Highlights or Lowlights?

The long-awaited first Budget of the new Labour Government has arrived. “Change can be difficult” and that will certainly be the case for some, in the light of some major changes – some expected, some less so. A limited few may be delighted at the certainty that has been introduced for them – especially long-term non-UK residents. Whilst there is simplification in some areas, complexity abounds in others.

So, what are the headlines?  Below is a summary of the main changes that we know about.  More detail about some of these will follow in due course!  The main takeaway is this: if there is any possibility that you might be affected, speak to your tax adviser.  If you don’t have a tax adviser yet, get in touch with us!

Most of these changes will be introduced as from 6 April 2025, but some will be sooner and some latest.

1. Capital gains tax (CGT) – rates

From 30 October 2024:

• CGT rates will be 18% and 24% on everything except “carried interest”.
• There was no mention of whether ordinary CGT rates would change next tax year.
• However, CGT on carried interest will be 32% from 6th April 2025 (rather than 18% / 28%), but only where CGT treatment applies. From 6 April 2026, it is expected that carried interest will be taxed as income, but with some special reliefs, possibly bringing the effective tax rate somewhere nearer 34%.

2. Capital gains tax (CGT) – reliefs

• Those who have made a formal claim for the “remittance basis” of taxation in a year from 2017/18 to 2024/25 will be able to rebase certain non-UK assets to their value at 5 April 2017.
• Business Asset Disposal Relief (BADR – formerly known as Entrepreneurs’ Relief) will remain at £1m of relevant capital gains.
• Investor’s Relief (IR) is reduced to £1m from 30 October 2024.
• Where BADR or IR is available, the CGT rate will be:
  • 10% until 5 April 2025
  • 14% in 2025/26
  • 18% from 2026/27 onwards.

3. Stamp Duty Land Tax (SDLT)

From 31 October 2024:

• SDLT surcharge on buying a second home (where it does not replace one’s main home) has increased from 3% to 5%.
• SDLT for companies and “non-natural persons” buying dwellings worth more than £500,000 increases from 15% to 17%.
• There is no change to the surcharge for non-resident purchasers.

4. Inheritance tax (IHT) – allowances, reliefs, pensions

• The existing main allowances will remain the same until 2030: £325,000 nil-rate band and additional £175,000 (for some people) where a residential property is left, on death, to a direct descendant.
• Exemption remains for regular gifts out of surplus income.
• From 6 April 2026 – restriction on “business (property) relief” (BPR) and “agricultural property relief” (APR) will be limited:
  • Where APR/BPR would currently apply to reduce IHT to nil, in most cases only £1m will be tax-free from 6 April 2026, with any excess being taxed at half the usual IHT rate (generally at 20% instead of 40%). The £1m is the limit per person and per trust, although trusts not already set up by 30th October will share the allowance.
  • Where BPR applies to shares held on AIM or similar non-primary investment markets, IHT will be charged at half the usual IHT rate (again, at 20%, instead of 40%).
  • There will be a consultation on these changes in the New Year.
• From 6 April 2027 – unused pension pots will be subject to IHT on the scheme member’s death. It remains to be seen what other associated changes there will be, for example whether an unused pension will affect the availability of the “residence nil-rate band” or the reduced IHT rate of 36% where 10% of an estate is given to charity, or whether the income tax treatment of these unused pensions will be adjusted.

5. “Non-dom” regime changes

“Long term resident” rules replace “Non-dom” rules

• From 6 April 2025, “long term UK residence / non-residence” will displace “domicile” or “deemed domicile” as the determining factor for taxation. 
• A “long-term resident” (“LTR”) for IHT is generally someone how has been UK resident in at least 10 of the preceding 20 tax years.
• Special reliefs are available for income tax and CGT for four years after a person has had a non-resident period of 10 successive years or more.
• There will be a number of transitional rules under which domicile will continue to be relevant, but these will inevitably fall away over the coming years.

Inheritance tax (IHT) on non-UK assets

• Generally, a person’s non-UK assets will only be within the scope of IHT if they have been UK resident in at least 10 of the preceding 20 tax years. There are special rules for those under the age of 20.
• Non-UK assets will continue to be caught even after the person ceases to be UK resident, so long as the “10 out of 20 years” rule still applies, but this can be shortened. If they have been continuously non-UK resident for long enough after leaving the UK, their non-UK assets will cease to be caught. 
• The length of that continuous non-resident period ranges from 3 to 10 years, depending on how long the person had previously been UK resident in the previous 20 years:
  • 13 years of residence = 3 consecutive years of non-residence required
  • 14 years of residence = 4 consecutive years of non-residence required
  • etc,
  • 20 years of residence = 10 consecutive years of non-residence required.
  • But if the person becomes UK resident again before 10 consecutive non-resident years, this exception falls away and has to be restarted, unless the main “10 out of 20 years” rule no longer applies. 10 consecutive non-resident years appears to reset the clock (although the draft legislation is not entirely clear on this point).
• There will be no more “formerly domiciled residents” rules.
• The spouse exemption for gifts from a LTR spouse to a non-LTR spouse will be limited in the same way as gifts from a UK domiciled spouse to a non-UK domiciled spouse currently are. 
• A non-LTR spouse may elect to be treated as a LTR in order to benefit from the full spouse exemption, but their status as a LTR will then continue until they have completed 10 consecutive non-UK resident tax years after making the election (the current period is only four years of non-UK residence).

Income tax and capital gains tax from 2025/26

• After 10 consecutive years (or more) of non-UK residence, a UK resident can choose not to be taxed in the UK on their foreign income and foreign capital gains (“FIG”). 
• This will be allowed for their first tax year of UK residence following the non-resident period, as well as any of the subsequent three tax years in which they are UK resident.
• Where the claim is made in respect of any FIG arising in the relevant year, those FIG can be brought into the UK without any tax charge. This is called the “FIG regime”.
• There will also be a new form of “overseas workday relief” (OWR – where a person carries out some of their work outside the UK), available for the same four years (rather than the current three), with certain limits applying to the amount of relief available.  This too will need to be claimed.
• There are special rules for claiming relief under the FIG regime.  The relief is not automatic and must be claimed.
• All of the FIG must be specified on the tax return for the year and the relief expressly claimed for each amount of FIG (unlike under the “remittance basis” regime, where the FIG does not have to be mentioned unless remitted to the UK).
• Making a claim for the FIG regime or the new OWR to apply for a tax year will result in the loss of the personal allowance for income tax and the annual exempt amount for CGT.  Foreign income / capital losses for that year will also be lost. 
• The TRF (mentioned above) can be available where the remittance basis was claimed in relation to FIG within a trust.

Income tax and capital gains tax from previous years – the “temporary repatriation facility” (“TRF”)

• Those who previously claimed the remittance basis of taxation will have the three tax years from 2025/26 to 2027/28 in which to choose to be taxed on their unremitted FIG from remittance basis years.
• Where unremitted FIG are “designated” for taxation under the TRF, it is taxed at the rate of 12%, 12% and 15% in those years respectively. It is possible to make a designation even if the precise amount of FIG is not known.
• Those designated FIG do not have to be remitted to the UK in the year of the designation, but can later be remitted without any further tax.
• After the three years of the TRF, remittances of these older FIG will be subject to income tax or CGT at the prevailing rates.
• The TRF can be available where the remittance basis was claimed in relation to FIG which arose within a trust.
• The TRF can also be available where a beneficiary receives a capital benefit from an offshore trust in any of the three tax years of the TRF. This will be possible if the beneficiary was previously a remittance basis user and then, under various anti-avoidance rules, pre-2025/26 FIG from an offshore trust is attributed to the beneficiary because of that capital benefit. This is a particularly complex area and great care is required. See the next section below for more about trusts.

Trusts

• There are a number of complex changes to the taxation of offshore trusts and “excluded property trusts” (those outside the scope of IHT).
• Trusts will move into / out of the IHT regime for trusts as the settlor’s status changes between being a LTR and a non-LTR.  Importantly, an inheritance tax charge (of up to 6%) can arise for a trust when a settlor ceases to be a LTR – this will happen for many trusts on 6 April 2025.
• Once a trust moves into the IHT regime for trusts, it will suffer (up to) 6% tax charges on every 10th anniversary of the trust (“anniversary charges”) and pro-rated charges if capital is distributed from the trust between those anniversaries (“exit charges”).
• If a trust is settled from 30 October 2024 onwards and is within the IHT regime for trusts at the settlor’s death, then if the settlor was able to benefit from the trust assets, the trust fund will be subject to ordinary IHT on the settlor’s death (normally at 40%), in addition to the anniversary and exit charges mentioned above. This will not apply to trusts settled before 30 October 2024, although the anniversary and exit charges will still apply.
• Settlors and beneficiaries of offshore trusts will be subject to income tax and capital gains tax on income and gains in connection with offshore trusts, without the protections introduced in 2017, except where the new FIG regime applies to them.

6. Various other points

• Income tax thresholds – to remain unchanged for now.
• VAT on school fees – going ahead, with effect from January 2025.
• Employers’ National Insurance Contributions – to increase by 1.2%.

There is a lot of detail behind many of these changes, in particular the changes to the taxation of non-UK domiciliaries and non-UK residents and their trusts.  None of what was announced on 30 October 2024 has come into law yet, although, when it does, some will have effect from 30 October / 31 October 2024 or some other date that is actually prior to the date of the Finance Act when it is passed.  This means that there is still scope for adjustment to the rules that have been published.  Indeed, in some areas, there are further calls for input from the public (individuals and advisory firms), which again suggests that what has been announced so far is not set in stone.

Keep watching our “News and Insights” page for more detailed analysis of the impact of Rachel Reeves’ Budget.

If you may be affected by these new tax regimes or would like to discuss any aspect of them, please contact Paul Davidoff, our partner who specialises in UK and international tax matters. 

31 October 2024