Budget crunch

In this article I outline the most significant changes introduced in the autumn budget that private client practitioners should be aware of. For much of it, the devil will be in the detail, but this is the most opportune time to review your clients’ worldwide affairs and begin discussions about any required changes. 

Abolishment of non-dom regime

The non-dom tax regime has been a key feature of the UK’s tax system for over 200 years and Rachel Reeves has formally confirmed its abolishment, apparently in its entirety. However, there remain several uncertainties and unanswered questions.

The abolition was initially proposed by the Conservative government in the March 2024 budget but the new government has taken the proposal significantly further.

In the first instance, replacing the domicile regime with a residence-based regime is broadly welcome news. The concept of domicile is a hugely complicated and subjective topic, so the change to a residence-based regime does provide a firmer basis for advising clients. However, the implications of the changes are wider reaching, and potentially detrimental to ultra-high-net-worth clients.

In very broad terms, the position from 6 April 2025 will be as follows:

• New arrivals in the UK (those who have not been resident in the UK for the last 10 years) are eligible for the ‘four-year foreign income and gains (FIG) regime’, where FIG are not taxed in the UK and can also be freely remitted to the UK. This is to incentivise funds to come into the UK to be invested.
• Former remittance basis users will be taxable on their worldwide income and gains to the extent they remain UK-resident and do not qualify for the four-year FIG regime.
• Current and past remittance basis users can rebase their personally held foreign assets to 5 April 2017 on a disposal where certain conditions are met.

Ultra-high-net-worth individuals and families will see the end of the excluded property status of non-resident trusts settled by a settlor who at the time of settlement was not domiciled, or deemed domiciled, anywhere in the UK. Where the settlor is alive and has been resident for 10 years, the non-UK assets will be in scope of inheritance tax (IHT) such that IHT will arise at each 10-year anniversary from the date the settlement was initially made, and each time capital is distributed to beneficiaries.

Where a long-term resident settlor ceases to be a UK resident, there will be an exit charge on the trust assets. Settlors would therefore need to consider leaving the UK by 5 April in the tax year before they are considered a long-term resident under the new rules.

Where the settlor has died, and was not a long-term resident at that date, the non-UK assets will remain outside the scope of IHT.

Furthermore, the income and capital gains tax positions look even more onerous. From 6 April 2025 the settlor will be taxed on income and gains arising within the trust (and underlying non-UK companies) where the trust is settlor-interested. With solely tax in mind, this suggests that where the settlor, their spouse and possibly children are explicitly and irrevocably excluded, the automatic attribution of income and gains may not apply. Similarly, where the trust assets are owned by a foreign incorporated but UK tax-resident company, the automatic attribution of foreign income and gains may not apply. However, corporation tax and controlled foreign corporation rules should be considered, which may not make this suitable planning for some clients. 

The technical note published on 30 October suggests a settlor may be able to avail themselves of the four-year FIG regime, where non-UK source income and gains are not taxable and can be remitted to the UK without additional tax. It is also suggested that pre-6 April 2025 income and gains matched to distributions will be taxable on the beneficiaries, unless they qualify for the four-year FIG regime. 

However, the Labour government is more lenient when it comes to assets owned personally. Non-UK domiciled individuals, who were not deemed domiciled, or UK domiciled, before 6 April 2025, and have claimed the remittance basis for any one of the years 2017/18 to 2024/25, will be able to rebase their non-UK assets to their 5 April 2017 fair market value. 

There have also been significant changes to the spousal exemption and election for IHT purposes. Previously, the non-UK domiciled spouse could make an election to be treated as UK domiciled for IHT purposes only. This was an irrevocable election; however, it ceases to apply where the non-domiciled spouse has been non-UK resident for four consecutive tax years. Elections made before 30 October 2024 will remain in place under the old rules. Where an election is made after 30 October 2024, the spouse who is not a long-term resident will need to be non-UK resident for 10 consecutive tax years. This substantially increases the risk of the non-domiciled spouse, who may not be a long-term resident, bringing their worldwide estate into UK IHT, as they now need to establish an additional six years of non-UK residence.

While the concept of domicile may be due to be abolished, it is suggested that the provisions of any IHT treaties the UK holds with other countries (such as India, the United States and so on) will continue to apply. I personally see questions from US and Indian clients, so this will be welcome news for them as it provides scope for IHT protections. Specific advice should be taken, and any wills structured in accordance with the terms of the relevant treaty provisions.

Business and agricultural assets – succession planning

Previously, business owners and farmers enjoyed unlimited relief on passing down qualifying assets as part of their succession planning. The government’s proposal is therefore likely to cause significant disruption in that respect.

For deaths occurring from 6 April 2026, there is a “combined” relief of only £1m, with the excess charged at 50% to IHT. Statistically speaking, most estates should be unaffected by the reduced reliefs, further indicating the new government’s intention to seek higher taxes from “those with the broadest shoulders”.

What behavioural responses this will cause are yet to be seen – for the time being business owners and farmers are left scratching their heads. Further technical consultation will be published in early 2025.

Pension schemes

Most UK pension schemes are discretionary schemes, and as such typically do not form part of the policy holder’s estate for IHT purposes. For deaths occurring from 6 April 2027, any unused pension funds will form part of the deceased’s estate for IHT purposes. 

There has not been a suggestion that the government will end the unlimited lifetime allowance on pension savings (which was previously implemented by the Conservative government), so in theory this should not disincentivise saving for retirement, but the ultimate beneficiaries will face the burden of the additional IHT.

The concept of domicile, and the IHT legislation, are hugely complex. There is no doubt that rushing through such substantial changes is going to create uncertainties and ambiguities. As in all cases, the devil is (will be) in the detail. This is the time to speak to your clients about their worldwide affairs, potentially for the first time, as for some there may not have been a need to, given they had the benefit of the remittance basis.