The Chancellor has announced that the current remittance basis regime for non-UK domiciled individuals will be replaced with a residence-based regime from 6 April 2025.

Summary

Under current law, a non-UK domiciled individual (broadly someone originating from outside the UK, who does not intend to remain in the UK permanently), is able to elect to be taxed in the UK on the ‘remittance basis’, until they have been resident in the UK for 15 of the past 20 tax years. Under the remittance basis, an individual is subject to UK tax only on UK-source income and gains, and on any non-UK income and gains that are used in the UK. The Government plan to remove this regime and replace it with one based on tax residence.

The new regime will mean that individuals will not pay tax on foreign income and gains for the first four years after becoming UK tax resident. The regime is aimed at those coming to the UK either for the first time or after an absence of over 10 years, rather than being based on domicile status. Taxpayers who choose to use the regime will not be entitled to an income tax personal allowance or capital gains tax annual exemption for the relevant tax year.

Transitional arrangements will be made available to existing non-UK domiciled individuals after 6 April 2025. These will include:

- an option to rebase the value of capital assets to their value on 5 April 2019. This will be available for individuals who are currently non-UK domiciled and not deemed-UK domiciled under existing rules, who have claimed the remittance basis;
- a temporary 50% exemption on the taxation of foreign income in 2025/26, for individuals who will ‘lose’ access to the remittance basis on 6 April 2025; and
- a two-year ‘temporary repatriation facility’, which will allow individuals to remit existing pre-6 April 2025 foreign income and gains into the UK and pay a reduced 12% tax rate.

From 6 April 2025, the protection from tax on income and gains arising within settlor interested trusts will no longer be available and the foreign income and gains will be taxable on the settlor. The Government will also review provisions to prevent income tax avoidance by transferring income producing assets to a non-UK resident company. The existing rules will be revised to ensure that they remain effective and complement the new residence regime.

Overseas workday relief rules will also be revised. Under existing rules, inbound non-UK domiciled employees can benefit from an income tax exemption on income from non-UK duties for the first three years of UK residence, subject to that income not being remitted to the UK. The new rules will remove the requirement to keep the income offshore, meaning that the overseas element of the employment income can be brought to the UK without a tax charge.

A residence-based regime will also be introduced for inheritance tax. The Government plan to consult on this and has outlined plans for a 10-year exemption from inheritance tax on non-UK assets for new arrivals and a ‘tail-provision’ to keep a taxpayer within the scope of worldwide inheritance tax for ten years after leaving the UK. No changes to inheritance tax will take effect before 6 April 2025. The Government has advised that the current inheritance tax exemptions for non-UK property held in trusts will continue for trusts already in existence, and for trusts settled by a non-UK domiciled settlor before 6 April 2025.

Our comment

The Labour party had already announced plans to repeal the non-UK domicile tax regime if they form a Government after the next general election but, notwithstanding rumours in the press in the days leading up to the Budget, it was quite unexpected that the existing Government would take action now.

The new rules have been framed to attract foreign investment by those newly arriving in the UK. Such individuals will not be taxed on funds that they bring to the UK, whereas existing rules charge tax on remittances of foreign income and gains that arise after an individual becomes UK resident. Longer term UK residents stand to lose out, however, particularly if they anticipated using the remittance basis beyond 5 April 2025 or if they benefit from the existing beneficial regime for offshore trusts.

Individuals becoming taxed on a worldwide basis may need to give greater consideration to international tax treaties.

There is now a window of just over one year, during which time affected taxpayers should take the opportunity to review their tax affairs and plan for how the new tax regime will affect them in the future.

The headline rates of national insurance have been cut by a further 2% following the initial reductions in January and April 2024. The main income tax rates and bands will remain unchanged for a further year.

Summary

The Chancellor has announced that the main rates of national insurance contributions (NIC) suffered by employees and the self-employed will reduce to 8% and 6%, respectively, with the higher rates remaining at 2%. These changes will take effect from 6 April 2024. The employer’s contribution rate remains at 13.8%.

The income tax rates and allowances for the 2024/25 tax year remain unchanged and the tax-free personal allowance remains at £12,570. Perhaps the most notable income tax change is the reduction in the dividend allowance - dropping from £1,000 to £500, as previously announced in Autumn 2022.

Our comment

The cut to NIC will be welcomed by employees and the self-employed. The Government will hope that the savings stimulate consumer spending and promote job creation. Retirees, investors and landlords will not benefit from the reduction to NIC, however, and are likely to see their tax liabilities increased due to the income tax rates and allowances being frozen for another year.

Two changes are being made, which aim to increase tax revenues and increase the supply of housing by discouraging short-term lettings and incentivising the sale of second homes. The first measure removes the ‘furnished holiday lettings’ tax regime. The second reduces the higher rate of capital gains tax from 28% to 24% on gains realised on disposals of residential property.

Furnished holiday lets

Many second homeowners and landlords letting their properties on short-term tenancies, use the furnished holiday letting (FHL) regime. This enables them to deduct the full cost of their mortgage interest payments from their rental income and claim for a broader range of repairs and maintenance costs. FHLs can also benefit from being treated as ‘trading’ assets for capital gains tax (CGT) purposes, meaning a variety of reliefs are available. Gains on the disposal of FHLs have been eligible for holdover relief to defer gains on gifts, business asset disposal relief is available to reduce the rate of CGT to 10% in appropriate cases and rollover relief is available to defer CGT on the disposal of FHLs if acquiring other qualifying assets such as more FHLs.

From April 2025, the FHL regime will be withdrawn, meaning that there will be parity of treatment between short and long-term lettings moving forward. Anti-avoidance rules will accompany the change in legislation to prevent property owners from engineering disposals of their properties to take advantage of the current reduced rates of CGT that apply to FHLs. ‘AirBnB’ owners will be affected by the change, as will farmers and landowners who have converted surplus farmworkers’ cottages into holiday homes. Bed and breakfasts, guest houses and hotels are unlikely to be affected by the proposed changes.

Reduced rate of capital gains tax on sales of residential homes

In an accompanying announcement, which came as somewhat of a surprise, the Chancellor announced a reduction in the rate of capital gains tax applying to residential property.

Currently, the higher rate of CGT on gains on disposals of residential property by individuals is 28%. For disposals from 6 April 2024, however, the rate of tax will be reduced to 24%. Main residence relief will continue to apply for disposals of an individual’s main residence and the lower 18% rate, which applies to the extent that gains fall within an individual’s basic rate band, will also continue to apply.

Our comment

A mixed bag for landlords today. On the one hand, a reduction in the CGT rate will be welcomed, particularly as recent Budgets have seen a more singular direction of travel towards increasing the tax burden on landlords.

Those currently benefiting from the FHL rules will, however, suffer the impact of the changes from April 2025. Specifically, the loss of relief for interest on borrowings, could have a significant bearing on the overall tax liability and this may affect the commercial viability of some property business models.

The FHL changes were perhaps not unexpected given concerns around the need to redress the balance in areas suffering a perceived housing bottleneck for local residents and workers. The reduction in CGT, however, was not trailed in advance of the budget.

It does remain to be seen how much of an impact either of these changes will have in driving behaviour. In particular, how far it creates additional capacity in the property market, given that FHLs represent a small percentage of second homes. Property remains an attractive asset class both in terms of yield and capital returns, with the concern that higher tax costs could lead to higher rents as landlords look to preserve those post-tax profits.

The scope of agricultural property relief is to be extended from 6 April 2025 to land managed under an environmental agreement.

Summary

Following the Government’s consultation in spring 2023 on the taxation of environmental land management and ecosystem service markets, from 6 April 2025 agricultural property relief will be extended to land managed under an environmental agreement with specific approved bodies. The Government has also decided not to restrict agricultural property relief to tenancies of at least eight years following a recommendation from Baroness Rock in the May 2023 Rock review.

The Government announced a joint HM Treasury and HMRC working group with industry representatives to provide clarity on the taxation of ecosystem service markets where existing law or guidance is unclear.

Separately, the Government has confirmed that, as announced in Spring Budget 2023, from 6 April 2024 both agricultural property relief and woodlands relief will apply only to property in the UK (which excludes the Channel Islands and the Isle of Man).

Our comment

The extension to agricultural property relief will be a pleasing announcement for landowners where uncertainty has plagued decision-making on entering into potentially lucrative environmental schemes. With ever-mounting pressure on landowners and rural business owners to diversify their income streams, certainty over the preservation of valuable inheritance tax reliefs should help give further clarity to the wider implications of commercial decisions.

With many landowners carrying out diversified rural businesses, further work is still needed to evaluate the availability of business property relief for environmental land management.

The Government will introduce a new ISA, focussed on encouraging investments in UK companies. The Government has also confirmed that it will bring forward legislation to allow fractional share investments through ISA platforms.

Summary

The new UK ISA product will provide an additional annual £5,000 allowance over and above the current £20,000 allowance, to be used for investments in UK companies. The Government released a consultation inviting views on the design and implementation of the new UK ISA with responses required by 6 June 2024.

The Government will provide further details of this new product at a later date. The Government also previously announced, at the 2023 Autumn Statement, that it intended to legislate to allow fractional share investments in ISAs. The Chancellor has now announced that the Government intends to bring forward legislation by the end of summer 2024 regarding this.

Fractional share investments are allowed by some ISA platforms and mean that investors are able to invest in companies without needing to own a whole number of shares. This can benefit investors, particularly where the price of a company share is high. There has been some uncertainty around whether or not a fractional share is a ‘share’, which is an allowable investment under existing ISA legislation, or a form of derivative contract, which is not. The new legislation seeks to address this issue.

Our comment

The new UK ISA encourages investment into UK companies. Investors will, however, welcome the fact that there will been no changes to rules for existing ISA products, so individuals retain the opportunity to diversify their investments on a global basis, should they wish to.

The clarity around fractional shares is also good news for investors, as it will allow them continued flexibility with their investment strategy.

The Government has announced two measures to help savers. ‘Pension superfunds’ are intended to reduce costs and increase returns, and pension ‘pots for life’ to reduce the administrative burden of having many small pensions. In addition, the triple lock is being maintained.

Summary

The Government has reiterated its commitment to these measures, which have been trailed previously.

Pension superfunds are intended to ensure that contract based defined contribution pension schemes are competitive and offer savers value for money. Larger, consolidated pension funds could reduce costs and improve investment returns.

In parallel, the ‘pot for life’ initiative would allow employees to ask their employer to pay contributions into the pension plan of their choice, reducing the incidence of individuals with several small pensions. This is designed to reduce pension charges and increase pension investment options.

The maintained triple lock means that pensioners are likely to see their payments increase by 8.5% from Monday 8 April 2024. The new State Pension will therefore increase from £203.85 a week to £221.20 a week.

Our comment

These are all welcome changes. The introduction of pension superfunds will reduce scheme operational costs, which should increase value for money for many savers, and the ongoing commitment to the triple lock will allow many pensioners to meet the seemingly ever increasing costs of living.

The pots for life could be beneficial for employees, however the potential administration burden on employers would be considerable and care will need to be taken to protect savers from scams. These are easier to impose on private rather than company pension schemes.

From 1 April 2024, personal representatives of estates will no longer need to have sought commercial loans to pay inheritance tax (IHT) before applying to obtain a grant of probate.

Summary

The current law requires personal representatives to pay all of the inheritance tax due on the deceased’s estate before a grant of probate will be provided, unless an instalment option applies, whereby part-payment is still required. Where personal representatives can demonstrate they have made every practical effort to raise funds, which includes obtaining a loan to pay the tax, but insufficient amounts are available, HMRC may provide a grant of probate ‘on credit’ in exceptional circumstances.

From 1 April 2024 personal representatives will no longer need to have sought commercial loans to pay inheritance tax before applying for a grant of probate ‘on credit’.

Our comment

In an environment where the cost of borrowing has increased over the last few years, the prospect of taking out short-term debt in order to pay inheritance tax may appear particularly unattractive to personal representatives.

This timely announcement will give personal representatives the opportunity to administer the estate sooner without the adverse financial impacts of borrowing costs incurred to settle inheritance tax.

The Government has announced that from 6 April 2024, the threshold after which child benefit is gradually withdrawn will be increased to £60,000, with the benefit fully withdrawn when one partner earns over £80,000. From April 2026, the intention is to shift to assessing entitlement on a household rather than individual basis.

Summary

The high income child benefit charge was introduced in January 2013, with the aim of limiting the availability of child benefit for those perceived to be ‘high earners’.

The threshold for the charge was set at £50,000 and applies if either of a child’s parents has income exceeding this figure, with the charge gradually tapering-up so that when earnings exceed £60,000 the charge equals the full amount of child benefit.

From 6 April 2024, the charge will instead apply where one parent’s income exceeds £60,000 and the taper has been widened, so that the benefit is not fully repaid until that individual’s income exceeds £80,000.

Currently, entitlement to child benefit is just determined by the income of the highest earner in the household. This creates an anomaly where a household with two incomes below the threshold may be entitled to child benefit, whereas a household with one higher earner but a lower total household income is not. The Government intends to resolve this by switching to assessing entitlement on a household income basis from April 2026. A consultation on how to do so will be published in due course.

Our comment

The threshold increase will be welcomed by those effected by the charge and widening the taper range will decrease what has been an anomalous marginal tax rate ‘spike’, but the regime remains a significant complication and brings a large number of individuals into self assessment.

The proposed change to assessment on a household basis will be complex, as currently HMRC does not collect the necessary data on household income. The Chancellor acknowledged that the switch will require a “significant reform to the tax system”. Further detail will doubtless emerge when the consultation is published.