We announce the death of the UK Resident Non-Domiciled regime at the age of 225 years. So what now?
March 12, 2024
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3
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This is the third occasion since last November on which I have addressed the topic of UK resident non-domiciled individuals (RNDs) and the use of Protected Trusts. This illustrates the level of flux in this area – compounded by the Chancellor’s March Budget.
In my November piece, I flagged the likelihood of a Labour victory at the general election due by January 2025 at the latest. The broad consensus is for an autumn ballot but there is a chance that the Prime Minister could go to the country earlier, perhaps in May. The outcome remains uncertain albeit that the current polls show Labour way in the lead. Former PM Harold Wilson supposedly coined the phrase “a week is a long time in politics” back in the 1960s. The six months remaining before the likely election date will feel, to some, like an eternity.
In anticipation of a possible incoming Labour administration, wholesale changes to the RND tax regime have been the subject of vociferous debate. The argument for doing away with the RND regime or not centres on the cost to HM Treasury in terms of lost tax take compared to the increasing political pressure to remove the benefits available to RNDs. Labour’s previous plan was to scrap the existing remittance basis of taxation. They set out a move to ‘a modern scheme for people who are genuinely living in the UK for short periods to allow us to continue to attract top international talent’.
Those in favour of retaining the RND scheme suggest that any savings resulting from its scrapping fail to take into account existing RNDs who would choose to leave the UK. This very real possibility (some may say probability) implies that exiting RNDs would take with them innovation, entrepreneurship, talent and employment. This would reduce HM Treasury’s overall tax haul and impose a negative effect on the country’s GDP. Despite these dangers, the idea of scrapping the RND scheme has garnered wide public support.
In a move effectively neutralising Labour's policy and clearly designed to appeal to the electorate, the Chancellor announced the abolition of the UK's remittance basis of taxation. In its place, he plans to introduce from April 2025 a 'modernised residence-based regime that is simpler, fairer and more competitive'.
The announcement came as a surprise for many in the RND community, their advisers and trustees of Protected Trusts and Excluded Property Trusts.
The most important changes and the implications for RNDs, professional advisers and trustees may be summarised thus:
● Abolition of the remittance basis of taxation, to take effect from 6 April 2025.
● A new four-year foreign income and gains ('FIG') regime to replace the concept of domicile for the purposes of determining liability to income tax and Capital Gains Tax (CGT).
● Four years after becoming UK tax resident, the option to opt into the regime will be lost.
● Those formerly on the remittance basis will have the option to rebase assets to their 2019 value for CGT.
● Those who transition from the remittance basis and do not qualify for the new four-year FIG regime will be charged tax at 50% of their income for the two tax years following implementation (2025/26 and 2026/27).
● Two year "Temporary Repatriation Facility" to allow existing remittance based taxpayers to remit accumulated gains and income at a rate of 12%.
● From April 2025, UK resident settlors retaining an interest in a Protected Trust taxed as if they are UK domiciled. In most instances, this means that tax will be due on the trust’s income and gains on an arising basis.
● Historic income and gains that arise in a trust prior to April 2025 taxed on distribution.
● For those who can benefit from the new four-year regime, distributions will not be taxable from an offshore trust. This will be subject to modified “onward gift” anti-avoidance rules.
● The intention is to move to a residence basis of taxation rather than domicile.
● The aim is to implement a ten-year “grace period” together with an “outward tail”. Thus, an individual's worldwide estate would not fall into scope of UK inheritance tax (IHT) until they have been resident for eleven years. If they were to leave the UK subsequently, their estate would be subject to UK IHT in the event of their death in the following ten years. Special rules will apply for UK immovable property. Details of these changes are subject to consultation.
● Importantly, the government has confirmed that Excluded Property Trusts settled by a non-domiciled individual before April 2025, with non-UK situs assets, will not be subject to change for IHT purposes.
Clients, their advisers and trustees are able to consider a number of pre-emptive steps to plan for the changes within a very short window. RNDs should consider settling their non-UK situs assets into trust prior to April 2025 for the purpose of IHT protection. They might also think about a combination of other solutions to deal with income and gains after April 2025. These might include the use of offshore life bonds within a trust, bespoke pension arrangements and UK resident Family Investment Companies. These options are by no means exhaustive as personal circumstances vary widely.
It is clear that RNDs should review their affairs with their advisers as soon as possible whilst trustees of Protected Trusts should do the same. Before crystallising any changes, it is wise to wait for the passing into law of the draft legislation to take account of any further amendments. Moreover, a change in government may occur prior to implementation of the new rules. This may result in amendments to some or indeed all of the proposals. Whilst RND reform remains part of Labour’s plans, there can be no guarantee that they will take on these new proposals. The watchword is to monitor developments over the coming months.
If you would like to discuss further, please contact Oliver Andlaw, without obligation, as soon as possible to discuss your options.
The above is generic in nature and does not constitute advice. Clients should not rely on these notes to make any decisions whatsoever. Rather, clients should seek specific advice from competent UK qualified tax counsel in advance of making any planning choices. Acquarius works with a network of trusted advisers and would be delighted to assist with your tax planning needs in Gibraltar and further afield.
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