Everfair Tax

Specialists in UK, US and Expatriate Tax.

2024 Autumn Budget – Inheritance Tax

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Summary of Changes for IHT; Individuals and Offshore trusts

The current non-domicile tax regime, including the remittance basis of taxation, will be abolished from 6 April 2025.  It will be replaced by a new “residence based” approach.  This note focuses on how the changes affect inheritance tax (“IHT”).  Separate notes consider the impact on income tax and capital gains tax for individuals and offshore trusts.

Inheritance tax – Individuals

It has been confirmed that the basis for IHT on non-UK assets will change from domicile-based to residence-based from 6 April 2025.  The impact for individuals is summarised below:

  • The term domicile will be replaced by long-term residence.
  • The basic premise will be that an individual will be a long-term resident for a tax year if they have been UK resident for 10 out of the previous 20 UK tax years.
  • Long-term residence will end after a run of consecutive tax years of non-UK residence varying from three to 10 tax years depending on the number of years of prior UK residence.
  • The test resets after 10 consecutive years of non-UK residence.
  • There is transitional protection for non-domiciles who would otherwise be long-term resident but left the UK before 30 October 2024 and who remain non-UK resident.
  • Residence for a tax year is based on being resident for all or part of the year under the Statutory Residence Test.
  • Lifetime gifts of non-UK assets by long-tern non-residents remain outside the scope of IHT even if long-term resident on death within seven years.

Inheritance tax – Offshore trusts

It is with regard to IHT and offshore trusts, particularly so-called excluded property trusts, where there was thought to be the biggest divergence between Labour and the Conservatives and the budget confirmed this was the case.

Under current rules an excluded property trust is a trust set up by a non-UK domiciliary which only holds non-UK assets so that it is outside the scope of IHT.  This treatment generally continues regardless of changes in the settlor’s domicile so can be used as a long term IHT mitigation tool.

The position for offshore trusts from 6 April 2025 builds on the changes for individuals:

  • Rather than being fixed at creation, the scope of a trust’s exposure to IHT on non-UK assets will change with the settlor’s personal IHT status before being finally fixed based on their status at death.
  • Broadly speaking, a trust’s non-UK assets will be within the scope of IHT for periods where the settlor is a long-term resident with charges arising when relevant events occur.

2024 Autumn Budget – Offshore Trusts

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Summary of Changes for Offshore Trusts

The current non-domicile tax regime, including the remittance basis of taxation, will be abolished from 6 April 2025.  It will be replaced by a new “residence based” approach.  This note focuses on how the changes affect offshore trusts.  Separate notes consider the impact on income tax and capital gains tax (“CGT”) for individuals and inheritance tax.

Income tax and capital gains tax for offshore trusts

The main income tax and CGT changes that affect offshore trusts from 6 April 2025 are:

  1. the abolishment of the remittance basis and replacement with a new system based around a four year exemption for foreign income and gains (“FIG regime”) if tax residency conditions are met;
  • a three-year temporary repatriation facility (“TRF”) allowing previously unremitted income and gains to be remitted at a tax rate as low as 12%; and
  • the abolishment of settlor-interested offshore trust protections.

FIG regime

The FIG regime will be able to be used to exempt foreign income and gains in the following offshore trust situations:

  1. Those assessed on the settlor under settlor-interested rules.
  • Those matched to discretionary distributions received by settlors and beneficiaries.
  • The foreign income element assessed on an interest in possession beneficiary.

Foreign income and gains received by the trust during years covered by the FIG regime may still be taxed in later years if matched to a distribution.

TRF

The TRF will be able to be used to reduce the tax on foreign income and gains in the following offshore trust situations:

  1. Those matched to settlors and beneficiaries pre-6 April 2025 but not taxed as a result of the remittance basis.
  • Pre-6 April 2025 foreign income and gains matched to distributions received during the TRF window.

Settlor-interested offshore trust protections

Settlor-interested offshore trust protections currently mean that, where certain conditions are met, settlors are only assessable on foreign income and gains when distributions are received.  The abolishment of these protections will mean that the settlor of such a trust will become liable to all income and gains of such trusts as they arise.  The settlor will, however, be able to recover the tax from the trust.

  • For settlor-interested trusts, gift with reservation of benefit rules will also apply meaning that the non-UK assets are also included in the settlor’s estate while they are a long-term resident (though there are exceptions to this for trusts which were excluded property trusts on 30 October 2024).
  • There will be an additional test for certain interest in possession trusts based on the beneficiary’s long-term residence position such that the trust will be exposed to IHT on non-UK assets whenever either the settlor or beneficiary are a long-term resident.

2024 Autumn Budget – Income Tax and Capital Gains Tax

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Summary of Changes for Income Tax and Capital Gains Tax Affecting Individuals

The current non-domicile tax regime, including the remittance basis of taxation, will be abolished from 6 April 2025.  It will be replaced by a new “residence based” approach.  This note focuses on how the changes affect income tax and capital gains tax (“CGT”) for individuals.  Separate notes consider the impact on inheritance tax and offshore trusts.

New Residence Regime

From 6 April 2025 all UK residents will be taxed on the arising basis (worldwide income and gains), however, for individuals who have previously been non-resident for 10 years, a new regime will be available for the first 4 years of residence as determined by the statutory residence test).

In those 4 years, a taxpayer can claim to exempt from tax the foreign income and gains (“FIG”) arising.  A claim will need to be made each year and can include either or both foreign income and/or gains.  Unlike under the remittance basis regime currently in place, there will be no requirement to retain the exempted FIG outside of the UK, and the FIG can be brought into the UK in the same or future tax years.

Temporary Repatriation Facility

From 6 April 2025, a new temporary repatriation facility (“TRF”) will be introduced to encourage taxpayers to bring funds into the UK in respect of FIG that were not taxed in the UK in previous years as a result of a claim for the remittance basis.

Whereas before 6 April 2025, a remittance of such funds to the UK would attract an income tax charge of up to 45%, the TRF will allow taxpayers to designate FIG and be subject to a tax rate of 15% in the 2025/26 and 2026/27 tax years, and 15% in the 2027/28 year.  Once designated and the charge paid, the funds can be brought into the UK at any time, including after the TRF period of 3 years has finished.

Overseas Workday Relief

Currently, overseas workday relief (“OWR”) is available in the first 3 years of tax residence to resident but non-domiciled employees on overseas earnings (i.e. days worked outside of the UK as part of their employment) paid and kept outside of the UK. 

From 6 April 2025, with the ending of the non-domicile regime, the relief will be available for the first 4 years of residence.  As a key development, there will no longer be a requirement to retain the earnings offshore and so the relief will also be available for those who are paid into a UK bank account, or just want to use the earnings in the UK.

For the first time, OWR will have a limit on the amount to be claimed in each tax year.  The limit will be the lower of 30% of the employment income or £300,000, although the limit will not apply to those who are already claiming OWR by 5 April 2025 and are able to continue to claim in 2025/26 or a later tax year.

Capital Gains Tax Rebasing

UK resident taxpayers who are unable to use the new 4 year FIG regime outlined above, will be subject to CGT on foreign gains.

However, as a transition measure, and subject to conditions, those who have claimed the remittance basis by 5 April 2025, will be entitled to rebase foreign assets for CGT purposes to their market value at 5 April 2017.

The transitional measure is not available for those who have been UK domiciled or deemed domiciled in the UK prior to 6 April 2025.

CGT Rates

The CGT rates on all disposals (aligning with those previously in place for residential property) are now 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers, with the new rates coming into effect on Budget Day.

Where a claim for business asset disposal relief (“BADR”) is possible on a disposal after 6 April 2026, the rate is increasing from 10% to 14%.  The lifetime allowance will remain at £1m. 

The same rates of tax applicable where a claim for investors relief is available (on certain unquoted trading companies), although for investors relief there is a reduction in the lifetime allowance to £1m (previously £10m).

For those subject to CGT in respect of carried interest, the CGT rates are increasing to 32% from 6 April 2025.