The chancellor Jeremy Hunt delivered his Spring Budget to parliament on 6th March. With significant tax changes having been rumoured over the past month, some of these were officially announced.
Headline Announcements
01 Personal Tax:
- Class 1 (paid by employees) and Class 4 (paid by those self-employed) National Insurance contributions will be reduced.
- Capital Gains Tax for residential property gains will be lowered from 28% to 24% from April 6th, 2024, while the lower rate of 18% remains.
- Remittance basis will be abolished from April 6th, 2025, replaced by a residence-based regime. Individuals making a claim won’t be liable to UK tax on foreign income and gains for the first four years of tax residence.
- Transitional benefits for those currently on the remittance basis but not qualifying for the four-year regime include reduced tax rates on foreign income, a two-year window for low-rate taxation on remittances, and an option to rebase foreign assets to their value as of 5th April 2019.
- Overseas Workday Relief (OWR) will continue for the first three tax years of UK residence.
- Trust ‘protections’ will be removed for those not in the four-year regime, and foreign income and gains from settlor-interested non-UK trusts taxed on the settlor from April 6th, 2025.
02 Inheritance Tax:
- UK Inheritance Tax regime under consultation and will likely shift from an individual’s domicile to a residence-based test. Worldwide Inheritance Tax (IHT) could apply when an individual has been resident in the UK for 10 years, with a corresponding ‘tail’ duration for being within the scope of UK Inheritance Tax.
- Non-UK assets settled onto non-UK trusts before April 6th, 2025, will remain excluded property for UK Inheritance Tax purposes.
03 UK Investments:
- Introduction of a new ISA (Individual Savings Account) scheme (‘British’ ISA) with a tax-free £5,000 annual allowance for investment exclusively into UK assets. This allowance is in addition to the existing £20,000 ISA annual allowance.
What do the Non-Dom changes mean for me?
Currently, non-domiciled UK taxpayers have the option to claim the favourable remittance basis of taxation. With this going away, the structuring of accounts will need to be reconsidered. Some initial thoughts around this include:
01 Spending in the UK
Individuals tend to have separate ‘pots’ of money – ‘clean’ for UK spending in priority and ‘mixed’ for non-UK spending. Before the 6th April 2025, the same rules will need to be followed and could mean that an individual can be subject to UK tax if they bring funds from their ‘mixed’ pot into the UK. Under the new regime, individuals will not be taxed or penalised for bringing offshore income and gains – however, this applies only to the ‘new’ income and gains arising from April 2025 and not the amounts which were earned during previous years. Any legacy income can be brought into the UK at a reduced rate of UK tax.
02 Account Structuring
Currently non-domiciled UK individuals have the option to segregate their capital and income. Clean capital must be preserved and remain easily accessible in the UK, but it can become easily trapped with other mixed funds arising after becoming UK resident. This is a common issue that individuals face in the UK. Correct account structuring ensures that clean capital is not mixed with non-clean capital and not subject to adverse UK tax implications. With the introduction of the FIG (Foreign Income and Gains) regime a lot of these benefits go away, and there will be transitionary rules available.
03 Time frames
Currently individuals have up until the 15-year mark before they become deemed domiciled for income and inheritance tax. This has now changed to 4 years (income) and could be 10 years (inheritance) which means planning need to be considered sooner.
We are preparing to publish an article discussing the forthcoming opportunities arising from these changes, along with the requisite planning considerations and its implications for Americans. In the meantime, should you have any queries pertaining to this subject or any other topics covered above, we encourage you to reach out to our Tax & Advance Planning team for assistance.
