Posted by Lenka Bentall on 07 Nov 2024
Autumn Budget 2024 – Detailed Analysis
On 30 October 2024, Labour unveiled their first Budget in 14 years, and the first ever from a female Chancellor. Our Article covering the highlights can be found here. A more detailed analysis of the Budget Changes is set out below.
Changes to Domicile Rules
The concept of ‘Domicile’ will be removed from UK tax from 6 April 2025, being replaced by definitions based on tax residence under the Statutory Residence Test (“SRT”). Whilst the main impacts are on the tax regime for ‘non-doms’ and on inheritance tax (“IHT” – the scope of UK IHT depends on the taxpayer’s domicile), there are further impacts in other areas of UK tax.
Income and Gains
The current Remittance Basis of taxation of income and gains for UK resident non-doms will come to an end on 6 April 2025. From this date, UK residents will be subject to UK tax on their worldwide income and gains from the point they become UK tax resident under the SRT. There are some reliefs to soften the blow for taxpayers arriving in the UK:
- The FIG (Foreign Income and Gains) regime will apply to the first 4 tax years of residence of a ‘new qualifying resident’ or “NQR” (where the taxpayer has not been UK tax resident in the 10 years prior to arrival). During this initial 4-year period, the taxpayer’s FIG remains outside the scope of UK tax, even if remitted to the UK.
For NQRs who arrived in 2022/23, 2023/24 and/or 2024/25, the FIG regime can be claimed for the remainder of the 4-year period where the new regime applies.
- Overseas Workday Relief (OWR) is extended to 4 years and restricted to NQRs in order to align with the new 4-year FIG regime.
The existing OWR regime could be claimed in the tax year of arrival and the following two tax years by non-dom employees who are taxed under the Remittance Basis. The employee also must have been non-UK resident for 3 years prior to the first year of UK tax residence. When these conditions are met the employee’s earnings for overseas duties are not taxable unless the income is remitted to the UK.
The new OWR works as follows:
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- It can be claimed for any one or more of the four years in which the NQR criteria are satisfied (a “qualifying year”).
- It exempts from UK tax, employment income related to duties performed outside of the UK during any one of the qualifying years in respect of which a claim has been made to specify all of the employment income that is to be exempt. This applies whether the income is remitted to the UK or not.
- The exemption in each qualifying year is capped at the lower of £300,000 GBP or 30% of the net employment income received for that year in respect of the relevant employment.
- The claim has to be made by 31 January in the calendar year that is two years after the end of the qualifying year; i.e. 12 months after the tax return filing deadline for the relevant year (so 31 January 2028 is the deadline for the 2025/26 tax year)
- There will be a “Temporary Repatriation Facility” (TRF) for three tax years. Under this facility individuals can elect for foreign income and gains which have arisen under the current Remittance Basis regime, and not yet been brought to the UK, to be taxed at special rates. The special rate (for both income and gains) will be 12 per cent for 6 April 2025 to 5 April 2027, increasing to 15 per cent for 6 April 2027 to 5 April 2028. These funds can then be brought to the UK without any further UK tax in those three years or any time in the future.
- For Capital Gains Tax (CGT) purposes, on a disposal current and past remittance basis users will be able to rebase personally held foreign assets to their 5 April 2017 values where certain conditions are met.
Inheritance Tax
For UK IHT purposes, an individual will come within the scope of UK IHT on their worldwide assets if they become “long-term resident”. This is when they have been resident in the UK for at least 10 out of the last 20 tax years.
A long-term resident will only fall back outside the scope of UK IHT on their non-UK assets after leaving the UK once they have been non-UK tax resident for between 3 and 10 years, depending on how long they have been UK tax resident.
Non-UK Trusts
The removal of domicile has also led to the tax treatment of non-UK trusts to be amended in order to reduce the scope of the UK tax protections offered by a UK trust to taxpayers arriving in the UK.
Under the current regime, a non-dom arriving in the UK can place their non-UK assets into a non-UK trust and these assets would be excluded property within the trust. Often, the settlor of such an ‘excluded property trust’ would also be a beneficiary so that they could extract the assets once they left the UK once more.
The UK tax regime for such ‘settlor-interested’ excluded property trusts is favourable:
- The settlor-interested trust rules treat the income of the trust as the income of the settlor in any tax year where they are UK tax resident, so no income tax protection is provided.
- The settlor-interested trust rules for gains (treating the trust gains as arising to the settlor) only apply if the settlor is tax resident and domiciled, potentially protecting the settlor CGT on the trust gains.
- The non-UK property in the trust is excluded property that is outside the scope of UK IHT. Furthermore, it remains excluded property even if the settlor becomes UK domiciled, providing permanent protection from UK IHT on the trust assets.
The changes from April 2025 will:
- Remove the requirement for the settlor to be domiciled for the settlor-interested trust rules to apply to gains. Thus, the settlor will be subject to UK income tax and CGT on the trust income and gains as soon as they become UK tax resident (subject to the FIG regime for NQRs).
- Restrict the scope of excluded property, so that non-UK property in a non-UK trust is only excluded property whilst the settlor is not a long-term resident. Thus, as soon as the settlor comes within the scope of UK IHT on their non-UK assets, their non-UK trusts also come within the scope of UK IHT.
In respect of non-UK trusts which are not settlor-interested, the anti-avoidance provisions which can match the income and gains of the trust to payments are also being amended to close off the reliefs and exemptions for protected for foreign source income and gains. This will mean that all income and gains arising within non-UK trusts will be within the scope of the anti-avoidance provisions for UK beneficiaries receiving distributions and/or benefits from the trust on or after 6 April 2025.
Inheritance Tax – Other Changes
From April 2027, inherited pensions are subject to IHT. This is at the consultation stage so there is no draft guidance or legislation. However, it appears to bring pensions fully within the scope of UK IHT.
The change is to remove the protection for registered pension schemes and QNUPS (qualifying non-UK pension schemes). We note that there are legacy unapproved schemes, such as FURBS (funded unapproved retirement benefits schemes) where the IHT protection available prior to 6 April 2006 has been retained by the scheme. We would expect this ‘grandfathered’ IHT protection to also be removed as part of these changes.
From April 2026, agricultural property relief (APR) and business property relief (BPR) will be reformed, with the highest rate of relief remaining at 100% for the first £1m of combined business and agricultural assets on top of the existing nil-rate bands. The rate of relief will reduce to 50% after the first £1m, effectively giving a reduced rate of 20% inheritance tax, rather than the standard 40%.
This £1m of relief is on top of all the other spousal exemptions and nil-rate bands that people can access for inheritance tax too. This means that a married couple with farmland or a family business can potentially pass on up to £3 million without paying any inheritance tax, depending on their circumstances.
The IHT charge can be paid in instalments over 10 years interest free, rather than immediately, as with other types of inheritance tax.
There will be a combined £1 million allowance for trustees on the value of qualifying property to which 100% relief applies, on each ten-year anniversary charge and exit charge, consistent with the treatment of qualifying property chargeable to inheritance tax on death.
The BPR definition of ‘listed shares’ (which have more stringent qualifying conditions) will be amended to include AIM-listed shares, removing the current anomaly where AIM-listed shares are not treated as listed shares.
Income Tax and National Insurance
The income tax and NIC thresholds in England and Wales will remain frozen until the end of 2027–28, when they will begin to rise in line with inflation.
Rates of income tax and NICs paid by employees will remain unchanged, but Employers’ NICs will rise from 13.8% to 15% on a worker’s earnings above £175 from April 2025, and the threshold at which employers start paying the tax on each employee’s salary will be reduced from £9,100 a year to £5k. To slightly temper this for small businesses, the employment allowance for employer’s NICs will increase from £5k to £10,500.
Capital Gains Tax (CGT)
The rates of CGT are increased from 30 October 2024 from 10% to 18% for basic rate taxpayers, and from 20% to 24% for higher rate taxpayers. Rates on chargeable gains from selling residential property remain unchanged at 18% and 24%, respectively.
Business asset disposal relief will remain at 10%, before rising to 14% on 6 April 2025, and 18% from 6 April 2026.
The tax treatment of carried interest will be reformed by increasing CGT rates on carried interest to 32% and then, from April 2026, moving to a revised regime.
Stamp Duty Land Tax
The higher rate for additional dwellings surcharge of SDLT in England and Northern Ireland will rise from 3% to 5%, on transfers with an effective date of 31 October 2024 onwards.
A similar 2% increase will apply to the flat rate for companies purchasing property worth over £500k, making the flat rate 17% (19% for companies subject to the non-resident SDLT surcharge) where none of the exclusions from this apply (exclusions include property development and letting property to unconnected parties).
From 1 April 2025 the current 0% standard rate of SDLT for the first £250k of residential property will only be available for the first £125k of residential property. A 2% band for consideration that falls between £125k and £250k is being reintroduced, having been removed from September 2022. First-Time Buyer’s Relief, which currently gives first-time buyers an extended 0% band covering the first £425k paid for the property, is also being reduced by £125k to £300k from 1 April 2025, with the normal 5% rate applying to consideration over £300k.
If you would like any advice regarding any of the Budget changes mentioned above, or if you would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or customerservice@taxinnovations.com
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