On Wednesday 6 March the Chancellor of the Exchequer, Jeremy Hunt, set out the UK Government’s Spring Budget “for long-term growth” against a background of recent challenging economic conditions. Whilst the Budget was limited in length a significant announcement was made on reforming the non-UK domiciled tax regime and the UK Inheritance Tax regime. These announcements will have considerable implications for individuals and businesses in Jersey, and we await the details of the changes on the publication of the draft legislation.
We summarise the details announced so far below.
Reform of the UK Non-domicile regime
The current non-dom regime, and associated remittance basis of taxation, will be abolished from April 2025, to be replaced with a new regime based on residence and length of stay in the UK. The Government will also consult on reforming Inheritance Tax to move to a residence-based regime, although no changes are expected before April 2025. Transitional provisions have been announced to encourage existing non-domiciled individuals resident in the UK to remit historic unremitted foreign income and gains to the UK.
Under the current remittance basis of taxation, non-UK domiciled individuals who have been resident in the UK for no more than 15 of the last 20 tax years, are only subject to tax on non-UK income and gains when those amounts are remitted to the UK. No UK tax arises to the extent such income and gains are kept offshore. Domicile is also a factor for UK Inheritance Tax and the taxation of offshore trusts. The announced consultation on reforming inheritance tax and proposed changes to the taxation of offshore trusts suggest a move to drastically reduce the importance of domicile considerations for UK tax. Whilst this will fundamentally change the way existing offshore trusts are taxed, some of the associated risks with understanding settlor domicile will be removed.
The key measures of the new regime and the impact on offshore trusts are summarised as follows:
The taxation of newly resident individuals
– The new regime will introduce full tax relief for foreign income and gains arising in an individual’s first four years of tax residence in the UK
– Foreign income and gains can be remitted freely to the UK without any additional UK tax charge
– After the end of the four-year period, individuals will be taxable in the UK on their worldwide income and gains
– The regime will be available to individuals with 10 consecutive years of non-UK residence prior to their arrival in the UK
Transitional provisions
– A temporary 50% reduction in personal foreign income subject to tax in 2025/26 for non-doms losing access to the remittance basis and not qualifying for the new four-year exemption regime
– Rebasing of capital assets to 5 April 2019 values, so future disposals can be taxed by reference to the April 2019 value rather than original cost
– Previously unremitted foreign income and gains can be remitted to the UK at a rate of 12% in 2025/26 and 2026/27 under a new “Temporary Repatriation Facility”. It is unclear how such unremitted income and gains will be taxed after April 2027.
Implications for offshore trusts
– All protections for non-resident trusts will be removed from 6 April 2025, such that UK resident settlors of non-UK trusts may be subject to UK tax on income and gains of non-resident trusts arising after 6 April 2025.
– Foreign income and gains arising before 6 April 2025 will not be taxable in the UK unless distributions or benefits are paid to UK residents.
– Non-UK situs assets settled into a non-UK trust by a non-UK domiciled settlor prior to 6 April 2025 will continue to be outside the scope of UK IHT. The treatment of assets settled after this date will be subject to the consultation on IHT.
We await further details on the operation of the provisions, however it is clear that these measures will have significant implications for non-UK domiciled individuals and offshore structures established by non-UK domiciled individuals. Trustees and administrators should review the structures that may be affected by these proposals and consider whether such structures will continue to be effective.
There are also opportunities for Jersey trustees given the commitment to maintain IHT exemptions for non-UK assets settled into an offshore trust prior to 6 April 2025. Non-UK domiciled individuals who have plans to move to the UK in coming years may wish to explore establishing an offshore trust prior to 6 April 2025 to protect their non-UK assets. If you have any questions or concerns about the implications of the Spring Budget please get in touch with Zaeem or our tax team who will be happy to help.