Without doubt the most interesting aspect of the Budget concerns the taxation of UK resident foreign domiciliaries. The government is proposing sweeping and multi-faceted reform:
The remittance basis will be abolished with effect from 6 April 2025. In its place, a new four-year special tax regime will be introduced, under which qualifying individuals will be exempt from tax on their foreign income and gains for their first four years of UK residence, regardless of whether such income and gains are remitted to the UK. All individuals becoming UK resident after at least ten tax years of non-UK residence will be eligible for this regime, regardless of domicile.
Transitional reliefs will be available to current and former remittance basis users (RBUs). In particular, during 2025/26 and 2026/27, remittances of foreign income and gains from past tax years will give rise to tax at a rate of only 12%. There will also be a reduced rate of income tax on foreign income arising in 2025/26 (half of the rate that would otherwise apply). Lastly, there will be a rebasing of personally held foreign assets to their values on 5 April 2019, limiting the gain realised on post-5 April 2025 disposals of such assets.
The April 2017 ‘trust protections’ will cease to apply from 6 April 2025. Consequently, foreign income and gains of non-UK resident trust structures will generally become taxable on the settlor, if UK resident; unless he/she qualifies for the four-year special tax regime outlined above. In some cases there may be scope to prevent the settlor from being taxed on income of the structure by removing his/her ability to benefit from it. However, preventing the settlor from being taxed on gains of the structure will generally be much more challenging.
Domicile will no longer be a connecting factor for IHT. Instead, a new residence test will be introduced, potentially bringing the worldwide estate of individuals who have been UK resident for ten years or more within the scope of IHT, with a ten-year tail following cessation of UK residence.
Excluded property settlements created before 6 April 2025 will continue to offer indefinite IHT protection with respect to non-UK situated assets (other than those connected with UK residential property). However, the IHT exposure for trusts created after 6 April 2025 will turn on the residence of the settlor at the time of each potential tax charge.
The timetable for implementation of this proposed reform is a real shock. There must be serious concerns about the government’s ability to get this legislation in place, without technical defects, in the limited time available before the forthcoming general election.
Many will also worry whether a special tax regime lasting just four years will present a viable alternative to rival tax regimes in other countries, which are commonly available for ten or fifteen years. Arguably, four years is not a meaningful period – it is the fiscal equivalent of a one-night stand, whereas many wealthy internationally mobile individuals will be looking for a marriage.
For those foreign domiciliaries who are currently resident in the UK, there will (as ever) be winners and losers. The winners will include former RBUs with substantial offshore assets that, under the present regime, cannot be remitted to the UK except at a prohibitive tax cost, but who should be able to remit at a tax cost of just 12%. The losers will include those who have created ‘protected trusts’ in reliance on the current rules, who from April 2025 are likely to find themselves exposed to tax on all income and gains realised within such trusts. Such individuals are likely to feel very aggrieved; and rightly or wrongly, these developments will cement the UK’s international reputation for fiscal instability.
Home >Articles > Spring Budget 2024: Private client perspective: sweeping and multi-faceted reform
Spring Budget 2024: Private client perspective: sweeping and multi-faceted reform
Without doubt the most interesting aspect of the Budget concerns the taxation of UK resident foreign domiciliaries. The government is proposing sweeping and multi-faceted reform:
The remittance basis will be abolished with effect from 6 April 2025. In its place, a new four-year special tax regime will be introduced, under which qualifying individuals will be exempt from tax on their foreign income and gains for their first four years of UK residence, regardless of whether such income and gains are remitted to the UK. All individuals becoming UK resident after at least ten tax years of non-UK residence will be eligible for this regime, regardless of domicile.
Transitional reliefs will be available to current and former remittance basis users (RBUs). In particular, during 2025/26 and 2026/27, remittances of foreign income and gains from past tax years will give rise to tax at a rate of only 12%. There will also be a reduced rate of income tax on foreign income arising in 2025/26 (half of the rate that would otherwise apply). Lastly, there will be a rebasing of personally held foreign assets to their values on 5 April 2019, limiting the gain realised on post-5 April 2025 disposals of such assets.
The April 2017 ‘trust protections’ will cease to apply from 6 April 2025. Consequently, foreign income and gains of non-UK resident trust structures will generally become taxable on the settlor, if UK resident; unless he/she qualifies for the four-year special tax regime outlined above. In some cases there may be scope to prevent the settlor from being taxed on income of the structure by removing his/her ability to benefit from it. However, preventing the settlor from being taxed on gains of the structure will generally be much more challenging.
Domicile will no longer be a connecting factor for IHT. Instead, a new residence test will be introduced, potentially bringing the worldwide estate of individuals who have been UK resident for ten years or more within the scope of IHT, with a ten-year tail following cessation of UK residence.
Excluded property settlements created before 6 April 2025 will continue to offer indefinite IHT protection with respect to non-UK situated assets (other than those connected with UK residential property). However, the IHT exposure for trusts created after 6 April 2025 will turn on the residence of the settlor at the time of each potential tax charge.
The timetable for implementation of this proposed reform is a real shock. There must be serious concerns about the government’s ability to get this legislation in place, without technical defects, in the limited time available before the forthcoming general election.
Many will also worry whether a special tax regime lasting just four years will present a viable alternative to rival tax regimes in other countries, which are commonly available for ten or fifteen years. Arguably, four years is not a meaningful period – it is the fiscal equivalent of a one-night stand, whereas many wealthy internationally mobile individuals will be looking for a marriage.
For those foreign domiciliaries who are currently resident in the UK, there will (as ever) be winners and losers. The winners will include former RBUs with substantial offshore assets that, under the present regime, cannot be remitted to the UK except at a prohibitive tax cost, but who should be able to remit at a tax cost of just 12%. The losers will include those who have created ‘protected trusts’ in reliance on the current rules, who from April 2025 are likely to find themselves exposed to tax on all income and gains realised within such trusts. Such individuals are likely to feel very aggrieved; and rightly or wrongly, these developments will cement the UK’s international reputation for fiscal instability.
