Shifting Sands On Taxation – Navigating Uncertainty

The remittance basis of taxation has been a favourable feature of the UK tax regime for over a century, attracting many “non-UK domiciled” individuals to the UK. However, in the Spring Budget in March the government announced proposals to abolish the remittance basis from 6 April 2025 and to replace it with a new residence-based regime.

Another significant change is replacing the concept of domicile for inheritance tax (IHT) purposes with a new residence-based regime with IHT on worldwide assets now applying after 10 years of UK residence with a 10-year “tail” for individuals who leave the UK.

Having hoped for draft legislation and a consultation on the IHT changes over the summer months, the election on 4 July now means that uncertainty will continue as we are not likely to obtain further details until the autumn months. A series of engagement sessions held by HMRC with members of the tax profession in May did not provide further clarity.  In the meantime, individuals living in the UK are trying to grapple with the practical implications of the proposals and what steps, if any, can be taken to ease the passing into this new regime.

It had widely been felt that the remittance basis regime was outdated, encouraging individuals to keep assets outside the UK and making investment in the UK less attractive. If implemented successfully, the new regime could pave the way for greater investment in the country. However, this will require a careful balance between the desire to raise the tax intake from wealthy individuals who have made the UK their home and making the new system attractive enough to encourage people to move to and remain in the UK.

What would a more attractive regime look like?

There have been many discussions amongst tax professionals about the length of the proposed four-year regime that will replace the remittance basis. Provided an individual has not been resident in the previous 10 years, they will be able to claim this new regime for their first four years of UK tax residence, paying no UK tax on their foreign income and gains even if these are brought into the UK.

This is a major change from the current remittance basis regime where a UK tax charge applies if offshore income and gains are brought into the UK, subject to certain exemptions for business investments.

It is widely considered that the four-year regime is simply too short. For someone moving to the UK from abroad, this is typically not a long enough period for them to put down roots and become settled in the UK. It will be easy for many people to move to the UK only temporarily for four years and then move away again. If the regime was instead for six or seven years, individuals may be more inclined to remain in the UK, where they will continue to spend, invest and pay UK taxes.

Compared with other countries such as Italy, Greece and Israel, where the exemption periods range from 10 to 15 years, the proposed four-year regime for the UK seems quite short. The Chartered Institute of Taxation (CIOT) called for HM Treasury to share the figures that the proposal assumptions are based upon and specifically whether economic activity would increase if the four-year regime were to be extended. It is to be hoped that this comparison is made to inform the next government on the appropriate length of the exemption period.

Incentivising investment

Investment in the UK is a key aim of the proposals. The Labour Party has indicated that it would consider a UK investment incentive under the four-year regime and may extend the proposed transitional reliefs to encourage individuals to bring historic foreign income and gains to the UK. This is to be welcomed.

Offshore trusts

A key issue remains the potentially wide-ranging changes to the taxation of offshore trusts. From 6 April 2025 many settlors will face income tax and capital gains tax (CGT) charges on income and gains realised within their offshore structures – this is compared with the current position where charges may only apply to distributions and benefits they receive from offshore trusts and remit to the UK.

Added to this is Labour’s proposal to remove favourable excluded property status from existing and new offshore trusts in a bid to raise tax revenues further. Not only would this result in potential periodic charges on trust assets, but more significantly, assets in offshore trusts in which settlors retain an interest may suddenly be brought within the scope of IHT in their estates at 40 per cent. For many individuals this loss of IHT protection coupled with the loss of income tax and CGT protection will be too much.

They are plotting their exits with their sights set on countries with more favourable tax regimes such as Italy, Portugal, Monaco, Switzerland and Dubai. These individuals are typically wealthy enough to be able to move countries and they will vote with their feet. This again brings us back to the importance of achieving balance in the new regime – encouraging investment while raising tax revenues without driving people away.

Seeking solid ground

There is no doubt that the lack of legislation and clarity over the scope of the proposed changes, extended now by the election, is making planning difficult. The technical paper issued by the government outlining the proposal is only 10 pages long. The remittance basis and offshore trust legislation is hugely complex and yet we have only 10 pages of detail on the new regime on which to base our advice for clients considering their options. Added to this is the prospect of a new government making more changes to the proposals. Non-doms in the UK do not know where they stand and this will remain the case for the coming months. The transitional provisions will be key in softening the blow of the impact of the proposals and the Labour Party has indicated it would alter these if elected.

Looking ahead

Individuals who have not been UK resident for the previous 10 tax years will be able to reap the rewards of the four-year regime and with no charge for claiming it, this will make the UK an attractive jurisdiction, even if for a short period. In a significant change compared with the current remittance basis regime, planning opportunities will exist for UK expats who wish to return to the UK as they will also be able to claim the four-year regime if they have been non-UK resident for the previous 10 years.

The UK remains a strong world contender as an attractive location for wealthy individuals and families to settle – England is one of the best countries for education within the western world and London prime real estate continues to be sought after. It is to be hoped that the modernisation of the non-dom regime will continue to attract people to the UK. However, this will require consultation with professionals and careful drafting of new legislation.

Rushing in a new regime after the election without due consideration is unlikely to achieve the objectives and may result in a wasted opportunity to revamp the rules in a positive manner for both new and existing foreigners living in the UK.

This article first appeared in WealthBriefing in June 2024.