Regime change: The beginning of the end of the remittance basis

Following the seismic changes to the “non-dom” regime announced on Wednesday 6 March 2024, we summarise the key changes that are now expected to be introduced from April 2025 and provide in depth analysis of the policy details available so far.

Update: since this article was first published on 8 March 2024, a Labour Party document has entered the public domain, responding to some of the proposed “non-dom” changes announced in the Budget. The Labour document is not a formal policy document, and much is still unknown, but where the Labour Party’s position appears to differ from the Conservative Party’s, we have commented below.

The March 2024 Budget was not expected to contain much of interest to foreign domiciliaries or, as they have become known, “non-doms”. While significant changes were anticipated following the General Election which will be held later this year, there was no indication that “non-doms” were in the current Government’s sights. The Government had, after all, previously rejected further reform to the “non-dom” tax regime, on the grounds that such reform would not raise any money.

Then, a few days before the Budget, came rumours that Number 10 was considering an Italian-style “flat tax” regime to replace the remittance basis. This was widely seen as being in response to months of pressure from the Labour Party regarding the inequity and illogicality of the current regime. Even then, there was no real expectation of much more than a promise to review possible alternatives, in an attempt to take some of the wind out of Labour’s sails.

It therefore came as a bolt from the blue when, in the March 2024 Budget, Jeremy Hunt announced plans for reform which looked remarkably like the Labour proposals plus some added bells and whistles. Even more surprising was the scheduled timetable for such reform, including repeal of the remittance basis of taxation with effect from 6 April 2025.  The Government seems committed to bringing the changes into law, implicitly by means of a Finance Bill which will need to receive Royal Assent before the General Election. If this is achieved, it seems highly likely that the reform will take effect regardless of which party is in power at the time.

The announcements represent a complete overhaul of the taxation of foreign domiciliaries, with the concept of domicile being removed altogether from UK tax legislation and replaced with various residence-based tests. The remittance basis will be abolished and replaced with a four-year period for new UK residents in which their foreign income and gains will be exempt from tax. Inheritance tax (IHT) exposure will also be determined by a residence test, both for personally-held assets and assets held in trust. The beneficial protected settlement regime, primarily enjoyed by foreign domiciliaries who have been living in the UK for over 15 years, will also be abolished, in most cases rendering trusts settled by such individuals effectively transparent for income tax and CGT purposes.

The proposed new four-year special tax regime is not the one that many had hoped for, and may not be the most economically successful of the options available. There are good reasons to think that an Italian-style “flat tax” regime lasting 10 or 15 years would have been a far superior approach, if the objective is generating tax revenue and inward investment. However, the Government does not intend to consult on the topic, and although it can’t be guaranteed that the legislation required to effect the proposed reform will receive Royal Assent before the end of the year, foreign domiciliaries living in the UK should now prepare themselves for an imminent change of regime.

Headline points

The sweeping changes announced in the Budget may be summarised as follows:

• 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 the special tax regime, regardless of their 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% - a bargain compared to the rates of up to 45% which would apply in the absence of the relief. For certain former RBUs only half of their foreign income arising in 2025/26 will be subject to income tax. 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 to the increase in their value since April 2019. Labour have indicated that they would not wish to introduce the second of these three reliefs.
• 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 that individual 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 their 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 purposes. Instead, a new residence test will be introduced, potentially bringing the worldwide estate of individuals who have been UK resident for ten years into charge, with a ten-year IHT “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 5 April 2025 will turn on the residence of the settlor at the time of each potential tax charge. Labour have indicated that they would change the IHT rules applicable to all trusts, whenever settled, i.e. that the current excluded property rules would not apply to settlements created before 6 April 2025.

Drilling into the detail – the new regime

The special tax regime

Eligibility for the four-year special tax regime will be determined exclusively by the individual’s residence status over a reference period. There will seemingly be a requirement for at least ten years’ consecutive non-UK residence to access the regime. It appears that the test will be different from, and cruder than, the one that currently applies to determine whether an individual is deemed domiciled in the UK. The test will operate in an “all or nothing” fashion, in that any tax years of UK residence in the ten-year reference period will disqualify an individual from accessing the regime.

In addition, the regime will apparently be strictly limited to four tax years counting from the first tax year of UK residence after the ten-year period of non-UK residence. If the individual is only UK resident in some of those tax years, the unused allowance won’t be carried forward. So, for example, if an individual is non-UK resident for tax years 1-10, UK resident for tax years 11-12, non-UK resident for tax years 13-14, and UK resident for tax years 15-16, the special tax regime will be available in tax years 11-12 but won’t be available in tax years 15-16. The unused allowance (i.e. the failure to take advantage of the regime in tax years 13-14) won’t be carried forward.

As with the remittance basis, electing to be taxed under the special tax regime for a particular tax year will result in the loss of the income tax personal allowance and capital gains annual exempt amount.

There is no indication at present that there will be any further eligibility criteria for the special tax regime. In particular, there is no indication that individuals born within the UK will be prevented from accessing the regime.

There will be no annual charge on qualifying individuals if they wish to take advantage of the special tax regime. Although it would have been perfectly possible to require some kind of “flat tax” payment from individuals who choose to utilise the regime, the Government has chosen not to do this.

Putting to one side the brevity of the four-year period, and the absence of any annual charge, the UK’s special tax regime will have some similarities to the special tax regimes that apply in Italy, Greece and certain other countries. There will be a full and unconditional exemption from tax on foreign income and gains. This will be quite different from the remittance basis, where freedom from tax on foreign income and gains is dependent on the income and gains not being brought into the UK. The regime will be much simpler to operate and understand, and will require much less pre-residence planning, than the remittance basis does now.

It should be emphasised that the remittance basis will continue to have some relevance, as former RBUs will still be taxed on the remittance of their foreign income and gains of prior years (subject to the “TRF” discussed below).

Labour are considering whether an incentive to invest in the UK should be included in the new special tax regime, which would result in UK investment income also being free from UK tax. If such a relief were included, the new regime would offer nearly complete exemption from UK tax on worldwide income, which would seem remarkably generous. The contrast between the lenient treatment of those qualifying for the four-year special tax regime and the harsh treatment of foreign domiciliaries who are already UK resident and do not qualify for that regime is already striking.

Overseas workday relief

Overseas workday relief (OWR) is a relief which currently applies to remittance basis users in the first three tax years of UK residence. The effect of OWR is that remuneration (e.g. employment income or director’s fees) is notionally apportioned to duties performed within the UK versus duties performed abroad. The remuneration apportioned to UK duties is immediately taxable, whereas the remuneration apportioned to foreign duties is taxable only if remitted to the UK.

It has been stated that OWR will continue to apply in simplified form. It will be available for up to three tax years to individuals who qualify in those tax years for the special tax regime discussed above. The simplification will presumably be on the basis that, insofar as remuneration is apportioned to foreign duties, such remuneration will be unconditionally exempted from tax (instead of it being taxable if remitted to the UK).

The mismatch between the three-year availability period of OWR and the four-year availability period of the special tax regime looks messy and haphazard. It would make sense for the OWR availability period to be extended to four years, so that it aligns with the period in which individuals are covered by the special tax regime.

Trust protections

The protected settlement rules, also known as the “trust protections”, were introduced in April 2017. Under current law, their broad effect is to shield a UK resident, foreign domiciled settlor of a non-UK resident trust structure from tax which (in the absence of the protections) would be charged on the settlor by reference to foreign income received by the structure, and by reference to chargeable gains realised within the structure. Such shielding operates even where the settlor is deemed domiciled in the UK (and it is in that scenario that the shielding is most valuable).

These rules are to be repealed with effect from 6 April 2025, and there will be no “grandfathering” of structures created before that date. From that date, the default position will be that settlors of such structures will be taxed by reference to all income received by them and all gains realised within them, even where the structures were created prior to 6 April 2025. However, there will be no retrospective taxation – income and gains arising within these structures between April 2017 and April 2025 will not be brought into charge retrospectively.

From 6 April 2025, the only individuals who will in effect continue to benefit from the “trust protections” will be those who have only recently become UK resident and who qualify for the four-year special tax regime discussed above. They will be exempted from tax by reference to foreign income and gains of such structures, consistently with the fact that they will be exempted from tax on their own foreign income and gains. However, such exemption will only last for the four-year period in which the special tax regime will apply. Once that regime has expired, individuals in this category will generally be fully exposed to tax by reference to income and gains of structures they have created, if they continue to be UK resident.

For many long-term resident foreign domiciliaries who have created settlements, the repeal of the protected settlement rules will represent a major blow. Settlors who are prepared to be excluded as beneficiaries of their trusts will, in some cases, be able to eliminate their tax exposure with respect to trust income and underlying company income. However, this will depend on technicalities regarding which limbs of the transfer of assets abroad legislation are engaged, which could catch settlors out where they are not well-advised.

Moreover, exclusions from benefit will generally not protect settlors from tax on gains realised by the trust or by an underlying company. The reason is that where trust gains are concerned, a trust is deemed to be settlor-interested (causing the settlor to be subject to tax on its gains) not only where the settlor or any spouse can benefit, but where a child or grandchild of the settlor or their spouse can benefit (or even where a spouse of such a child or grandchild can benefit). Objectively, this is absurd, but it is a longstanding rule which is unlikely to be modified. 

It is fair to say that the "trust protections” were very generous when introduced, but it seems rather harsh to pull the carpet from underneath those who have undertaken careful planning based on the protected settlements regime - a regime which was devised by the Conservative government a mere seven years ago. This is particularly so given that trusts may be created for non-tax reasons, and are not always easy to unwind once they have been created, especially once they have existed for a significant period.

Arguably, a more rational approach would have been to allow trusts created before 6 April 2025 to continue to benefit from the existing regime (as is proposed in relation to excluded property settlements – see below). In other words, existing settlements which qualify for the “trust protections” ought, in the interests of fairness, to be grandfathered. Whether this viewpoint will gain any traction remains to be seen.

Trust distributions

At this stage it is unclear whether the removal of the “trust protections” will be accompanied by any technical changes to the operation of the trust “matching” rules (the rules which are engaged where a UK resident beneficiary receives a capital distribution or benefit from a non-UK resident trust). By default, there will be scope for harsh outcomes. UK resident settlors of trusts which have become unprotected (after 5 April 2025) will now typically be subject to tax on post-5 April 2025 income and gains of the trust as they arise and, if they receive a distribution, there may be scope for that distribution also to be taxed by reference to pre-6 April 2025 income or gains of the trust. Although a trust which has ceased to be protected will, in a sense, be transparent for income tax and CGT purposes, such transparency is unlikely to extend to a disregard of distributions from the trust.

One exception to this will apply where post-April 2025 current year income is paid to the settlor in the form of an income distribution. The settlor will already be taxable on the income following the loss of the “trust protections”, but no further tax will be triggered by the distribution. This is likely to be an important planning point in future, as many settlors will need liquidity to pay tax on trust income and gains.

Onward gifts

Under current law, where a RBU receives a distribution from a trust, which causes foreign income and/or gains to be attributed to them under the “matching” rules, the RBU is typically only taxable on those attributed income/gains if and to the extent that the distribution is remitted to the UK. From 6 April 2025, only UK resident beneficiaries qualifying for the new four-year special tax regime will be able to receive tax-free trust distributions. Such distributions will not be “matched” with trust income or gains and so will not reduce the relevant income / trust gains total available for “matching” with distributions to other UK resident beneficiaries. However, this will apparently be subject to some kind of onward gift rule, presumably applying in the event that a UK resident beneficiary who is subject to the four-year special tax regime passes the distribution on to a UK resident donee, who does not qualify for that regime. The broad effect of the onward gift rule will be that any such donee will be taxed as though the onward gift were a trust distribution.

Scope to simplify

It is worth noting that the current legislation dealing with the taxation of non-UK resident trust structures, including the “trust protections”, is almost unworkably complex and in places verges on unfathomable. It is to be hoped that the proposed reforms will be taken as an opportunity to simplify and streamline the existing rules, instead of creating reams of additional legislation. For example, there are already three onward gift rules, which are broadly but not exactly aligned with each other. It is hoped that there will be no further accretions to the onward gift rules and that, instead, the opportunity will be taken to consolidate and rationalise these rules.

Transitional reliefs

Major structural changes to the tax code are typically accompanied by transitional reliefs, which are intended to provide a little cushioning for individuals affected by a dramatic transition from one set of rules to another. Reliefs of this kind were a feature of the April 2008 and April 2017 reforms to the taxation of foreign domiciliaries. It is therefore no surprise that the changes announced in the March 2024 Budget include transitional reliefs. These will be welcomed by affected individuals. At first sight, they seem very generous, although as ever it will be necessary to dig into the details of the legislation to see whether this first impression is borne out.

Temporary repatriation facility

Arguably the most striking of the transitional reliefs is what the Government has called the “temporary repatriation facility” (TRF). This will enable former RBUs to remit pre-6 April 2025 foreign income or gains to the UK at a tax cost of just 12%. This is a snip compared to the rates that normally apply on a remittance: up to 28% on a remittance of foreign chargeable gains and up to 45% on a remittance of foreign income. The TRF will be available for the tax years 2025/26 and 2026/27 only. Thereafter, normal rules will apply, so the remittance basis legislation will continue to have some relevance for former RBUs, albeit that such relevance will be in constant decline.

The Government has stated that the TRF will apply to remittances of foreign income and gains that “arose to the individual personally”.  It is not wholly clear what this means. A particular issue is whether the TRF will apply if, in 2025/26 or 2026/27, a former RBU remits to the UK money that was received under a capital distribution from a non-UK resident trust, where such distribution caused foreign income or a foreign gain to be attributed to the individual under the “matching” rules that apply to trust distributions. The remittance of the money would cause the attributed income or gain to be remitted, but the concern is that the 12% rate might not apply. However, that would be highly irrational, as there is no obvious reason to distinguish between income actually received or gains actually realised by an individual, on the one hand, from income or gains attributed to an individual due to receipt of a trust distribution. It seems relatively clear, in any event, that where a former RBU has received an income distribution from a non-UK resident trust, a remittance of money that is derived from such distribution in 2025/26 or 2026/27 should qualify for the 12% rate. It is very hard to see how an income distribution could be characterised as anything other than income that arose to the beneficiary personally.

The TRF proposal seems sensible in terms of enabling funds that would otherwise be trapped offshore to be invested / spent in the UK, while also generating significant tax revenue during the two-year window. We would expect it to be popular, particularly amongst those foreign domiciliaries who have been UK resident for a long period.  The TRF may also help individuals who have become resident in the UK more recently but who have not carried out pre-arrival planning and are struggling to find sufficient clean capital to meet their UK spending needs.

Labour have expressed concern that the proposed TRF will not sufficiently incentivise former RBUs to remit their foreign income and gains, leaving significant sums still “stockpiled” offshore. They intend to “explore ways to encourage people to remit stockpiled [foreign income and gains]” even after the initial two-year window. It is not clear what form this “encouragement” will take, if the TRF is not simply extended.

Special reduction in income tax

The Government white paper states that, for individuals “who move from the remittance basis to the arising basis”, only half of their foreign income arising in 2025/26 will be subject to income tax. It appears that the broad effect of this will be a reduction in the effective rate of tax on foreign income, to half of what it would have been in the absence of this relief. A possible qualification to this would be if individuals were able to pick and choose which half of their foreign income is taxable and which is not, allowing them to select income that will already be taxed at a lower rate (eg where it has borne foreign tax) to form the taxable “half” of their income. At present it is very unclear how, precisely, this relief will operate.

It is not also clear from the statement in the white paper whether only individuals who would have been eligible for the remittance basis in 2025/26, had the regime continued, will be eligible for the income tax reduction, or whether individuals becoming deemed domiciled on 6 April 2025 will also qualify. A further question is whether the relief will apply to offshore income gains, or “OIGs”, and other deemed income. The Parliamentary drafting team have form for forgetting about OIGs and producing tax legislation that does not address them, resulting in anomalies and controversy. In any event, the Government may have decided that OIGs should not qualify for the relief as a matter of policy, given that OIGs are a form of capital gain, rather than income. The overall policy here is somewhat hard to discern, as there is no obvious reason to relieve individuals from tax on income but not gains.

Labour have stated that they would not grant this relief to former RBUs. 

Rebasing to April 2019 values

A new CGT rebasing relief will also be introduced. A former RBU making a post-5 April 2025 disposal of a non-UK situated asset which was held at 5 April 2019 will be able to elect to use its value at that date as the base cost for CGT purposes, instead of the actual acquisition cost. Why 5 April 2019 has been chosen as a rebasing date is obscure.

The relief will only apply to personally held assets (not those held in trust) and only individuals who have claimed the remittance basis in the past and have not become deemed domiciled in 2024/25 will be eligible.  The white paper also refers to other “conditions” for the relief to be set out in due course. These might include a stipulation that the asset must have been non-UK situated for a specified period, as required for the current April 2017 rebasing relief.

Labour have not commented on the rebasing relief specifically. However, as they support “most aspects” of the Conservative policy paper, it seems reasonable to assume that they would enact this relief, or something like it.

The future of inheritance tax

The announcements regarding IHT are much less settled than the income tax and CGT changes. There is a clear intent to move to a residence-based test, again with effect from 6 April 2025, but the Government intends to consult on the details.

Personally-held foreign assets

Under current law, the position is broadly that whether an individual’s personally-held foreign assets are within the scope of IHT depends on whether the individual is domiciled within the UK under general principles, and on whether they are deemed domiciled. If the answer to both questions is “no”, the individual’s foreign assets are outside the scope of IHT, as “excluded property”. A significant qualification is that non-UK assets that are connected with UK residential property may be within the IHT net even where their owner is non-UK domiciled and not deemed domiciled.

The Government’s proposal is that an individual’s foreign assets should come within the scope of IHT once that individual has been UK resident for 10 years. This residence rule will be accompanied by a 10 year “tail”, such that exposure to IHT with respect to foreign assets is only lost after 10 years of non-residence. This proposed “tail” is presumably intended to align with the new four-year special regime for foreign income and gains, such that a decade of non-UK residence resets both regimes. However, a ten-year IHT “tail” seems extreme and disproportionate. It would surely be possible for the IHT “tail” for an individual leaving the UK to be limited to say, three years (as is currently the case), unless the individual resumes UK residence within a ten-year period, in which case the “tail” would be resurrected.

The proposed shift from a domicile-based regime to a residence-based regime will be relevant to the UK’s network of estate tax treaties. These treaties, which can shield an individual from IHT where the individual is caught by the current IHT “tail” (ie the persistence of a deemed UK domicile following cessation of UK residence), are expressed in terms of domicile. Some kind of deeming provision will be needed in the IHT legislation to the effect that where an individual’s foreign assets are within the scope of IHT under the residence-based test, that individual shall be treated as UK domiciled for the purposes of any relevant treaty.

Foreign assets of settlements

Under current law, the issue of whether foreign assets of a settlement (i.e. a trust) are within the scope of IHT essentially depends on the status of the settlor when those assets became comprised in the settlement. Broadly, such assets are outside the scope of IHT (as “excluded property”) if at the relevant time, the settlor was neither domiciled within the UK under general principles nor deemed domiciled. Again, there is a qualification for assets connected with UK residential property.

The Government proposal is that these rules should continue to apply up to 5 April 2025, and that so-called “excluded property trusts” created up to that date should be grandfathered in terms of their IHT treatment. Assuming that the final legislation does include this grandfathering of pre-6 April 2025 settlements, there will be scope for new excluded property trusts to be created within the coming year, and the IHT treatment of such trusts won’t be affected by the shift to a residence-based IHT system. However, as indicated above, such trusts will generally be transparent for income tax and CGT purposes once the income tax / CGT “trust protections” fall away on 6 April 2025.

With effect from 6 April 2025, the current domicile-based excluded property rules will be replaced by a residence test that will seemingly be applied at each potential occasion of charge, i.e. when assets are first settled, on ten year anniversaries, on distributions from the trust and (where the trust is settlor-interested) on the settlor’s death. The residence test proposed is the same as discussed above, i.e. one under which an individual will become fully enmeshed in the IHT net once ten years of UK residence have been clocked up, and will only escape that net once ten years of non-UK residence have elapsed.

It therefore appears that under the proposed new IHT regime, a trust holding foreign assets may move in and out of the IHT net throughout its existence, depending on the application of the ten-year lookback on any given event of potential charge. Presumably the scope for IHT on events of potential charge following the settlor’s death will be determined by the application of the residence test at the time of death.

Labour have indicated that they would not grandfather the existing IHT rules for trusts created prior to 6 April 2025. They have stated that “Labour will include all foreign assets held in a trust within UK inheritance tax, whenever they were settled, so that nobody living here permanently can avoid paying UK inheritance tax on their worldwide estates.” It is not clear precisely what this means. The future IHT treatment of trusts settled by foreign domiciliaries is now deeply uncertain, making it very hard for advisors to advise, and for individuals to plan.

Other connecting factors

The policy paper refers to “other connecting factors” that may be included in the new IHT regime. This raises the spectre of the current rules on “formerly domiciled residents”, who are subject to a harsher tax regime than other foreign domiciliaries by virtue of having been born in the UK, with a UK domicile of origin.  Will the worldwide assets of individuals born in the UK automatically be within the scope of IHT, even after ten years’ of non-UK residence?

Planning points

The changes discussed above are further-reaching than anticipated and are due to come into effect much sooner than most practitioners thought likely. However, there is still over a year before any new legislation will take effect, and immediate action is unlikely to be necessary or wise. In many cases it will be prudent to postpone major planning steps until draft legislation has been published and there is greater clarity about what the new rules will say.

Nonetheless, many individuals who are caught in this sea change will wish to start considering options and possibilities. These could include the following: 

Delaying remittances and accelerating gains

Any current or former RBUs considering making a remittance of foreign income or gains in the near future would be well advised to wait to do so until after April 2025, when they can enjoy the 12% rate under the TRF.  

Current RBUs who will not qualify for the new four-year special regime should also consider the scope to realise latent gains prior to April 2025. Similarly, trustees of structures set to lose their trust protections should try to realise latent gains, perhaps by way of a transfer to an underlying company. Where possible, the receipt of income should be accelerated in the same way.

Settlors of protected settlements

These individuals will arguably be the hardest hit by the proposed changes. Settlors of (soon to be un-)protected settlements will need to take expert advice to understand whether being excluded as a beneficiary will eliminate their income tax exposure, and to decide if this is a price they would be willing to pay. Consideration will also need to be given to whether such settlors can accept future ongoing CGT exposure with respect to trust gains and/or whether there is scope to mitigate the CGT position. Such mitigation might be possible by changing the investment policy to focus on income generation or by investing in particular assets that will grow in value but will not give rise to chargeable gains.

Where the post-5 April 2025 tax exposure for such settlors is considered unacceptable, consideration will need to be given to the possibility of leaving the UK altogether, perhaps for sunnier Italian or Greek climes. In such cases, it would be worth thinking about the feasibility of becoming non-UK resident in 2025/26, bearing in mind the often drastic reduction of UK days required, or whether it might be more realistic to aim for non-UK residence in 2026/27, accepting much greater tax exposure for the first year of the new regime.

New excluded property trusts

Many foreign domiciliaries will wish to consider establishing excluded property trusts before April 2025, but will need to bear in mind that such trusts will typically become transparent vis-a-vis their settlors for income tax and CGT purposes thereafter.  Following the loss of the protected settlement regime, there will often be less need for such trusts to be non-UK resident, creating scope for settlors to be trustees of their own trusts, reducing administrative costs. With suitable planning, there may also be scope to soften the income tax / CGT exposure for the settlors.

This planning opportunity appears to be top of Labour’s hit list and, if they win the next election, it may well be that there is no IHT advantage to creating a new trust between now and 6 April 2025.

The noises coming from the Labour Party regarding the IHT treatment of trusts in fact mean that in some cases, consideration ought to be given to the exclusion of settlors from benefit under existing trusts, so that the “gift with reservation of benefit” rules do not apply and a 40% IHT charge on the death of the settlor is avoided. This is of course a drastic step, which cannot be taken lightly.

Closing thoughts

Many practitioners would enthusiastically support the proposition that the remittance basis is in need of replacement by a more rational and straightforward tax regime. There are powerful arguments in favour of a “flat tax” regime for the UK resembling that available in Italy, Greece, Switzerland and elsewhere, under which qualifying individuals pay an annual levy to be exempted from tax on their foreign income and gains. To be attractive, any such regime needs to be available to qualifying individuals for a significant term, at least ten years, as moving to another country is a significant commitment. Clearly, the four-year special tax regime which the Government has chosen to adopt to is very different from this, and is not obviously competitive with rival “flat tax” regimes available within Europe. This feels like a huge missed opportunity. Not only is the proposed special tax regime too short-lived, it also seems illogical for the Government to be forgoing annual “flat tax” charges on qualifying individuals. In the perception of many practitioners, a significant number of wealthy foreign domiciliaries would be willing to pay a substantial annual charge as a quid pro quo for a straightforward and suitably long-lived special tax regime which promises stability and certainty.

Reforms to the tax rules on foreign domiciliaries are invariably bewailed by Cassandras and Jeremiahs, who prophesy vast exoduses of footloose wealth-creators from the UK. So far, such predictions have not come to pass. But the current proposed reform, coming as it does so soon after the reforms of 2017-18, might exhaust the last reserves of patience of the UK’s “non-dom” community.

It is only fair to say that the impact of the changes on particular individuals will be highly situation-specific, and there will be winners as well as losers. For some RBUs and former RBUs, the TRF will be a powerful incentive to stay in the UK for longer, allowing them to increase their clean capital reserves at a bargain 12% rate.  For other UK resident foreign domiciliaries, particularly those who are deemed UK domiciled and are reliant on the trust protections, the tax cost of living in the UK may simply become unacceptable. The length of the new four-year special regime is so limited in comparison to the regimes on offer in other European countries (eg Switzerland, Italy, Greece) that it seems inevitable that there will be a reduction in the number of foreigners moving to the UK. However, the number of potential immigrants “lost” to other countries will be all but impossible to measure.

It is unusual to have such a major tax policy change this close to a General Election, and to have such major tax legislation pushed through in such a compressed timeframe, without adequate consultation. This creates a distinct risk of defects in the statutory drafting which, based on recent history, are unlikely to be rectified.  Whether or not one agrees with the policy of having special tax rules for individuals who have come to the UK from abroad, UK resident foreign domiciliaries have been subjected to a rollercoaster ride of tax changes in recent years. They deserve a properly considered, coherent regime, which is clear and stable, does not thwart legitimate expectations based on prior rules, and is set out in lucid and error-free statutory drafting.