Article by Spice Taxation: Update from HM Treasury on the March 2024 Budget Proposals regarding Domicile and Residence – 30th July 2024

Source: Article by Martin Rimmer, Managing Director of Spice Taxation Pte Ltd

In my last update, regarding the Tax Policies of the new Labour Government, I suggested that the new Government would come out of the tracks at a gallop and that we should expect some renewed momentum on the much-publicised decision to abolish the concept of ‘domicile’ as far as UK tax law is concerned, which was announced at the March 2024 Budget.

The Treasury has, today, published a ‘Policy Summary’ which moves us all a few steps forward. It is clear that the Government will be proceeding with the broad proposals as published at the Budget by the then Conservative Government and that they will not be putting forth something totally different. This is good news insofar as gives us a little more certainty and a better sense of policy direction.

Secondly, the Government has reiterated that it intends for the reforms covering Income Tax, Capital Gains and Inheritance Tax to come into force from 6 th April 2025. They will not be proceeding with a formal consultation process on the Inheritance Tax proposals but will be relying on ‘stakeholder feedback’ obtained to inform its decision-making. I thought they would take longer with Inheritance Tax, but they are obviously keen to press ahead.

Thirdly, there is still no suggestion at all that these proposals will not apply to those we currently think of as ‘domiciled in the UK’ and who become resident in the UK. This is good news which appears to confirm our earlier thinking. However, it is still early days in the process and a little too soon to pop the champagne. But, if I am being honest, I am quietly excited now – at least, as far as a tax adviser can get excited at all!

Fourth, the Government will hold its first Budget on 30th October 2024 which, it says, will contain more clarifications about their proposals.

What did the announcement say?

In short, the Government intends to:

• Allow ‘new arrivals’ into the UK from 6th April 2025 to exempt their Foreign Incomes and Gains (FIG) from taxation on an elective basis (at the loss of their tax allowances) for the first 4 years of resident status
• That elective benefit will disappear from year 5, when individuals, whoever they are, will be subject to tax on their world-wide income and gains whether or not remitted
• A ‘new arrival’ appears to be someone who has been non-resident for all the immediately preceding 10 years (we don’t know whether that is tax years or not yet)
• From the start of the fifth year of residence, the incomes and gains of trusts of which the settlor or someone connected with them can benefit, will be assessed to tax on the UK resident settlor (or so it appears)
• The Government will conduct a review of existing offshore ‘anti-avoidance legislation’ – principally the ‘Transfer of Assets Abroad (ToAA)’ code and the ‘Settlements Legislation’ – in order to ‘modernise’ it and make it more ‘fit for purpose’. I think that this must mean something akin to driving a coach and horses through most types of protections from the existing legislation. However, don’t expect anything to materialise on this before the 2026/27 tax year though.
• The Government will retain ‘a form of Overseas Workday Relief’ and details will be announced at the Budget. This relief allows those who were non-domiciled to exempt earnings relating to non-UK performed duties from Income Tax for the first 3 tax years of UK resident status. It will be interesting to see what they do here. These provisions should (all other things being equal) apply to anyone becoming resident in the UK from 6th April 2025 who has been non-resident for all the 10 immediately preceding years.
• The Government has confirmed that only the following transitional reliefs will be available to those non-domiciled individuals who are already resident in the UK on 6th April 2025 and who are ineligible for relief under the 4 year ‘FIG rules’ (i.e. longer term residents):
  • The right to ‘rebase’ the value of non-UK assets to their market values at a date to be confirmed at the Budget
  • A ‘Temporary Repatriation Facility’ to remit foreign Income and Gains previously excluded from tax under the Remittance Basis at a reduced level of tax for a period to be confirmed at the Budget

What was said about Inheritance Tax?

• The Government has confirmed that it intends to determine whether foreign assets are subject to Inheritance Tax from 6th April 2025 by reference to a test of whether someone has been resident in the UK for 10 years immediately preceding the relevant date (date of gift, date of death etc).
• It has described this as ‘the Basic Test’ which suggests to me that the final regime may contain other not so basic tests
• However, there is still no explicit suggestion that these proposals will not apply to those we currently consider as domiciled in the UK and who relocate to the UK. This could amount to a 10 year period of UK resident status when a person’s non-UK assets remain exempt from Inheritance Tax.
• However, when someone has entered their 11th year of residence, their foreign assets become subject to Inheritance Tax and, furthermore, they need to have been non-resident for 10 years before the exemption from Inheritance Tax on non-UK assets is restored to them. Expect to see lots of people leaving before that happens!
• The exemption from Inheritance Tax enjoyed by ‘Excluded Property Trusts’ will cease where the settlor has been resident for at least 10 years. It will be replaced by a new regime which will also include some transitional reliefs. This is an improvement on the sweeping statement previously made that there would be no form of protection for existing structures.

I am not sure that I believe in trying to ‘read between the lines’ of policy announcements such as these and perhaps we should simply take them all at face value – a new Government speaking plainly perhaps. If they intended to differentiate, as a matter of policy, between those we currently think of a ‘domiciled’ and ‘non-domiciled’, surely it would have said so by now? In which case, for someone who has been or eventually achieves 10 years of non-resident status, the following benefits still appear to be consistently implied based on all that two Governments have said from Budget Day on 6th March 2024 to now:

• Exemption from Inheritance Tax for non-UK assets including for the first 10 years of UK resident status subsequently, and
• Exemption from Income Tax and Capital Gains Tax and access to a ‘form of Overseas Workday Relief” for up to the first four years of UK resident status

For the British expatriate falling into this category, this remains potentially great news. However, whilst being quietly excited now, I don’t want to get too carried away – mostly because I will look a bit silly if I do, and you wouldn’t thank me for the false hope. So, I don’t want you to get too carried away with it either. I do still struggle to see how any Government can justify losing the Inheritance Tax revenues on non-UK assets from anyone who has been non-resident for at least 10 years.

However, stranger things have happened and if the cost of aligning tax policy for all people results in a collateral benefit to qualifying British expatriates, I will certainly drink to that. I have now officially moved from ‘eyebrows raised’ to having put my teacup down and casting furtive glances at the Moet & Chandon in the corner.

If you would like to discuss your own circumstances in confidence or would like to be on the subscriber list for our new dedicated coverage of these breaking developments, please contact me at martin@spicetaxation.com or by sending a Whatsapp to +65 9665 0019.