The new Labour Government has issued a policy paper that provides some but certainly not all of the detail for the proposal to reform this area of the law from 6 April 2025, including abolishing the remittance basis of taxation.

We have already published two articles summarising the 2024 Spring Budget proposals and the early reaction by the Labour Party prior to the general election to the proposed reform of this area. 

Summary

The Government's proposal remains to remove access to the remittance basis entirely from 6 April 2025 and to move from a tax regime based on residence and domicile to one based on residence alone.

The Government will provide a new favourable regime for arrivers to the UK from 6 April 2025 but will cap it at the first four tax years of being here. During this new arriver period, foreign income and gains will be exempt from tax – meaning a much simpler regime eventually consigning to the dustbin the historic and curious incentive for non-domiciled taxpayers to hold wealth outside the UK (although current law is likely to remain relevant for some time to come in relation to previous unremitted income and gains).

Alongside this, it is proposed that many of the tax advantages of holding assets via non-UK trusts will be removed. There is still a significant lack of clarity about how existing structures will be treated.

The proposals include suggestions that the Government intends the new regime to be as competitive as possible. As it stands, there are very significant problems in this context if these statements are anything more than posturing. The Government should be bolder (even if it remains wedded – as we understand – to the key features of the new regime as confirmed so far), and we make some suggestions below as to how. Now is also the time to grasp the nettle and simplify the motive defences to income tax and capital gains tax attribution from existing structures including trusts. Without doing each of these things, the Government will fail in its ambition and it seems highly likely that inbound investment and growth of the UK economy will each suffer as a result.

There is a great deal to consider for affected clients, their advisors and trustees. Further detail is anticipated in the 30 October budget.

Prior to then there is a great deal for the Government to consider, too – it is not too late to improve the proposed regime.

Current position

As a reminder, certain UK resident non-UK domiciled individuals ("non-doms") are able to claim an alternative basis of taxation known as the remittance basis. Very broadly, this allows these individuals to pay UK income and UK capital gains tax on their foreign income and gains only if these funds are brought to the UK or used in the UK.

This alternative is available until such time as the individual becomes UK resident for more than 15 out of the previous 20 tax years, at which point they become deemed domiciled and are no longer able to claim the remittance basis, meaning that they are then subject to UK tax on their worldwide income and gains on an arising basis. They will also become subject to UK inheritance tax on their worldwide estates instead of only on their UK situated assets from that point.

Future position for individuals

First, for those who move to the UK, the remittance basis will be replaced with a new four-year window during which "arrivers" to the UK will not be liable to UK tax on any of their non-UK income and capital gains. This opportunity will only be available for individuals who have not been UK tax resident for any of the 10 consecutive years prior to their arrival in the UK and will apply for the first four tax years of UK tax residence. As it is effectively an exemption which is proposed, rather than a form of the remittance basis, the position will be simpler than currently. On the basis that domicile will become entirely irrelevant to this regime, it being based solely on residence, this will also materially simplify the law in this area, as well as (it seems) benefitting those who may be moving here permanently.

The Government also intends to move to a system where the territorial scope of UK inheritance tax is based purely on an individual's residence, rather than their domicile. The suggested position is that once an individual has been tax resident in the UK for 10 or more years, they will become subject to UK inheritance tax on their worldwide assets (individuals who do not meet this criteria would be solely liable to UK inheritance tax on their UK situated assets). Individuals who meet this long-stayer test will also be subject to a 10-year tax tail on leaving the UK, meaning that UK inheritance tax will continue to apply on a worldwide basis until the 10-year period following exit has expired. Many clients, including recent and new arrivers to the UK are understandably very worried about this aspect of the proposed regime. It is one of the features proposed which if retained would render the new regime particularly uncompetitive in an international context.

Incentivising inbound investment/transitional reliefs

The Government's policy paper has suggested that it will be focused on attracting investment to the UK, though it is not yet clear what incentives will be introduced to do so beyond the two transitional measures which we briefly discuss below and which we consider are insufficient on their own.

It would be better for the Government to reward inbound investment to the UK with a form of targeted tax reliefs / tax credits (consider for instance the tax reliefs for those who invest in EIS / SEIS qualifying investments). The Government should be bold if it is serious about incentivising inward investment and growth of the UK economy in priority sectors and if it is serious about finding ways for the UK to compete internationally for mobile capital and high net worth individuals in this context. It could for instance provide more generous income and capital gains tax reliefs for arrivers who invest in sectors / entities which reflect Government priorities (no doubt with an appropriate minimum holding period, plus we would suggest each of generous or unlimited carry forward and a matching system to attribute tax reliefs / credits to UK resident beneficiaries of trust structures which have made a qualifying investment). A system of tax reliefs / credits could and should also endure beyond the initial 4 year period so that recent arrivers to the UK continue to invest here, and are rewarded for doing so. More creativity and lateral thinking is needed in the design of this new regime in this area.

The Government has now provided detail on two beneficial transitional rules originally proposed by the previous Conservative administration:

Rebasing of assets

This will allow those who either currently claim the remittance basis or who have claimed it in the past to elect to rebase their foreign assets for capital gains tax to the rebasing date when they dispose of them.

We do not yet know when the rebasing date will be, as the Government has scrapped the (rather arbitrary) 6 April 2019 date that was previously suggested by the Conservative regime.

A Temporary Repatriation Facility ("TRF")

This will be available for a limited time period (TBC) to individuals who have claimed the remittance basis in the past. The TRF will allow those individuals to remit foreign income and gains that arose before 6 April 2025 and to pay a reduced tax rate on doing so after the remittance basis has come to an end.

The detail is yet to be explained. Recent and welcome clarification indicates that the TRF will include remittances of sums distributed from (and matched to) relevant income and stockpiled gains within overseas trusts. The tax rate that will apply to foreign income and gains remitted, and the length of time for which TRF will be available, are yet to be confirmed, but the policy statement does state that each will be set to makes its use as attractive as possible.

The previous Conservative government previously proposed a tax rate of 12% for a fixed two tax year period, but the new Government has not adopted this.

It is important that the new TRF regime does feature an attractive rate, otherwise many clients will leave their historic unremitted income and capital gains outside the UK, and indeed the UK's tax regime to will retain unnecessary complexity for the foreseeable future. Indeed those who hold assets for affected clients such as banks and investment managers will have will bear some of the costs of the ongoing complexity, which would better be avoided if possible. Again, targeted tax incentives for particular forms of investment, and a longer period of availability would each be positive, and would increase the likelihood of actually achieving a simplification of the application of the tax rules in this area.

Other concessions promoted by the Conservative government have been removed. For example, individuals who claim the remittance basis in 2024/25 will not be able to benefit from a 50% reduction in income tax on their non-UK income as had previously been suggested.

Future position for trusts

The Government wishes to end the use of Excluded Property Trusts which can be (very broadly) used to keep assets outside the scope of UK inheritance tax (even following a settlor having become deemed domiciled in the UK). It is not yet clear quite how the Government intends to change the regime in this context, although most expect it to be the tax status of the settlor which will be determinative (i.e. whether or not they have become a "long stayer" after ten years or more of residence). Only brief consideration of any alternative is soon shown to be unworkable in practice in many if not all cases. The policy paper has also suggested that there may be an adjustment period for existing Excluded Property Trusts, but it is so far unclear what this will entail – probably a window within which settlors can be excluded from benefit going forward and the trust will thereafter continue to benefit from broadly the current inheritance tax regime.

Protected trusts will also lose their beneficial tax treatment from 6 April 2025 onwards. This means that UK resident settlors may become liable to UK tax on the income and gains arising in their structures (unless for instance the settlor is within the four-year arriver period outlined above). Affected settlors and trustees need to review their structures urgently.

The Government has said that it also intends to review the Transfer of Assets Abroad and Settlements anti-avoidance legislation which can attribute income from non-UK resident structures to UK resident individuals. The policy paper states that the Government wishes to make the legislation clearer, simpler and more certain, plus to increase the effectiveness of its application. It is not proposed that any changes will be made to the legislation prior to April 2026, however. This is a mistake given the importance of these regimes to those who will now be affected by changes which will take effect from 6 April 2025, especially due to the impact of the attribution regimes for asset holding structures they may have funded (e.g. as settlor of existing trusts). The Government should both bring this review forward and clarify the relevant income tax and capital gains motive defences in the course of it: there is currently too much uncertainty here and it will continue to damage the attractiveness of the UK for those with pre-existing structures if this opportunity is missed, as well as adding to the incentives for many to leave the UK.

Conclusion

The Government is committed to reform of this area of the UK tax system. There is still an opportunity for it to make fundamental adjustments and improvements to certain aspects of its policy proposals and to existing legislation in this context to avoid some of the unnecessary capital flight and to make the new regime more competitive than it currently appears. It should do so, and communicate its intention to do so as soon as possible.

Although much is still uncertain about this new regime, we can advise on appropriate means of preparation for these changes to ensure individuals and trustees are ready to take action, and to review current structures with a view to doing so. Please contact Will Ford or James Radcliffe, or your usual contact in the team for more information.