|
Speaker
|
Transcript
|
|
Guy Broadfield, Senior Associate
|
[Music] Hello and welcome back to Death & Taxes, a Private Wealth podcast from Burges Salmon. My name is Guy Broadfield, and I am delighted to be joined by my colleagues from our Tax and Trusts team, Edward Hayes and Helen MacLeod. Now before we delve into the detail of this podcast, it's worth noting that we have recorded it on Thursday 2 May, and as things stand there have been rumours that Labour will provide a further update to their proposals which might be published soon, but as at the date of recording we do not have that update. When it comes out we will be the first to let you know our thoughts with a short update to this episode. In this episode we're going to discuss the overhaul of the 'non-dom' regime, so without further ado - hello Helen.
|
|
Helen MacLeod, Senior Associate
|
Hi Guy.
|
|
Guy
|
And hello Ed.
|
|
Edward Hayes, Director
|
Hello Guy.
|
|
Guy
|
So both, there is a saying that a week in politics is a long time, and it feels like a week in the world of tax policy is even longer at the moment. Not only have we had the budget announcements in March we've then had Labour proposals as well, and given the current polling would see a labour victory in the next election as being a very realistic possibility, it's fair to say that their response to these proposals announced by the chancellor should be factored into planning and are essential considerations for clients and advisers alike. So, the purpose of this podcast really is to summarise where we are now, importantly where we might end up, and what this means in practice for clients who are affected.
Listeners will know that we've been talking about this quite a lot on the Pod recently for good reason, and the recent episodes are highly (hopefully) relevant and provide some key background, so if you want to know more about residents and domicile, or indeed how in UK inheritance tax works, or hear Ed and John Barnett's initial thoughts on the proposals announced by the chancellor, then check out those episodes.
So, Helen and Ed we got two main aspects that we'd like to cover today they are the proposals in so far as they relate to individuals, and then secondly how they relate to trusts, and possibly the transitional rules.
So, Helen, could you kindly summarise where we are now with the proposals as they relate to individuals, and how Labour might amend them?
|
|
Helen
|
Sure, thanks Guy.
From an income tax and capital gains tax perspective, the biggest news is that the current remittance basis regime for non-domiciled individuals is being scrapped in its entirety, and is instead being placed with the new so-called four-year FIG regime — FIG standing for Foreign Income and Gains. Whereas the old remittance basis regime was available to those with the non-domiciled state status, the new regime will be tested by reference to an individual's residence rather than domicile. So, domicile essentially falls away for these purposes which is a huge change. The new regime will be available for the first four years of UK tax residence, and in essence it will mean that any foreign income and gains earned during that period will be free of UK tax, and then they can also be brought into the UK without triggering any tax as well. So, on the face of it looks much simpler than the current regime but is much more time limited, so we're dropping from 15 years for the remittance basis regime to four, so that's really quite a big change.
|
|
Guy
|
And there are elements of — as you said simplification — but let's be honest it's a significant overhaul of what we have currently isn't it?
|
|
Helen
|
Absolutely yeah.
|
|
Guy
|
So do Labour support this fundamental change?
|
|
Helen
|
Yes, in essence they do, they support all of it in principle. They have made a comment that they would consider whether there should be some sort of investment incentive during the four-year window, for example, that would allow UK investment income to be free of UK tax, so it's not to disincentivise investment into the UK rather than having investment taking place outside the UK. Otherwise, they seem on board with it.
|
|
Guy
|
Okay, and I suppose it is positive that there is some element of alignment between the parties on this particular aspect of the changes. Ed, when it comes to the so called 'transitional rules', I understand there maybe isn't quite as much alignment on those. Do you want to talk to that briefly?
|
|
Ed
|
Absolutely. Well, thank you to Helen for the summary of the four-year FIG regime.
As we mentioned on the previous budget podcast, the government did recognise there needed to be some kind of adaptation to the new world that's being introduced, and so we started out with three transitional rules which were announced by the chancellor. There are quite a few different bits of criteria to satisfy for each one, but if you think of them very very broadly as: rules one and two were for people who were within the first 15 years of being UK tax residents and therefore were not deemed domiciled, and rule three was for anyone who had ever claimed the remittance basis.
So, rules one and two (which were for people who are not yet deemed domiciles) — the first one said that if you were coming off the remittance basis and into kind of the new world of being taxed on foreign income, as of 6 April 2025 you'd only pay income tax on half of your foreign income. Labour have said they do not like that rule, and they would just scrap it entirely, so that rule looks to be in jeopardy. Rule number two was that there'll be a degree of rebasing for some non-domiciled individuals, so broadly those who owned an asset as of 5 April 2019, disposed of it on or after 6 April 2025, and were neither domiciled nor deemed domiciled on the 5 April 2025. Now Labour have not commented on that proposal specifically, so as far as we're aware they're planning on keeping it.
The third rule is probably the most interesting and is something which Labour have indicated they will keep but possibly amend. So the third rule is called the temporary repatriation facility also known as the TRF, and the idea behind this is to allow people who have stockpiled foreign income and gains — so incoming gains they've had a rise abroad whilst they've previously been a remittance basis user, and if they bring that into the UK under current rules they'll pay up to 45% tax depending on exactly what it is. But there's this TRF facility where, if you actually bring those funds into the UK in the 25/26 or 26/27 tax years, so between 6 April 2025 and 5 April 2027, you'd only pay UK tax on them at 12%. And Labour have said in relation to this, and I quote, that "we are also concerned that after the two-year window for stockpiled foreign income and gains there will remain sizable stockpiled FIG overseas and a huge disincentive to bring it to the UK, so we will also explore ways to encourage people to remit stockpiled FIG to the UK so that we can end the legacy of the current non-dom rules" end quote.
Now it is unclear from that whether they're intending to add carrots, for example expand the TRF and make it available for a longer period, or indeed add sticks, such as imposing some kind of tax penalty on those who choose not to take advantage of the TRF, or maybe even some combination of both. My personal hope is that they will look at making it available for longer — I think that's the most sensible option — but we'll have to wait and see.
|
|
Guy
|
Yeah, and those transitional rules are going to be key to planning so important to get as much clarity on those as we can. Thank you Ed for that.
I mean by their nature the transitional rules will be relatively temporary however, and one of the more fundamental proposals is possible changes to the inheritance tax regime. So, we know when it comes to inheritance tax there is the major reform on the horizon, however the detail of what is proposed is relatively scant.
So, Helen, perhaps you could explain what we know so far, if anything.
|
|
Helen
|
Absolutely.
As you say, we don't have much detail at all on this at the moment. The chancellor announced he was going to do a consultation on changes to inheritance tax, so we are not likely to see any draft legislation at any point soon, but as far as we currently understand it they do plan to change the inheritance tax regime pretty substantially as well.
So currently, the UK system essentially puts individuals into one of two buckets: those exposed to UK and inheritance tax on their worldwide assets, and that would be UK domiciled individuals and deem domiciled individuals, and those only exposed to inheritance tax on UK situated assets, so that would be non-domiciled people. This is going to change, and instead will be tested by reference to residents again. So as we understand it, the current proposal is that for the first ten years of residence there will be no inheritance tax on non-UK situated assets, but then after that everything will fall within the UK tax net wherever in the world it is situated and further, there will be a ten-year tale so once you've been resident for ten years, you'll remain within the scope of UK inheritance tax for a further ten years regardless of whether you still live in the UK at that point.
And, I think we can say that Labour have said that they support this proposal. They explicitly state that they agree with the ten-year threshold, so that looks quite certain to come in to effect at some point. But as we say whether or not there'll be a consultation on how it's done when it comes in, that we're all slightly unclear on.
|
|
Guy
|
Well, thank you Helen for that explanation as far as we understand it.
Clearly inheritance tax is an important consideration for individuals and may or may not push people into making certain decisions about whether they stay here or not based on those rules, but another equally important consideration for Private Client advisers — and clients of course — is how these proposals are going to affect trusts, because that is an important part of structuring when it comes to many clients.
So, Ed, what are the proposals in regard to trusts and how are Labour going to amend the current rules?
|
|
Ed
|
Sure. So, the taxation of non-UK resident trusts is, fair to say, ferociously complicated. Let's start with a really high-level summary saying that you've basically got three aspects of a trust you can kind of tax. You could tax the structure itself, you know the trust, maybe underlying companies if there are any. You could tax the settlor who's funded the trust — possibility number two, or you can tax the beneficiaries when they receive things from the trust, which is possibility number three.
Until now lots of the non-UK resident trusts that our clients set up and on which we advise are managed in such a way that the structure itself pays either no or very little UK tax, the settlor doesn't usually pay UK tax because of something called the protected trust regime, and so you generally have taxation when things come out to beneficiaries. The big change that's been announced apparently to take effect from 6 April 2025 is that the protection for settlors will fall away, so we'll move to a position where lots of trusts will have settlors who actually become taxable by reference the incoming gains arising within the structure. And for more detail on that, do look at our previous podcast and our commentary online.
The big news I suppose from recent weeks is that Labour have essentially said they're planning on changing that. The big change for the taxation of trust in terms of the difference from what the chancellor announced to what might actually happen is in relation to inheritance tax, and I'll let Helen take you through that.
|
|
Helen
|
Thanks Ed.
Yes, so for inheritance tax the Conservative's proposal is basically that, for trusts established by 5 April 2025 — so trusts that are in place by the time the rules change — would retain their existing IHT treatment. So a trust settled by a non-domiciled settlor prior to that date holding non-UK situated assets would be excluded from the scope of inheritance tax. The Labour proposal however is the bit that's rightly got quite a lot of the headlines, because they have essentially said that they will scrap excluded property status for trusts to at least some degree. This does not include a lot of detail as it stands. What they have said so far is that Labour will include all foreign assets held in a trust within UK inheritance tax whenever they are settled, so that nobody living here permanently can avoid paying UK inheritance tax on their worldwide Estates. The implication of this is that pre-April 2025 trusts will be brought within the scope inheritance tax. The sentence I've just read out from Labour makes it sound very very simple, but this will not be straightforward to implement, and we need to make educated guesses as to how they're going to apply it in several different circumstances.
If you take it on its broadest interpretation, it could be that a discretionary trust with one UK resident beneficiary who doesn't receive anything from the trust at all is brought within scope, but it seems that that would be quite a stretch to interpret it in this way. And so, the general thinking is that instead the test will be the status of the settlor as at the time any inheritance tax arises, so the trust would track — the trust status sorry — would track the personal status of the settlor. So, a trust might, for example, come into scope once the settlor has been UK resident for ten years, and will remain in scope of inheritance tax for ten years after they leave the UK as well and become non- UK resident.
There's also the assumption we are making at the moment that when the settlor dies, the inheritance tax of the trust will be fixed as at that point. So, this is a huge huge change, and will have an enormous impact for a lot of clients with very wide-reaching implications, which is why it's caused quite so much discussion in the industry.
It remains to be seen whether Labour will do anything to alleviate any potential double taxation that could arise of a result of the changes, so for example, if you have a trust from which settlor can benefit, these rule changes could mean that the trustees are subject to inheritance tax, but the assets of the trust also fall within the settlor's estate on their death, which could lead to double taxation.
So as you can see, not as simple as that straightforward sentence from Labour would imply, and we do need to wait for the detail to see exactly how they'll work in practice, but it's fair to say that whatever happens if Labour implement these proposals in any way shape or form, it will be a significant change.
|
|
Guy
|
Well thanks again Helen.
I mean there's a lot of things are still up in the air as you've quite rightly explained and we're ready and on standby to advise clients when we have the more granular detail, but I think from a practical perspective of course, people, clients, revisers, want to know when will this all happen, and in the space of a month as I mentioned at the start, we've gone from a situation where clients have wanted to know what they should be considering immediately after the budget, only to find that three weeks later the Labour party come out with their proposals and in effect, you then have to restart all those discussions again.
So, looking at it more practically, when do we expect all this to happen and when should clients be implementing changes? So, Ed, do you want to speak to that?
|
|
Ed
|
Sure.
If you think about where we've got to now the Conservatives have set out the heads of terms of what they would like to do, but there's lots of details still to be clarified. Labour have confirmed that they would do something similar but with some key changes, particularly the removal of one of the transitional rules and the removal of IHT protection for various trusts settled by non-doms. So, we know the rules will change, and we know the rough outline of what those changes will be. A big uncertainty is when any changes will be made, and I think the starting point: all outcomes remain possible.
So, all these changes could come into force on 6 April 2025 as intended, some of the changes could come into force and others be delayed, or indeed all the changes could be delayed, most likely to 6 April 2026 if that happens. As for which of those is most likely, there is enormous uncertainty here, but we can make some educated guesses.
So, if you think about what needs to actually happen for this to become law. The first step is for all these changes to be finessed and for more detail to be worked out, and we know on that there are listening sessions scheduled for the latter half of May, where the government will be taking soundings from the professionals and others, and we've been promised a formal consultation on the IHT reforms. We've heard rumours of draft legislation in early summer. It's not clear yet whether that would cover all the changes or perhaps just the income tax and CGT changes which is replacing the remittance basis and the removal of trust protections, or whether we would also cover the Inheritance tax changes. One could easily imagine it would just be the income tax and CGT changes because we think that those are you worked out in slightly more detail, and there's probably more to do on inheritance tax, but not yet known. The earliest we will probably see that legislation is June — you'd assume it would come out after the listening sessions in May. Then there need to be further rounds of debate on that draft legislation, and finally a vote on the bill to make it law.
So, will all that happen before the election? If you look at the dates here, a key one is that Parliament will rise for the summer recess on 23 July 2024, so that's less than 3 months from now at the time of recording, and then that summer recess would usually last until late August or early September. There are rumours of an election in mid-November. If that happened Parliament would probably be dissolved several weeks beforehand, so possibly beginning of October even potentially. So, in terms of the time available to consult on all of this, issue draft legislation and have that voted on, we're looking at possibly around three months now, and then perhaps just over a month after the summer recess.
It's worth stressing that if there's political will, draft legislation can become law very quickly — you only need a handful of days. But is this going to be a high enough priority issue, given we suspect the government will be dealing with all sorts of issues we get closer and closer election? Is this going to be a high enough priority for them to commit that kind of political will and political resource to push it through? If you ask me to put my money on it right now, I would probably say there is a slightly more than 50% chance of the changes to the remittance basis and the removal of protected trust status becoming law by an election, and there is a slightly less than 50% chance of the inheritance tax changes — whether to individuals or trusts — becoming law before an election.
If these things do not become law before the election, I think it's relatively unlikely they will get deferred because there may not be an enormous amount of time between an election and, even if there is a change of government, that government having time then before 5 April 2025, to do what it wants to in this area.
So, there's a slight difference there as I say between the income tax and CGT changes, and the IHT changes, just because we think they've made slightly different progress down those various roads. But the key message is, all outcomes remain possible, and clients need to factor this into their planning. You cannot simply assume that all these changes will be deferred.
|
|
Guy
|
So, wait and see for 23 July, we might have to have an emergency Pod.
|
|
Ed
|
We're always a fan of those Guy.
|
|
Guy
|
Exactly! Death and Taxes on tour — Ed speaking from the beach, talking about tax.
Okay, well I think that certainly answers the timing question in as far as we can, but what should clients be doing Helen?
|
|
Mike
|
So, we need to start thinking about it now, obviously we don't have that much clear information as we've said, but it's not too early to start thinking. So as and when the law changes there will be some planning options that we can consider.
I mean the most drastic one is that some existing non-doms may look to become non-UK resident. They will therefore need to think carefully about day counts in the UK under statutory residence test, and their ties to the UK to make sure that they do actually achieve non-resident status when they want to do that, and don't accidentally fall back into the UK residence net.
Then the slightly more nuanced solution is to think about planning around the changes, so we can think about things like rebasing assets prior to the changes. So, disposing of assets for example and realising the gains while they are outside the scope of CGT.
Clients might want to think about how they time the new FIG regime, so if they are for example thinking of moving to UK, they might want to delay that until the FIG regime is in place so they can make use of the full four years. We might also want to think about changing the terms of the trust, or the investment strategy for example to balance off the incoming gains arising and to mitigate the impact of those being attributed to various individuals related to the structure.
So, there is a broad scope of the things we are considering at the moment, Ed I don't know if you have any further things to add to that?
|
|
Ed
|
Yeah, thank you.
I think a lot of this does come down to timing and you've made that clear already, but there are some things clients can do before 5 April 2025 assuming these rules come into effect then, and there's some things they can do afterwards but maybe should prepare for now. Certainly, one of them is just timing when foreign incoming gains arise if you have control over that, and trying to influence which regime they fall under. Otherwise, we might see people moving back to more traditional UK planning, so using family investment companies, investing into assets which benefit from certain reliefs, using insurance that kind of thing.
I think all of that will crop up, but in terms of what clients should be doing right now — I absolutely get how tempting it is for people to think, well there's lots of uncertainty let's not do anything until we have greater clarity. I think the most important message from anyone's take away from this Podcast is that by the time we get complete clarity, it may well be too late to come up with and implement any planning to take advantage of that, so I think the well advised clients will be speaking to their advisers now accepting there is uncertainty, but looking at the most likely outcomes based on what we currently know, ideally coming up with their key options — see what's plan a what's plan B — thinking about the impact that will have on their lives, because it's easy to say I'll reduce my day count in the UK and become non-UK resident, but actually living that is sometimes quite different, and once you have your plans looking very carefully at exactly when would they need to be implemented by; when is your cut off point to make a decision. Ideally then, you wait as long as you can and get as close to that cut off point as possible, so when you do make your final call, you have the maximum amount of information available to you.
I think everyone operating in this area, both clients and advisers, fundamentally needs to accept we're all going to be advising in a grey area for the next year or so, and helping clients make educated guesses is the best course of action to take. But it is something that needs to be addressed now and can't just left until later, after the election or after 6 April 2025.
|
|
Guy
|
Well, thank you Helen, and thank you Ed for that comprehensive summary of the current position.
I think it's clear from what we've discussed today that this topic is going to be something we have to revisit regularly over the next few months, certainly 23 July, Ed being one of your dates and no doubt there'll be others in the run up to April 2025, and indeed after that.
So, the Death & Taxes team will keep you updated with our thoughts and analysis as things develop. We will be publishing new episodes of Death & Taxes over the coming weeks and certainly in the leadup to the general election, so don't forget to subscribe and thanks again for listening.
|