UK Spring Budget 2024

The Chancellor delivered his Spring Budget yesterday which included some very interesting tax announcements from a personal tax perspective.

As expected, the Budget was largely aimed at workers and families with National Insurance cuts, changes to the High-Income Child Benefit Charge, and an increase to the VAT registration threshold. However, the announcement that the “non-dom” tax rules will be abolished with effect from 6 April 2025 goes further than anticipated, the suggestion of a radical reform to UK inheritance tax was unexpected and the reduction in the higher rate of capital gains tax rate for residential property was a welcome surprise.

Abolition of the “non-dom” regime

Although the abolition of the non-dom regime was widely trailed in the media, the detail surrounding these changes was hard to predict and thus, the outcome still surprising.

The headlines are as follows:

• The current non-dom tax rules which allow UK resident non-dom individuals to benefit from the remittance basis of assessment will be abolished from 6 April 2025.  The current remittance basis regime broadly allows non-doms who are UK resident to elect to be taxed on UK income or gains but only foreign income and gains to the extent that they are enjoyed in the UK.
• This fundamental change to the remittance basis regime removes preferential tax treatment for all non-doms in receipt of foreign income and gains (“FIG”) arising from April 2025.
• New UK tax residents, who have been non-UK tax resident for at least 10 years, can benefit from 100% tax relief on FIG arising in the first 4 years of being UK tax resident and tax-free remittances of FIG during this same 4-year period.
• Existing UK tax residents can also benefit from 100% tax relief and tax-free remittances of FIG until the end of their 4^th year of tax residence, provided they were non-UK tax resident for the 10 years prior to the 4-year period.
• For existing non-doms, "transitional arrangements" will be available, including:
  • an option to rebase capital assets to 5 April 2019 for disposals after 6 April 2025 so only gains arising since April 2019 are taxed.
  • a two-year period in which non-doms who have claimed the remittance basis will be able to remit FIG that arose pre-6 April 2025 to the UK at a rate of 12% to encourage the bringing of wealth earned overseas to the UK. It is understood this measure will potentially generate more than £1 billion of extra tax.
  • for those non-doms unable to benefit from the remittance basis and the new 4-year FIG exemption regime, a temporary 50% exemption for the taxation of foreign income in 2025/26.
• Non-doms taxed on the remittance basis are eligible for Overseas Workday Relief (“OWR”) during their first 3 years of UK tax residence. OWR will be retained and simplified under the new system.
• The existing tax rules that apply under the Protected Trusts regime broadly prevent a non-resident trust’s income and gains being taxed on the settlor on an arising basis provided certain conditions are met. Non-resident trusts will no longer be able to benefit from “protected tax” status on FIG that arises after 6 April 2025.  From 6 April 2025, FIG arising in non-resident trust structures will therefore be taxed on the settlor if they have been UK resident for more than 4 tax years. However, FIG that arose prior to this date will not be taxed unless it is distributed, or benefits are provided, to UK resident beneficiaries who have been in the UK for more than 4 years.

Radical reform to UK inheritance tax

Even more surprising than the non-dom changes was the Chancellor’s announcement that UK inheritance tax (“IHT”) which is currently also based on domicile in combination with the location of assets, will be radically reformed with a move to a residence-based regime. 

The Government will consult on the best way to move IHT to a residence-based regime. It is understood that the consultation will cover transitional provisions, residence conditions, gifts with reservation, formerly domiciled residents and trust tax implications. To provide certainty to affected taxpayers, however, it has been confirmed that the treatment of non-UK assets settled into a trust by a non-UK domiciled settlor prior to April 2025 will not change, so these will not be within the scope of the IHT regime.  The current proposals indicate that non-doms who are resident in the UK for 10 years will become subject to IHT on their worldwide estate with a further 10-year IHT tail applying when they leave the UK.  If effected, this simplification could be welcome for ex-pat Brits who have found it difficult to shed their domicile of origin but a significant consideration for long-term UK tax resident non-doms who will have an extended exposure to IHT even if they leave the UK.

Other matters

Other key measures worth noting include:

• The higher capital gains tax rate on UK residential property will fall from 28% to 24%.
• Changes to the UK transfer of asset abroad anti-avoidance provisions to ensure that these provisions cannot be circumvented by individuals where a close company is used to make a transfer in order to avoid a charge to tax.
• A further 2p cut to national insurance which follows a previous 2p cut announced in the Autumn Statement could save the average worker up to £900 a year.
• The High-Income Child Benefit Charge threshold will increase from £50,000 to £60,000.
• A new excise duty on vaping, as well as a one-off increase to tobacco duty.
• The abolition of the furnished holiday lettings regime. This initiative currently gives beneficial tax reliefs to owners of furnished holiday homes being let out on a commercial basis over those who let residential properties to longer-term tenants.
• The abolition of multiple dwellings relief for stamp duty land tax purposes on the basis that it was being regularly abused.
• The VAT registration threshold will rise from £85,000 to £90,000 from 1 April - the first increase in seven years.

KPMG comment

This was a very interesting UK fiscal event from a Crown Dependencies tax perspective with the abolition of the UK’s non-dom regime stealing the headlines, closely followed by a proposed radical reform to IHT following Government consultation.

In absence of more detail and supporting legislation, it is difficult at present to fully appreciate the practical impact of these changes on non-doms living in, or considering moving to, the UK or indeed, to existing offshore trust and company structures.  In addition, the political uncertainty that exists with a pending election makes it harder to plan with certainty.  What is clear is that these changes will have a significant impact and require full assessment and detailed planning with a potentially short time frame to get it right.

We will be examining the proposed non-dom and IHT changes in detail over the upcoming weeks and will be issuing detailed commentary regarding those affected.  In the meantime, if you are concerned about how the changes will impact you and/or your clients, please contact us.