Autumn Budget 2024 – key changes for non-doms and new arrivals

Rachel Reeves’ Budget set out a series of measures designed to close what Labour perceives to be the non-dom ‘loophole’, effectively abolishing the concept of domicile in the UK tax system.

Labour will implement (with some adjustment) many of the far-reaching non-dom reforms proposed in the Spring Budget by the Conservatives - most notably:

• abolition of the remittance basis regime for foreign income and gains of non-doms and its replacement with a residence-based regime with effect from 6 April 2025; and 
• replacement of the domicile-based system for inheritance tax (“IHT”) with a residence-based system, pursuant to which, broadly, non-UK assets will be within the scope of IHT where an individual has been resident in the UK for at least 10 out of the last 20 tax years (such person being a ‘long term resident’), with transitional provisions for those who ceased to be UK resident before 6 April 2025. 

For details of the measures set out in the Budget in respect of IHT generally, please refer to our separate Law-Now publication.

Taxation of foreign income and gains

From 6 April 2025, UK residents, irrespective of their domicile status, will be within the scope of UK tax on their global income and gains. This is subject to an important carve out for ‘new arrivals’ (broadly, those in their first four years of UK residence, with a period of 10 years of consecutive non-UK residence prior to the first year of UK residence). 

Those ‘new arrivals’ will be able to benefit from 100% tax relief on foreign income and gains for their first four years of UK tax residence and will be able to bring such overseas income and gains to the UK at any time, without an additional tax charge (the “FIG Regime”).  This is good news for some – including those wishing to move to the UK on a short-term basis and those who cannot benefit from the current remittance basis regime but could qualify for relief under the FIG Regime (e.g. UK doms who have been outside the UK for 10 years or more).

Once an individual has been tax resident in the UK for more than four years, they will pay UK tax on any newly arising foreign income and gains (i.e., they will be subject to UK tax on their global income and gains on the same basis as all other UK residents). Under the new IHT rules, such individuals would remain outside the scope of IHT for a further 6 years. 

Overseas workday relief remains but has been amended to align it with the FIG Regime by removing the need to keep the income offshore and extending the period that employees can benefit from the relief from three to four years.  An annual financial limit has also been introduced.

The Government has retained some, but not all, of the transitional measures proposed in the previous Budget to soften the impact of the new regime for previous remittance basis taxpayers (subject to some notable adjustments):

• whilst foreign income and gains arising to remittance basis users pre-6 April 2025 will continue to be taxed if remitted (and hence the concept of ‘remittances’ will not become completely obsolete), pursuant to a ‘temporary repatriation facility’ (“TRF”) UK residents will be able to designate, in any of the tax years 2025/26 to 2027/28, foreign income and gains that arose before 6 April 2025 as being chargeable to UK tax. Such designated amounts will be charged to tax at a rate of 12% if designated in 2025/26 or 2026/27 and 15% if designated in 2027/28 (this last year being an extension from the previous government’s proposals). The designated amounts upon which tax is paid can then be remitted to the UK at any time and without further charge. Note that the amounts designated do not have to be cash - it will also be possible to designate amounts used to purchase non-liquid assets.  The TRF could be particularly beneficial for current remittance basis users who would have needed to make remittances in the next three tax years because, for example, they have run out of ‘clean capital’; and
• individuals who have claimed the remittance basis will, on a qualifying disposal after 6 April 2025, be able to elect to rebase that asset to its value as at 5 April 2017 (this being two years earlier than the 5 April 2019 rebasing date proposed by the Conservatives).  

The transitional measures do not include the Conservatives’ proposed 50% reduction in foreign income subject to tax in 2025/26 for those losing access to the remittance basis on 6 April 2025.

Transitioning to the new regime may be a challenge from a practical perspective and increased compliance costs will be faced by many taxpayers in trying to navigate it.  For example, those wishing to rely on the FIG Regime must make a claim in their self-assessment tax return and must quantify the amounts of foreign income and/or gains upon which they wish to claim the relief. Amounts in excess of those quantified in the return will not be covered by the relief and will be subject to tax at the usual rates.

Non-resident trusts and excluded property trusts 

In a major change to the taxation of non-resident trusts established by non-dom settlors (protected trusts), income and gains arising in such offshore trusts after 6 April 2025 will be taxed on UK resident settlors with an interest in the trust who do not, or cannot, make a claim for relief under the 4-year FIG Regime. 

Where a beneficiary qualifies for relief, the FIG Regime will prevent them from being subject to tax on benefits received from offshore trusts during the four-year period (though the benefits will not reduce the relevant tax pools in the trust). 

Foreign income and gains that arose in protected non-resident trusts before 6 April 2025 will not be taxed unless distributions or benefits are paid, or deemed to be paid, to UK residents who do not or cannot make a claim for the 4-year FIG Regime. 

The TRF may be available for qualifying individuals with respect to unremitted foreign income and gains they have received, benefitted from or that is attributed to them from an overseas trust before 6 April 2025. It may also be available where beneficiaries receive a benefit from an offshore trust during the 3-year TRF period, provided that the benefit is matched to ‘unattributed’ foreign income and gains that arose before 6 April 2025. The TRF will not apply to income distributions received from non-UK trusts from 6 April 2025. 

The change to the taxation of settlors is not likely to be well-received, given that many non-doms established such trusts in good faith and in reliance on legislation which specifically provided that income and gains arising and retained in protected trusts would not be subject to UK tax for the settlor (unless the trust was “tainted”).  As a result of the change, individuals who had entered into what they perceived to be long-term, low-risk tax planning must now make adjustments to (perhaps complicated) structures in a relatively short timeframe, which is likely to further erode faith in the stability and predictability of the UK tax system.

From an IHT perspective, non-UK assets settled into trust at a time when the settlor is non-UK domiciled are not currently subject to IHT charges, other than indirect holdings in UK residential property (excluded property trusts). Whilst there had been some suggestion that the Government might abolish excluded property trust status altogether, they have instead amended the rules such that non-UK assets will only be excluded property (and not subject to IHT charges) when the settlor is not long-term resident.  When a settlor becomes long-term resident, any assets they have settled (even assets settled at a time when they are not long-term resident) will be subject to IHT i.e., going forward, assets in settlements can fall in and out of IHT on the same basis as a settlor’s personally held assets.  Note that where a settlor has been a long-term resident but then ceases to be so, an exit charge will arise.   After the settlor’s death, whether ongoing charges will arise will depend upon whether the settlor was a long-term resident at death. 

Transitional provisions will apply to non-UK assets comprised in settlements established before 30 October 2024, including that such assets in a settlor interested trust will continue to be protected from IHT on the settlor’s death (i.e. the gift with reservation of benefit rules will not apply with respect to such assets), although if the settlor is (or becomes) a long-term resident, charges under the relevant property regime will arise.

Finally, the Government has also made a welcome call for evidence on the modernisation of certain complex anti-avoidance rules applicable to (amongst others) non-resident trusts (settlements legislation, transfer of assets abroad and certain capital gains rules).

Conclusion

Whilst the contents of the Budget vis-à-vis non-doms is, for the most part, unsurprising given the announcements made in the Conservative’s Spring Budget and Labour’s manifesto, the overhaul of the non-dom regime will undoubtedly create considerable financial, administrative and personal challenges for taxpayers who have previously enjoyed the remittance basis of taxation.  The changes generally take effect from 6 April 2025, which provides a welcome, albeit relatively short, transitional period for affected individuals to assess their position and consider adjustments.  The Budget documents contained a lot of information, and draft legislation, on the new rules, which will have to be carefully digested by advisors.

The coming “new arrivals” regime is said by Labour to be ‘internationally competitive and focused on attracting the best talent and investment to the UK’ but it remains to be seen whether that will play out in practice or whether the changes will deter high net worth individuals from making the UK their home in the longer term or, indeed, drive out those who already have.   

For a certain type of new arrival – for example, individuals looking to make substantial gains on the disposal of non-UK situated assets or individuals entitled to substantial amounts of non-UK source income - the new regime looks very attractive indeed. However, as compared to, say, the Italian regime, the new UK regime looks more attractive to individuals coming to the UK in the short term, to enjoy material tax-free events, rather than incentivising individuals to bring their wealth to the UK and to stay in the UK for a number of years.