Introduction

The Spring Budget 2024 saw the announcement by the previous Conservative government of the abolition of the UK’s system of taxing non-UK domiciled individuals, and the introduction of a new regime to tax new arrivers to the UK from 6 April 2025. Transitional rules were announced to apply to those who are already paying tax under the UK’s existing tax regime.  

Labour's position

Prior to the Spring Budget 2024, Labour had been calling for non-dom status to be abolished and for a new regime for new arrivers to the UK to be introduced. Once the previous government announced their own changes, Labour publicly stated in April 2024 that it “supports most aspects of the proposed replacement to the non-dom rules”. However, Labour also stated that they were “concerned that major loopholes remain”. During the General Election 2024 campaign Labour pledged to “…abolish non-dom status…replacing it with a modern scheme for people genuinely in the country for a short period” and “…end the use of offshore trusts to avoid inheritance tax…”.

The Labour Party won an overall majority of seats in the UK General Election held on 4 July 2024 and have formed the current government. A policy paper was released on 29 July 2024 setting out the government’s plans to create a new residence-based regime for foreign income and gains (including transitional arrangements) and inheritance tax. 

The following is a summary of the previous government’s proposals to which we have added Labour’s remarks (in bold) on aspects of the Conservative plans they agree with and those they would change. The Labour comments included below were made after the Spring Budget 2024, in the run up to the General Election and the July policy paper.

The new regime

Individuals

• The new regime is to be purely based on tax residence and is intended to be simpler to understand and apply than the existing regime based on domicile. 
• Individuals who have not been UK resident during the previous ten tax years will be eligible for the new regime for the first four tax years of UK tax residence. Individuals who opt to use the new regime will lose their income tax personal allowance and capital gains tax annual exemption, and will be able to decide whether to use the new regime annually. Labour is supportive of a four-year arrival window during which foreign income and gains (FIGs) will be exempt from UK taxation.
• UK income and gains will be fully taxable but FIGs received during tax years in which the new regime applies to the individual will not be taxable in the UK, even if remitted. Distributions from non-UK resident trusts will not be taxable during this period. Labour have said that the party is interested in exploring an investment incentive for UK investment income during the four-year window so that UK investment income is “free of UK tax and not disincentivised versus investment elsewhere in the world”. 
• It will not be necessary to keep track of FIGs received during tax years in which the new regime applies, which should reduce administration.
• Overseas workdays relief (OWR) will remain available to some employees during the first three tax years of UK residence who receive income from overseas duties. The relief will however be reformed. Labour intend to retain OWR and will engage with stakeholders on the design principles for this tax relief and further details will be confirmed at the next Budget.
• The previous government also planned to make changes to inheritance tax. There was due to be a consultation on this point, though the previous government’s preferred position was that individuals who have been UK resident for ten years will be subject to inheritance tax on worldwide assets, and will remain taxable on worldwide assets for ten years after leaving the UK. Labour is supportive of the principle of a ten-year window for inheritance tax.

Trusts

• The protected trust rules introduced in 2017 to apply to income and capital gains tax arising within settlor-interested trusts are to be abolished. At a high-level, the intention is to tax settlors on both UK and foreign trust income and gains that arise within settlor-interested trusts from 6 April 2025 (unless the new four-year regime applies), with no further tax on distributions made by the trustees. Consideration of the application of the existing rules will be required where settlors are not within the class of beneficiaries because they could still have a tax exposure on capital gains in particular. Labour have said they will remove the protection, from 6 April 2025, from tax on income and gains arising within settlor-interested trust structures for non-domiciled and deemed domiciled individuals who do not qualify for the 4-year FIG regime. 
• The existing inheritance tax regime that applies to foreign assets held by trusts settled by non-UK domiciled individuals was, under the Conservative government, expected to remain in place for any trusts settled before 6 April 2025. For trusts settled on or after 6 April 2025, inheritance tax charges were to depend on whether, at the point of any inheritance tax charges arising, the settlor is UK resident and within the scope of worldwide taxation or within the scope of the year tail for inheritance tax purposes. Labour have said that they will include all foreign assets held in a trust within UK inheritance tax, whenever they were settled. Labour say this is to ensure that “nobody living here permanently can avoid paying UK inheritance tax on their worldwide estates”. 

Transitional rules

Transitional arrangements for current UK resident non-UK domiciled individuals are, or were, to include: 

• A two year “Temporary Repatriation Facility” from 6 April 2025 to allow FIGs received pre-6 April 2025 to which the remittance basis applies to be remitted to the UK at a flat 12% tax rate. Remittances made after the two-year window will be taxed at standard income and capital gains tax rates. The facility will not be available to pre-6 April 2025 FIGs generated in a trust or trust structure. Labour also wants to explore ways to encourage individuals to remit stockpiled FIGs. Labour believe a sizable amount of FIGs will remain stockpiled overseas after the two-year Temporary Repatriation Facility ends, and the current plan provides no incentive to remit this to the UK. Labour will set the rate and the length of time that the Temporary Repatriation Facility will be available to make use as attractive as possible. Labour is also exploring ways to expand the scope of the facility, including to stockpiled income and gains within overseas structures, and will confirm further details at the next Budget.
• If the remittance basis has been claimed and the individual is neither legally nor deemed UK domiciled by 5 April 2025, there will be an option to rebase the value of capital assets owned personally to their value on 5 April 2019. Labour are considering an appropriate rebasing date and will set this out at the next Budget.
• For 2025/26 only 50% of foreign income will be taxable on individuals who have been remittance basis users prior to 6 April 2025. There was to be no similar reduction for capital gains. Labour will not retain the 50% exemption.
• Business Investment Relief will remain available after 5 April 2025 for qualifying investments of unremitted FIGs received in tax years in which the remittance basis applied. Labour have not specifically commented on business investment relief, though have said that they wish to encourage ways to explore ways to encourage individuals to remit FIGs.
• Pre-6 April 2025 FIGs received by trustees are to be taxable if matched to trust distributions received by UK resident beneficiaries after 6 April 2025 (depending on the specific facts). Labour have not yet commented on this point.
• As noted above, excluded property trust status for inheritance tax purposes will continue to apply to trusts settled before 6 April 2025 by individuals who are neither legally nor deemed UK domiciled. Broadly, this means that trust inheritance tax charges do not apply to foreign assets which do not derive value from UK residential property. As per the comment above, Labour want to include all foreign assets held in trusts in the scope of UK inheritance tax, whenever the trust was settled.  

Areas of uncertainty and actions to take

• A technical paper was published by the Conservatives on Budget Day, though full details of the Conservatives plans were not available by the time the General Election was called. Labour’s policy paper is largely supportive of the changes with the exception of the areas noted above.  
• When the Conservatives were in power we were told that changes would be made to the mixed funds regime to support the making of remittances under the repatriation regime, though we did not receive detail of the changes to be made. Careful consideration will need to be given to any new rules that are introduced, and, most likely, careful analysis of remittances to make to the UK will need to be undertaken. 
• We need to know how “foreign income and gains” are to be defined for the purposes of the new regime. For example, will this definition include offshore income gains, which are presently excluded from the trust protections? This point will be relevant to both taxation in 2025/26 and later tax years, and to remittances during the temporary repatriation period.
• Consideration will need to be given to how income tax and capital gains tax will apply to both new and existing trusts, taking account of the potential application of the settlements, Transfer of Assets Abroad and capital gains tax provisions as they apply to non-UK resident trusts and underlying companies. Under the new regime, additional tax may be payable and additional reporting required in relation to offshore trusts. In certain cases, notably where the trust has underlying trust companies, the motives for the trust structure and impact on taxation will need to be considered. Labour intends to conduct a review of offshore anti-avoidance legislation, including the Transfer of Assets Abroad and Settlements legislation, to “modernise the rules and ensure they are fit for purpose”. Further details on this will be provided in due course although it is not anticipated that any changes will be implemented before the 2026/27 tax year.
• Careful analysis will also need to be given to the taxation of trust distributions. The information published on Budget Day did not refer to provisions to enable individuals to receive trust distributions of post-5 April 2025 foreign trust income or gains that have already been taxed without also being subject to taxation based on being deemed to receive pre-6 April 2025 trust income and gains. This point also arises under the current regime, notably in relation to UK income. 
• As set out above, transitional rules can apply to eligible non-UK domiciled individuals. The availability of these transitional rules hinges on the affected individual being legally non-UK domiciled. Domicile is a key area of HMRC enquiry activity, and HMRC may enquire into the availability of transitional reliefs, or indeed to taxation under the existing non-domicile regime. Due consideration should be given to individuals’ legal domicile position, particularly if new settlements are being created before 6 April 2025. 

Consultation and implementation

• The Conservatives had announced changes which were due to take effect from 6 April 2025. Labour plan to keep to this timetable and released a policy paper setting out their initial position. More details will be released at the Budget set for 30 October 2024. 
• Draft legislation on the income and capital gains tax changes is yet to be published for comment. Comments will be sought on the detail of the changes, though the previous government did not intend to seek comment on the policy itself.  On 29 July 2024, the government announced its intention to provide an opportunity for stakeholders to share views and feedback on the detail of legislative provisions relating to the changes.
• The previous government had announced that they would consult on the inheritance tax changes. Labour will not carry out a formal policy consultation on moving to a residence-based system for IHT. Instead, it will review stakeholder feedback provided following the Spring Budget 2024 and will carry out further external engagement over summer 2024 on policy design. It will also hold ‘insight gathering sessions’ to gather feedback on changes required to legislation and practical considerations.
• During May 2024, the previous government arranged a series of listening events which were an opportunity for stakeholders to provide comments on the policy changes as announced at the Spring Budget 2024. These events were underway when the General Election was called and all remaining events were cancelled. Labour are rescheduling the remaining sessions for August 2024.