Chancellor Jeremy Hunt yesterday delivered his Spring Budget to a lively House of Commons. With the polls predicting a Labour victory in the next election, Hunt mined every inch of available fiscal headroom in order to fund broad tax cuts for workers in a last ditch effort to win over voters. In doing so he also both used up theoretical headroom available via future tax changes which until very recently he had opposed, and sought to steal Labour's political territory in the process – by announcing the abolition of the tax regime for non-UK domiciled taxpayers from April 2025 (see our focussed section of this briefing below).

As a result, he made some notable changes to personal taxes – these are our highlights:

National insurance contributions (NICs) rates

Building on the cuts in the Autumn Statement (read our comments here), the main rate of Class 1 employee NICs will drop from 10% to 8% from 6 April 2024. The main rate of Class 4 self-employed NICs will also go down by 2%. This was the big ticket item of the day, and the much promised "tax reduction", at a cost to the Exchequer of more than £9bn per annum.

Capital gains tax (CGT)

Referring to research that showed lowering the higher rate of CGT for residential property disposals would boost revenue by stimulating more sales, Hunt slashed the higher rate of CGT from 28% to 24% with effect from 6 April 2024 for disposals of residential properties which do not qualify for main residence relief (which typically provides a full exemption from CGT). The lower rate of 18% stays the same for any gains within an individual's basic rate band. The Government hopes that this change "…will encourage landlords and second home-owners to sell their properties, making more available for a variety of buyers…"(1).

Abolition of furnished holiday lettings tax regime

After what he described as "tenacious" campaigning by communities across the country, especially in Devon and Cornwall, Hunt announced that the tax benefits for landlords renting out short-term furnished holiday properties will end from April 2025. Campaigners hope this change will lead to more long-term residential lets for locals. Whilst abolition itself will be delayed, there will also be anti-forestalling measures which will apply from 6 March 2024.

Abolition of multiple dwellings relief

Starting from 1 June 2024, this relief will no longer apply to property transactions. However, if contracts have already been exchanged on or before 6 March 2024, they will still benefit from the relief, regardless of when the transaction is completed (as long as there are no contract variations). The same applies to any other purchases that are completed before 1 June 2024. Affected buyers will want to do all they can to get their transactions through in time.

Inheritance tax on land in environmental management schemes

The Budget announced the extension of agricultural property relief (APR) to land that is managed under an environmental agreement with the Government or other approved bodies. This will apply from 6 April 2025 and will support the development of environmental land management and ecosystem service markets. This brings some welcome certainty to landowners who want to do the right thing for the environment but thus far have worried about the impact on their inheritance tax position. However the Government has stopped short of designating such land use as a trading activity, so the usual rules for business property relief will still apply – meaning that estates considering a Balfour claim will need to be mindful of this. Once in place, the relief will apply to all qualifying schemes whether entered into before or after Budget day.

Launch of the "UK ISA"

Finally, the Chancellor also announced, and published a consultation document on, a new "UK ISA" initiative that will incentivise investment in the UK. The proposal is to allow investors to invest up to £5,000 a year into UK equities and bonds, in addition to the existing £20,000 annual ISA limit. The particulars and timing of this scheme would emerge after consultation.

In the various documents accompanying the Budget, the Government acknowledges the possibility that they may not have time to implement all these changes. Several references are made to the Government’s intention to ‘consult on the details.’ As the general election approaches, there is of course uncertainty regarding whether some of these announcements will ever materialise. You should however, especially if you are impacted by the non-domiciled tax changes, stay in touch with your usual WBD contacts to help you prepare and adapt. 

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Non-dom changes

There was a lot of hysteria in the professional community in recent weeks, leading up to the Chancellor committing to abolishing the current tax regime for non-UK domiciled individuals, which has for some time been a key feature of Labour policy. Some of us guessed that it would cost the Chancellor nothing to commit to abolition at a future point in time – for example with effect from 6 April 2025 – and that he might calculate that in the meantime the Conservatives would steal significant political territory from Labour by doing so (and notionally bank any savings in fiscal projections, making Labour's future policy decisions harder in due course, should they come to power). That’s exactly what he’s done.

Accordingly, unless the Conservative Party wins the next election, none of what follows will necessarily happen (so unless you think they might, you may be forgiven for not reading on). Anyone potentially affected will want to pay this all fairly close attention, however, not least to imagine (and plan for) what a Labour designed regime may look like given the thinking the current Government has done so far.

Goodbye to domicile?

The main thrust of the reforms is (virtually) to remove the relevance of the arguably anachronistic, but certainly complex, concept of domicile from the UK tax code. Further, a new system would replace the remittance basis of tax which would include sweeteners to encourage inward investment.

New four year arrivers' regime to replace the remittance basis

The proposal here is essentially to provide a new favourable regime for arrivers to the UK, but cap it at the first four tax years of being here. Broadly the four year regime would only apply to those who have been non – UK resident for ten years or more.

The remittance basis itself would disappear entirely for new arrivers. Instead, during this new four year period, foreign income and gains could be remitted tax free – much simpler and eventually consigning to the dustbin the historic and curious incentive for non-domiciled taxpayers to hold wealth outside the UK.

Overseas workday relief (relevant for tax on earnings in the first three years of residence) would also be reformed and updated.

Transitional arrangements for individuals: reduced tax rates and CGT rebasing

Those who move from the remittance basis to the arising basis (i.e. being taxed in the UK on a worldwide basis) on 6 April 2025, and who aren’t eligible for the new four year arriver regime could benefit from a reduced rate of income tax on remittances of their foreign income – the effect of which would broadly be to half the rate of tax which would arise. This is one of the sweeteners for inward investment.

Anyone who is not UK domiciled nor deemed domiciled on 5 April 2025 would be able to benefit from a capital gains tax rebasing, under which an election can be made to re-base assets to their 5 April 2019 value (albeit subject to certain conditions yet to be explained). This is one of the most generous aspects of the proposals as more historic gains would be wiped out tax free (as was the case with the 2017 rebasing opportunity).

Next, a reduced rate of tax will be offered, broadly for remittances of personally owned assets which comprise unremitted and untaxed foreign income and gains. It’s proposed that a flat rate of 12% would be paid on remittances of these if made in the 2025/26 and 2026/27 tax years, a further positive incentive for individuals to bring assets into the UK.

The remittance rules won’t disappear completely, however. Unless steps are taken to remit all of the untaxed income gains under the arrangements above, historic unremitted foreign income and gains will continue to be taxed on remittances occurring – meaning that the old rules would continue to have ongoing relevance (and segregated bank and investment account structures won't disappear for some time to come).

Transitional arrangements for trusts – income and capital gains tax and the trust protections

There has been a lot of concern about how existing trusts would be treated in this context. The proposal to some extent confirms the worst fears in that the "trust protections" would be removed with effect from 6 April 2025. The only limited exceptions would be for settlors who qualify for the new four year arriver regime. All other settlors of settlor-interested trusts (broadly where they can benefit) will, from 6 April 2025 be taxed on the trust's income and gains broadly as if it was their own.

Further, the remittance basis would not apply to trust distributions at all – instead beneficiaries and settlors who are within the four year regime would be able to receive distributions tax-free, but after then all distributions will be taxed on a worldwide basis. (The announcements include mention that there will need to be some modified onward gifting rules to combat avoidance.)

Clearly, all settlor-interested structures should be reviewed in this context.

Inheritance tax, including transitional arrangements for trusts

The proposed reforms are not restricted to removing the relevance of domicile from income and capital gains tax. It is also proposed that inheritance tax would move to a purely residence based system with effect from 6 April 2025.

Under the proposed new system, personally held assets would remain outside the scope of UK inheritance tax for an initial 10 tax year period. The sting in the tail is that it's proposed that it would then take ten tax years of non – UK residence for an individual to escape exposure to UK inheritance tax on a worldwide basis. This, however, is all subject to consultation, and it seems (to us at least) that this latter part is unlikely to survive to implementation in the event of a Conservative government continuing in office after the next election.

For assets held in trust:

• The existing rules for excluded property trusts (those created and funded by non-domiciled and non-deemed-domiciled settlors) would stay in place until 6 April 2025, and

• Both existing trusts and those created and funded before 6 April 2025 would be grandfathered under the new regime.

The effect would be that trusts created until that date would benefit from the same inheritance tax advantages as currently, broadly offering ongoing protection from tax, albeit the lack of trust protections (as explained above in relation to income and capital gains tax) will make the position a good deal more complicated to manage on an ongoing basis. Importantly, it is confirmed that the interaction with the gift with reservation of benefit provisions and excluded property rules for trusts would remain as it is now.

It seems there will be further consultation on the treatment of formally domiciled residents / "returners" in this context, who are already treated very harshly. (Formally domiciled residents are individuals who were born in the UK with a UK domicile of origin and who have returned to the UK and become resident here. It may that there is some better news to come for this category of taxpayer with a move to a residence based system and away from domicile – time will tell.)

Given all of this, affected clients and their trustees should be taking advice and reviewing their asset holding structures sooner rather than later with a view to preparing either for a Labour Government, or for this proposed new regime

This comment was also authored by Caroline Pellow, Practice Development Lawyer at Womble Bond Dickinson.

Sources:

(1) Para 3.28, Spring Budget 2024, HM Treasury

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