHT from 6 April 2025.
Many expats will already be under this understanding already (additionally, many believe they have NO UK IHT exposure at all!) but this would require them to have some confidence in their being non-UK domiciled under general law. The UAE has some difficulties in this regard as one cannot get permanent residence. However, as its unlikely they will have obtained any such confirmation from HMRC, the position is, at best, uncertain.
Under the new rules, there will be greater certainty as residence is an objective test.
For those that have come to the UK, once they have been resident for the 10 tax years, they will have a UK IHT exposure on their worldwide assets.
What about trusts, set up before the new regime, in this context?
Well, this is bad, bad news I am afraid.
At present, where a trust was settled by a non-domiciled (and non-deemed domiciled) individual, and the assets in the trust are foreign situs, then they are excluded property and outside the scope of UK IHT. This is the case even if the person settling the trust subsequently becomes deemed domiciled.
However, the government has confirmed the significant decision to provide no grandfathering where the settlor has become a long-term resident of the UK. This potentially brings significant amounts of wealth back into the UK IHT net.
This might well be a key consideration on whether a wealthy non-dom remains in the UK or decides whether any of their life in the UK can be conducted as a non-resident.
Of course, there will be a lag of up to 10 years before they escape the long-term UK resident designation.
It should be noted, that everyone, wherever they are domiciled, will be exposed to UK IHT on UK assets
– subject to reliefs and capital tax treaties.
These new rules will be effective from 6 April 2025.
Capital Gains Tax – rebasing
As well as the relief for new residents under the FIG regime, there are also changes for those who have previously benefited from the remittance basis regime.
Here, current and past remittance basis users will be able to rebase personally held foreign assets to 5 April 2017.
In other words, rather than the historic cost being brought into account for CGT purposes on sale, the market value of the asset in April 2017 will take its place.
This will generally be beneficial. But if it is not, then one can make an election for it not to apply to a particular disposal.
The Temporary Repatriation Facility (“TRF”)
A pertinent question is what happens to unremitted income and gains that is currently sitting in financial limbo – as, if remitted under the old regime, it would suffer UK taxes.
As a compromise, the so-called TRF was created.
Originally, when Labour announced its TRF, relevant non-doms would be able to remit foreign income and gains that arose before 6 April 2025 at a rate of 12%. This was only to be available in the tax years 2025-26 and 2026-27.
However, the government has announced that it will extending this to 3 years. It will expand the scope to offshore structures to sensible encourage non-doms to being their FIG into the UK.
The rate of tax for first 2 years the rate is 12% and will be 15% for final year. This seems to add unnecessary complexity but, it is assumed, this is to stop people dallying.
In some welcome news for non-doms, the TRF will also apply to distributions from trusts that were designated as protected trusts.
This would seem to be a bonus for those who are looking to extract the previous income and gains of those trusts at a ‘discount.’
Overseas Workday Relief (“OWR”)
At present, if a non-UK domiciled individual moves to the UK, becomes UK-resident, and works part of the year abroad, they can use OWR to exclude their foreign earnings from UK tax for those workdays spent overseas, provided the earnings remain offshore.
The Budget confirmed that OWR will be retained and reformed. It will be extended to a 4 year period (to match the new 4 year FIG regime) and remove the need to keep the income offshore.
The amount of relief that can be claimed each tax year will be limited to the lower of:
£300,000; or
30% of the employee’s net employment income.
Conclusion
So, with the flick of the Bard’s quill, the remittance basis is bade a fond farewell.
Well, not so much a flick of the quill, but heaps of more legislation.
There are some welcome provisions in there, such as the extension of the TRF. However, I feel the lack of grandfathering for trusts and the new IHT regime are a really egregious change. Will non-doms react, as predicted, by exeunt-ing stage left?
To quote Antonio in the opening lines of a Merchant of Venice, “in sooth, I know not why I am so sad”
Curtain.
For over two centuries, the UK’s non-domiciled tax regime and its remittance basis has been a cornerstone of tax planning for wealthy expats and international families. It was introduced, along with income tax, by Willian Pitt the Younger at the very end of the 18th century. It was part of the fiscal firepower necessary to battle Napoleon Bonaparte. And, like income tax, it had pretty much been a constant feature of the UK’s system ever since. But in March 2024, the then Chancellor, Jeremy Hunt, rang the death knell for the remittance basis, with Labour’s Rachel Reeves – who would succeed Hunt a few months later - declaring she would have abolished it anyway. The end is therefore very much nigh for the UK’s non-dom tax regime. More specifically, the end is 6 April 2025. However, out with the old and in with the new’ goes the saying. As such, the ‘what comes next’ will reshape the tax landscape for non-doms, expats, and international investors with a UK footprint (or those considering creating one). What is Domicile (and Non-Domicile)? Domicile is not a straightforward concept like tax residence. The latter is largely about physical presence (or otherwise) in a particular. Instead, as well as physical presence, it also requires an understanding of your future intentions. Is a place somewhere that you intend to live permanently or indefinitely. There are two main types of domicile that I will discuss here: • Domicile of origin: This is inherited at birth, usually from your father (if you think that is misogynistic then I don’t make the rules, OK?). You do not lose your domicile of origin. However, think of it as the foundations of a building. You can a domicile of choice on top it. • Domicile of choice: You build a new domicile of choice by achieving two things. Firstly, by physically residing in place and, secondly, by forming the intention to stay in that same place permanently or indefinitely. Both must be present.
So you’ve left the UK for pastures new. The sun is shining. You're making more money. You’re enjoying a great quality of life in a new country. In fact, you’re totally de-mob happy. Even better, as a non-UK resident, UK taxes are a dim and distant unpleasant memory, right. Right? Wrong. I don’t necessarily see my role in life as chief balloon popper. However, there are some Uk tax things you should bear in mind before declaring yourself a tax exile. Am I really non-UK Resident (“NR”)? Up until 2013, the UK didn’t really have a statutory definition of residence for tax purposes. Yes, that’s as crazy as it sounds. Fortunately, the Statutory Residence Test (“SRT”) was introduced from 2013. The idea is that it provides a degree of objectivity through a series of tests. Although a statutory test, other than in straightforward cases, it can still remain complex.
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