The 2024 Autumn Budget delivered by the Chancellor introduced significant reforms impacting offshore tax planning, particularly for non-UK domiciled individuals. This article outlines the major changes to residency and domicile tax regulations, how they affect non-doms, and the Treasury’s broader efforts to reform offshore anti-avoidance measures.
Key Changes to Non-Domicile and Residence-Based Taxation
1. Shift from Domicile to Residence-Based Regime
Starting from April 2025, the remittance basis—a system allowing non-doms to only pay UK tax on foreign income when it is brought into the UK—will be abolished. Instead, the new residence-based regime offers a four-year foreign income and gains (FIG) relief, intended to support individuals newly resident in the UK but without a prior history of UK tax residency over the last decade. This new approach is designed to simplify tax obligations while aligning more closely with international standards. However, it restricts tax deferral strategies previously available to long-term UK residents under the remittance basis.
Impact on Settlor-Interested Trusts
The Budget announced the removal of specific tax benefits for settlor-interested trusts that previously allowed non-doms to shield foreign gains and income from UK tax. From April 2025, UK residents with such trusts will lose these protections unless they qualify for the FIG regime. This change will dramatically affect individuals using trusts as an offshore planning tool for IHT purposes.
Temporary Repatriation Facility (TRF) and Transitional Measures
To ease the transition from the remittance basis, the government will introduce a Temporary Repatriation Facility (TRF). This option will allow non-doms to repatriate foreign gains and income accumulated before 2025 at a reduced tax rate, provided it is brought into the UK within a specific time frame. Additionally, non-doms will be able to rebase their foreign-held assets to their value at the beginning of the new regime, protecting some of the asset value from UK tax on future gains.
Planning Considerations for Affected Individuals
For those previously benefiting from non-dom status, this Budget represents a marked shift, urging a reassessment of tax planning strategies. Trustees and tax advisors may need to restructure existing offshore arrangements and reassess the benefits of holding assets in non-UK trusts or other foreign entities. The Treasury is engaging with stakeholders to further refine the framework, providing guidance to aid in planning for the 2025 changes. Clients will need to engage with their advisors.
2. Inheritance Tax (IHT) Reform
The IHT system, currently based on domicile, will transition to a residence-based model. Individuals who have been UK tax residents for a minimum of ten years within the preceding fifteen years will now fall within the IHT net on their global assets. The government is introducing safeguards to prevent tax avoidance through Excluded Property Trusts, which historically allowed non-doms to keep certain assets out of the UK IHT scope. Many long-term UK residents will have already been deemed to be domiciled in the UK. The change will bring more into this net sooner than they had planned.
3. Anti-Avoidance and Compliance Enhancements
In line with the broader focus on compliance, the Treasury will conduct a comprehensive review of existing anti-avoidance rules, including the Transfer of Assets Abroad (TOAA) and Settlements legislation. This initiative aims to modernize and clarify regulations. Any changes are likely to affect existing planning as well as planning for the future.
4. Increased Resources for HMRC:
HMRC has published experimental statistics estimating that 4% of UK resident individuals under-declared tax on their foreign income in 2018-2019, amounting to around £0.3 billion. These statistics highlight the need for improved compliance and enforcement.
The Budget allocates additional resources to HMRC to tackle offshore tax non-compliance. This includes enhancing data collection and international cooperation to ensure that taxpayers declare all their income and assets accurately.
It should be borne in mind that FATCA and CRS (“Common Reporting Standard”) mean that HMRC already have much of this information and have had for several years. The increased resources will help HMRC to use the information that they already have or have access to.
All of these reforms reinforce the need for solid professional tax planning. Sandstone Tax have always operated a full disclosure policy. If your “tax planning” is only effective because HMRC do not know about it, then you should not be doing it.
For more detailed planning considerations, individuals and trustees should seek professional advice.