Insights

On 29 July 2024, HM Treasury issued a Policy Paper confirming the end of the current tax rules for non-UK domiciled individuals ("non-doms") with effect from 6 April 2025 and the implementation of a new residence-based regime for foreign income and gains as well as inheritance tax.

Surprisingly and contrary to what was initially expected, the new Labour government will not carry out a formal consultation. It will review the feedback received to date and will carry out further external engagement session over the coming weeks.

This policy Paper also confirms that the government will review some other key areas of the previously announced reforms "to ensure the new regime is both fair and as competitive as possible".

On 29 July 2024, HM Treasury also published a "call for evidence" requesting written representations from all interested parties on the case for an approach to reform the tax treatment of carried interest.

The Chancellor has confirmed that the Budget would be delivered on 30 October 2024 and we will therefore have further details and confirmations on that date.

We set out below a summary of the announcements, please speak to your usual Statura contact should you wish to discuss the content of this document in more detail or indeed the way in which the Policy Paper the “call for evidence” on the carried interest might affect your personal circumstances.

New residence-based regime for foreign income and gains

The government will remove the preferential tax treatment based on domicile status, which permits non-doms who are UK resident to pay tax on UK income and gains and on foreign income and gains but only if and when remitted, or brought to, the UK (the “remittance basis” of taxation).

The new residence-based regime will be available to individuals who have a period of 10 consecutive years of non-residence prior to arriving in the UK. This new regime will provide full 100 per cent tax relief for a 4-year period (once UK tax resident) on foreign income and gains (FIG), which can however be brought to the UK without additional tax charges.

The Overseas Workday Relief, which broadly exempts from UK tax earnings from overseas employment duties, during their first 3 years of UK tax residence, will be retained although it may be subject to changes.

Transitional arrangements for foreign income and gains

The transitional arrangements for existing non-doms who lose access to the remittance basis will be as follows:

• The previously announced 50% reduction in foreign income subject to tax in the 2025/26 tax year will not be introduced.
• A so-called Temporary Repatriation Facility (TRF) will be available in relation to foreign income and gains arising prior to 6 April 2025 so that they can be remitted at a reduced rate of tax for a limited period. The rate and the length of time that the TRF will be available for have not yet been confirmed.
• A re-basing of capital assets for disposals that will take place from 6 April will be available. The re-basing date has not yet been confirmed and will be set out within the Budget.

New residence-based regime for inheritance tax

Liability to inheritance tax (IHT), which currently depends (partly) on an individual's domicile status, will also be determined by a new residence-based system.

The Policy Paper has stated that, with effect from 6 April 2025:

• Individuals will become liable to UK IHT on their worldwide assets once UK tax resident for 10 years prior to the tax year in which the chargeable event (including death) arises.
• Individuals will no longer be liable to UK IHT on their worldwide assets once non-UK tax resident for 10 years.

The government has however indicated that they will engage further with stakeholders on the operation of this new test.

New residence-based regime and the effect on trusts

From 6 April 2025, the protection from tax on income and gains arising within settlor-interested trust structures will no longer be available for non-domiciled and deemed domiciled individuals who do not qualify for the 4-year FIG regime.

The government will end the use of Excluded Property Trusts (broadly, trusts created by non-UK domiciled individuals which hold non-UK assets) to keep assets out of the scope of IHT. Helpfully, however, the Policy Paper states that the government “is considering how these changes can be introduced in a manner that allows for appropriate adjustment of existing trust arrangements” which leaves the door open to the current rule continuing to apply to existing trust structure while the new rules will apply to future trust arrangements.

Confirmation of these new rules will be published within the Budget, following external engagement.

Anti-avoidance legislation

The government intends to conduct a review of offshore anti-avoidance legislation, including the Transfer of Assets Abroad and Settlements legislation, to remove ambiguity and uncertainty as well as to make the rules simpler to apply in practice.

Carried Interest

The government believes that the current capital gains tax treatment of carried interest does not reflect the economic characteristics of this performance-related pay typical of the Private Equity and asset management sectors.

The government is therefore launching a “call for evidence”, by engaging all interested parties, with a view to design a fair tax system.This “call for evidence” will focus on the following areas and representations should be provided by 30 August:

• How can the tax treatment of carried interest most appropriately reflect its economic characteristics?
• What are the different structures and market practices with respect to carried interest?
• Are there lessons that can be learned from approaches taken in other countries?

Further announcements can be expected at the Budget on 30 October.

We will keep monitoring further developments and remain ready to assist you with tackling these changes.