Autumn Budget 2024: Reform of the UK’s “non-dom” regime, inheritance tax and trusts

Overview

On 30 October 2024, the Chancellor of the Exchequer, Rachel Reeves, delivered the 2024 UK Autumn Budget.

This Briefing Note addresses the key issues arising from the Budget for private clients, family offices, and trustees with international connections, with an emphasis on the changes for non-UK domiciled individuals.

This note reflects the law in force on 31 October 2024 and announcements made in the Budget held on 30 October 2024. It is possible that changes may be made before enactment of the measures announced in the Budget.

Abolition of the Remittance Basis and introduction of the “4 Year FIG” Regime

New 4 Year Foreign Income and Gains (“FIG”) regime

The concept of domicile will be removed from the tax system from 6 April 2025. The current remittance basis regime applicable to non-UK domiciled individuals will be replaced by a regime available to individuals who are in their first four years of UK residence, after at least 10 consecutive years of non-UK residence. Individuals who qualify will be able to make a claim to pay no UK tax on FIG arising during that time. The FIG subject to this tax exemption needs to be quantified and disclosed on a tax return. 

Transitional provisions

With the abolishment of the remittance basis, two transitional provisions will be introduced for individuals who were UK tax resident before 2025/26 and have been subject to tax in the UK on the remittance basis – the temporary repatriation facility and rebasing of assets.

Temporary Repatriation Facility (“TRF”)

A transitional relief will be introduced whereby pre-6 April 2025 FIG can be taxed at a flat rate. The regime will last for three years from 6 April 2025 and will apply to any individual who has claimed the remittance basis for at least one tax year – it therefore includes individuals who are deemed UK domiciled but still retain FIG outside the UK.

FIG designated in the first two tax years will be taxed at 12%, increasing to 15% in 2027/28. It is not necessary to actually remit the FIG benefitting from the TRF. Instead, it can be designated upfront (which will trigger the tax) but remitted at a later date. This avoids the need for individuals to liquidate assets and actually remit funds in order to benefit from the temporarily reduced rate. Where the TRF regime is used in respect of funds that are “mixed” the TRF funds are treated as remitted first when applying the mixed fund rules.

Rebasing of assets

Non-UK sited assets of qualifying individuals will be automatically rebased (subject to an election to disapply) to their value on 5 April 2017 where the asset is disposed of on or after 6 April 2025. To qualify:

• The individual must have not been UK domiciled or deemed UK domiciled at any time prior to 6 April 2025, and must have claimed the remittance basis for at least one year between 2017/18 and 2024/25.
• The asset must have been non-UK situated at all times between 6 March 2024 and 5 April 2025 (subject to limited exceptions).

Inheritance Tax (“IHT”)

Long Term Resident rule replaces domicile

The scope of UK IHT on non-UK situated assets will no longer be determined by reference to an individual’s domicile. Instead, the concept of a “Long Term Resident” will be introduced from 6 April 2025. Individuals who have been resident for at least 10 out of the last 20 tax years will fall within this definition and will be subject to UK IHT on their global estate. 

When an individual ceases to be UK resident, the period for which they will continue to be within the scope of UK IHT on non-UK assets will depend on how long they had been resident. An individual who had been resident for 10 to 13 years will fall outside the scope of UK IHT on non-UK assets after three tax years of non-residence (but subject again to the 10/20 rule if they later return). This increases after each additional year of tax residence and, once an individual has been resident for 20 years, they will be subject to UK IHT on their worldwide estate for 10 years after leaving the UK. 

Whether non-UK domiciled individuals who cease to be resident in the UK before 6 April 2025 are Long Term Residents will be assessed by reference to the existing rules that determine deemed-domicile for IHT purposes (a three year ‘tail’ provided no return within six years).

Moving to a residence based test instead of a domicile test means that all individuals are affected by these changes – whether UK or non-UK domiciled under current law. Notably, this means that individuals who consider that they have abandoned their UK domicile and acquired a non-UK domicile of choice will have greater certainty regarding their exposure to UK IHT.

Agricultural Property Relief (“APR”) and Business Property Relief (“BPR”)

In addition APR and BPR are to be reformed from 6 April 2026. Relief from IHT at 100% will be limited to £1 million of assets aggregated across the reliefs, with 50% relief above this level. AIM shares (and other shares designated as 'not listed' on recognised stock exchanges) will not qualify for this £1m allowance.

The £1 million combined allowance will be available for trusts in respect of ten year charges and exit charges. Where an individual has already settled multiple existing trusts, each will have a £1 million allowance for qualifying property, but where a settlor sets up multiple trusts on or after 30 October 2024, the government intends to introduce rules that apply that will mean this allowance will be divided between them.

An anti-forestalling provision will apply such that these restrictions will also apply to lifetime transfers made on or after 30 October 2024 if the donor dies within 7 years of the gift where death occurs on or after 6 April 2026, such that the gift becomes chargeable to IHT, with the restrictions to APR/BPR as described above applying.

Changes to the taxation of trusts

UK resident settlors who do not qualify for the 4 Year FIG Regime will be taxed on gains arising to currently “protected” trusts they have settled if they, their spouse or any of their children/grandchildren can benefit, and on income of such trusts where they are also a beneficiary. In addition, non-UK assets will become Relevant Property in cases where the settlor meets the definition of a Long Term Resident, whether or not the settlor is also a beneficiary of that trust. This means trustees will be subject to up to 6% UK IHT (based on the value of the trust) on each ten year anniversary of the settlement of a trust, pro-rated for the period during which the property was Relevant Property (so generally commencing from 6 April 2026), when the settlor is a Long Term Resident.  

If a settlor ceases to be a Long Term Resident then the non-UK assets in the trust will cease to be Relevant Property. However, this will trigger an ‘exit charge’ on the trustees (pro-rated 6%) – which will therefore arise after the settlor has left the UK. This can also apply to certain trusts where the settlor has already left the UK (in the last three years).

Settlors of trusts settled before 30 October 2024 will not be subject to the Gift with Reservation of Benefit (‘GROB’) Rules with respect to Excluded Property (generally, non-UK assets). This means that Excluded Property owned by “protected” trusts should not be subject to 40% IHT on the death of the settlor, irrespective of the settlor’s residence position. UK residential property interests will still be subject to the GROB rules (as is the case today).

Where the settlor is deceased, the scope of these rules will be determined by the domicile of the settlor (if the settlor died before 6 April 2025), or whether the settlor was a Long Term Resident at the date of death (from 6 April 2025).

The TRF will apply to capital payments from offshore trusts to beneficiaries who have claimed the remittance basis at any time prior to April 2025, to the extent the payment is matched to trust income/ gains that arose prior to April 2025. This should enable qualifying beneficiaries to receive capital payments at 12% or 15% (see above) in the three tax years from 6 April 2025.

Capital Gains Tax (“CGT”)

With effect from 30 October 2024, the main rates of CGT will increase from 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers to 18% and 24% respectively. This aligns these tax rates with the residential property CGT rates which remain at 18% and 24%. 

Carried Interest

The CGT rate applicable to carried interest will increase to 32% from 6 April 2025.

From 6 April 2026, carried interest will be brought into the scope of income tax and national insurance. There will be a “multiplier” of 72.5% applying to “qualifying carried interest”, which will then be subject tax as UK trading profits at up to 45% income tax plus 2% National Insurance Contributions (NIC), resulting in an effective income tax/NIC rate of just over 34% (if “qualifying”).

There will be a consultation on whether other conditions should apply for carried interest to be treated as qualifying from April 2026. At a minimum, it seems that carried interest will need to meet the current rules to be outside the scope of the “Income Based Carried Interest”. Two points specifically being considered as part of this consultation are introducing a minimum co-investment requirement, and a minimum time period between a carried interest award and receipt. The consultation will run until 31 January 2025.

Consultation on offshore anti-avoidance provisions

The government will hold a consultation on existing offshore anti-avoidance regimes, including the settlements legislation, the Transfer of Assets Abroad regime, and the equivalent rules for CGT applicable to non-UK trusts and companies. These areas of legislation can apply to UK residents (irrespective of domicile) with overseas structures. This consultation has been opened with a call for evidence which will close in February 2025.