Spring Budget – Taxation no longer determined by domicile; what does that mean for you?
Today was possibly this Government’s last chance to make a notable change to UK taxpayers’ finances before the UK heads to the poll stations later this year. Undoubtedly, the pressure was on as the polls and recent by-election results predict a gloomy election results night for the Conservatives (whenever that may be).
As always, rumours had been circulating and it appeared this Budget would be a cash raising exercise with the “abolition” of the non-dom status, to cover a much cheaper National Insurance decrease for the working population. After all, this is still the Government linked to that Budget so the books have to balance and financial instability in an election year is not an option.
Spoiler alert: there were no proverbial rabbits in Jeremy Hunt’s hat and the rumours were true.
We have outlined the changes below:
Non-domiciled individuals tax resident in the UK (“Non-Doms”)
As predicted, Jeremy and Rishi have adapted Labour’s policy (and a main source of funding for their spending plans) to overhaul the non-dom regime.
As a reminder, a non-domiciled individual is a person who is considered to have their ‘home’ overseas (usually in the country of the family’s origin) and is not considered to be residing indefinitely or permanently in the UK. Domicile is determined in accordance with Common Law and is subject to interpretation.
A person’s tax residence status is determined in accordance with the Statutory Residence Test (“SRT”), which is legislated for in the Finance Act 2013. The SRT considers an individual’s circumstances and presence in the UK. Ordinarily, it is very clear whether an individual is UK tax resident when considering the SRT.
Non-doms can benefit from a beneficial tax regime known as the “remittance basis”. Under the remittance basis, non-doms are taxed on their UK sourced income and gains as they arise but their offshore income and gains are subject to UK tax to the extent that they are remitted to the UK only. This has often been highlighted as counterproductive as it discourages the wealthiest individuals from using their offshore money in the UK.
The remittance basis is free for the first 7 years of UK tax residency, but after 7 years the non-dom is required to pay the remittance basis charge of £30,000 for the next 5 years, rising to £60,000 for the 3 years thereafter. After 15 out of the previous 20 tax years of UK tax residency, a non-dom can no longer access the remittance basis and is subject to UK tax on their worldwide income and gains as they arise. This is known as deemed-domiciled. Deemed-domiciled individuals are subject to inheritance tax on their worldwide assets also.
It has long been said that the lack of clarity around domicile has meant that the non dom status has been exploited, prompting a number of changes over the years.
However, today, Jeremy Hunt announced that this ambiguity would be removed going forward by abolishing the concept of domicile when determining an individual’s exposure to UK tax. Instead, a person’s exposure to UK tax will be established by their tax residency status as determined by the SRT. Furthermore, the existing 15-year access to a favourable tax system will be reduced to 4 years.
To summarise the changes:
- From 6 April 2025, the current remittance basis of taxation will be abolished for non-doms. The regime will be replaced with a new 4-year foreign income and gains (FIG) regime for individuals who become UK tax resident after a period of at least 10 tax years of non-UK residence.
- Qualifying individuals will not pay UK tax on any FIG arising in the first 4 tax years of residence (subject to the 10-year absence outlined above) and will be able to bring these funds to the UK free from any additional charges. Qualifying individuals will not pay tax on non-resident trust distributions either. UK income and gains will continue to be subject to UK tax as they arise.
- Any individuals who have been tax resident in the UK for less than 4 years (after 10 years of non-UK tax residence) on 6 April 2025 will be able to access this new regime for any tax year of UK residence in the remainder of those 4 years.
- Overseas Workday Relief (OWR) for the first 3 tax years of UK residence will continue to apply but will be simplified (and brought in line with the new FIG regime).
- From 6 April 2025, income and gains arising within trust structures (whenever established) will no longer benefit from the protected status if the relevant individual (which may be the settlor, or a beneficiary, depending on the situation) does not qualify for the FIG regime in a particular tax-year.
- FIG arising in non-resident trust structures from 6 April 2025 will be taxed on the settlor or transferor (if they do not qualify for the new regime in that tax year) on the arising basis.
- FIG which arose in the trust or trust structure before 6 April 2025 will be taxed on settlors or beneficiaries if they are matched to worldwide trust distributions.
- Individuals who are no longer able to claim the remittance basis on 6 April 2025 and are not eligible for the new regime will, for 2025-2026 only, pay tax on 50% of their foreign income only. This does not apply to foreign chargeable gains. From 6 April 2026 tax will be due on all worldwide income in the normal way.
- From 6 April 2025, any individual who does not qualify for the new regime will be chargeable on their worldwide gains as they arise. Transitionally, individuals who have claimed the remittance basis previously will, on a disposal of an asset held personally at 5 April 2019, be able to elect to rebase that asset to its value as at that date.
- Under a new Temporary Repatriation Facility (TRF), remittances to the UK of non-UK sourced income and gains that have been sheltered from UK tax by virtue of a claim for the remittance basis of taxation previously will be subject to a flat rate of 12%. The TRF will be available for the 2025-26 and 2026-27 tax years only. TRF will not apply to pre-6 April 2025 FIG generated within trusts and trust structures.
- From 6 April 2025 the government intends to move inheritance tax from a domicile based regime to a residence based regime. This will be subject to consultation. However, assets settled into an excluded property trust prior to 6 April 2025 will continue to be outside the scope of inheritance tax going forward.
Tax Reductions…
There was some limited good news for taxpayers with a further reduction in Class 1 National insurance (for employees) from 10% to 8% and Class 4 National Insurance (for self-employed individuals) from 8% to 6%.
The tax savings didn’t stop there, the higher rate for Capital Gains Tax for UK residential property was reduced from 28% to 24% also, although this is unlikely to be significant enough for those with enveloped dwellings or properties in Trust structures to look to unwind these structures.
Both of these provisions will be effective from 6 April 2024.
High Income Benefit Charge
Currently, if either you or your partner earn £50,000 or more child benefit payments are tapered such that the payments are reduced to £nil once either you or your partner’s income reaches £60,000. The Government have announced that they will consult on how to move this tapering to consider the household income rather than the income of each individual within the household.
In the meantime, from 6 April 2024, child benefit payments will not start to be abated until you or your partner’s income exceeds £60,000 with full abatement applying at £80,000.
Other Taxes
The VAT threshold will rise from £85,000 to £90,000 from 1 April 2024 and Multiple Dwellings Relief, a relief from Stamp Duty Land Tax for bulk purchases, will be abolished for transactions with an effective date on or after 1 June 2024.