Non-dom tax changes – government policy paper published

Posted: 02/08/2024

The new Labour government has now published a policy paper on 29 July, in which it has confirmed its intention to proceed with abolishing the remittance basis, and change inheritance tax to a residence-based regime. This is expected, as Labour had previously stated that it largely supported the changes proposed by the last Conservative government (see here for a previous update). 

Although the policy paper is scarce on detail, it does provide some useful clarity on the government’s intentions and likely timing. Further detail is unlikely to be available until the Autumn Budget, which has been confirmed for 30 October 2024. Notable points provided in the policy paper are as follows:

• From 6 April 2025, the remittance basis will be replaced with a new regime which exempts foreign income and gains from UK tax for a period. The government has confirmed that the period will be four years and it will be available to anyone who has not been UK tax resident in any of the 10 consecutive tax years prior to their arrival. This is known as the four-year FIG regime.  
• From 6 April 2025, protected trust status will be abolished so that a UK resident non-UK domiciled settlor of a settlor interested trust will no longer be protected from income tax, and capital gains tax (CGT) on income and gains arising in the trust structure (unless the settlor qualifies for the new four-year FIG regime). 
• Regarding the transitional arrangements proposed by the previous Conservative government for those remittance basis taxpayers who would move to the arising basis from 6 April 2025:
  • The government has confirmed that there will be no 50% reduction in foreign income subject to tax for individuals who lose access to the remittance basis in the first year of the new regime.
  • Rebasing of foreign assets for CGT purposes will be available to ‘current and past remittance basis users’. The rebasing date will be confirmed at the Budget.
  • A ‘temporary repatriation facility’ (TRF) will be introduced so that ‘individuals that have previously claimed the remittance basis will be able to remit FIG that arose prior to 6 April 2025 and pay a reduced tax rate on the remittance’. No rate of tax, or length of time that the TRF will be available for, has been announced. The rate was announced by the previous government to be 12% and, although this rate may now be optimistic, the government has said that the rate and period of availability will be set to make its use as attractive as possible. A useful development is the government’s statement that it will also explore ways to expand the scope of the TRF, including to stockpiled income and gains in overseas structures. These details will be confirmed in the Budget.
• The government has confirmed its intention that from 6 April 2025, the current domicile-based system for inheritance tax will be replaced by a residence-based system. UK resident individuals’ worldwide estates will be subject to UK inheritance tax if they have been resident in the UK for 10 tax years prior to the tax year in which a chargeable event occurs.  Further, once within scope of the new rule, any individuals who decide to leave the UK will have a ‘10-year tail’ whereby they will continue to be within the UK inheritance tax net for a period of 10 years. The policy summary states that the government will not carry out a formal consultation on the proposed inheritance tax changes, and instead will consider the stakeholder feedback provided following the Spring Budget (to which we contributed).
• The policy summary also states that the government will end the use of ‘excluded property trusts’ for inheritance tax purposes and change the way inheritance tax is charged on non-UK assets held by non-trusts, so that any long-term UK residents who benefit from such trusts are no longer protected from UK inheritance tax. Usefully there is an acknowledgment that such trusts have been created in accordance with existing rules and that the government will consider whether the rules can be introduced in a manner to allow for appropriate adjustment. No further details are proposed as to what such rules may mean, and further details on the inheritance tax rules, including how existing excluded property trusts will be treated and transitional arrangements for affected settlors, are expected in the Budget. 

Greater detail will be required to consider precisely how the changes will affect individuals and existing trusts. However, the policy summary does provide some useful confirmation of the government’s intentions and an acknowledgment of the need for appropriate relieving provisions.  

Further information is only likely to be provided in the Autumn Budget on 30 October, which will leave only five months until the start of the 2025/26 tax year when many of these changes are intended to take effect. This is a short period of time within which to implement any changes which may be required for clients to manage their current arrangements. Affected clients may wish to undertake a review of their circumstances and the likely options available to them now to ensure that any preparatory work is undertaken and that decisions can be made efficiently when the time comes. 

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