An update on Labour’s non-dom tax policy

• The FIG regime - Jeremy Hunt previously announced the replacement of the remittance basis of taxation with the new four-year foreign income and gains (FIG) regime as part of his March 2024 Budget. This was to take effect from 6 April 2025 and further detail can be found here. Individuals qualifying for the FIG regime will be exempt from UK tax on FIG for the first four years after arrival, provided they have not been resident in the ten years prior
• The taxation of settlor-interested trusts – The Conservatives also announced changes to the taxation of settlor-interested trusts. The proposals ensured that settlors of non-UK resident trusts would be subject to tax on an arising basis on any income and capital gains arising to the trustees from 6 April 2025. This remains the case, albeit with a commitment for the Government to review existing anti-avoidance legislation from April 2026 in respect of these attribution rules and specifically, how they apply to offshore company structures
• A residence-based test for IHT - A commitment to introduce a ‘residence-based’ system for assessing individuals to UK IHT, effectively replacing the concept of domicile for IHT purposes.   Impacted individuals are expected to be subject to UK IHT on their worldwide asset base once resident for 10 years. This will remain the case for ten years post-departure (the provision will have a ‘ten year nose and a ten year tail’)

Rachel Reeves has announced that she will broadly follow these proposals from 6 April 2025 but with some key modifications.

Rachel Reeves has decided to modify the ‘transitional provisions’ related to the FIG regime. She has also left some ambiguity over the exact application of the new IHT rules to existing excluded property trust arrangements. The headline modifications are summarised below:

• A proposed 50% reduction in the amount of foreign income assessable on former remittance basis users from 2025/26 has been scrapped
• Transitional Repatriation Facility (TRF) – the previous Government had proposed a flat 12% rate on remitted foreign income and gains for a two-year period from April 2025
• Retainment of the Overseas Workday Relief (OWR), with exact details to be confirmed at the Budget

In a potentially welcome move, the Government has suggested the TRF will remain but with the rate and length of time to be set to make its use as attractive as possible.

It is also exploring whether this should be extended to include stockpiled gains and income within trust structures, effectively allowing for a more tax-favourable ‘dismantling’ of such structures, or repatriation of capital from them to the UK. Full details will be announced in the Budget on 30th October.

• Application of the new IHT rules – the proposals make it clear that there will be a residence-based system for IHT from 6 April 2025
• It is expected that this will apply where a person has been resident for 10 consecutive tax years prior to the tax year in which there is a ‘chargeable event’
• The Government has also made it clear that it will “end the use of Excluded Property Trusts to keep assets outside the scope of IHT”.   However, it is noted that further consideration is needed for existing trust arrangements made under a different regime. There is uncertainty whether this alludes to a potential ‘grandfathering’ of existing excluded property trusts, or the ability to dismantle such structures in a tax favourable way

The exact form of these provisions will be announced at the Autumn Budget, following a review of the feedback from existing external engagement with the professional bodies.  

While we wait for further detail, it is a good time to speak to your tax adviser about potential actions you could be taking now. These may include:

• A review of the likely tax burden of the rules if you do not qualify for the FIG regime but intend to remain UK tax resident. This should include personal assets and assets of trust structures of which you are the settlor
• Consideration of the application of existing anti-avoidance provisions in respect of income and gains arising to non-UK company and/or trust structures
• A review of income generation, and the scope for ‘rebasing’ assets now to reduce future gains
• Consideration of modifications to existing structures– subject to the points above, it may become clear that certain structural modifications prior to 6 April 2025 could reduce the potential tax burden from after that date. For example, the use of UK companies with a known 25% tax rate which may be lower than a personal attribution of FIG
• Trustees should bring their records up to date relating to stockpiled income and gains pools, given the potential extension of the TRF announced by Rachel Reeves

If you would like to discuss any of the above further, please do get in touch with your usual Evelyn Partners contact or one of the contacts listed.

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