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Speaker
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Transcript
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Tim Wlliams, Director, Burges Salmon
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[Music] Hello and welcome back to Death & Taxes, a Private Wealth podcast from Burges Salmon. My name is Tim Williams and I'm delighted to be joined by my colleagues from our Tax and Trusts Team, John Barnett and Edward Hayes.
We have a special episode following The Spring Budget 2024 and in this episode we briefly cover the highlights from the announcements on the 6th of March and take a closer look at the big headline changes to the non-dom regime. Including what people need to be doing now, in relation to the announcement and some more details on the questions raised by The Budget.
For those wanting to know more about the changes to the non-dom regime announced in The Budget we've also published an article on the tax regime for non-doms and their trusts and how they'll change significantly from the 6th of April 2025, on our website. I'm joined by John Barnett.
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John Barnett, Partner, Burges Salmon
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Hi Tim.
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Tim
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And Ed Hayes.
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Edward Hayes, Director, Burges Salmon
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Hello Tim.
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Tim
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After a somewhat non-event of an Autumn Budget, The Spring Budget announced on Wednesday contained numerous important announcements for us in the Private Wealth world.
We're going to cover the broad sweep of what's happened and then John and Ed are going to talk through some of the practical points around the non-dom changes which is obviously the biggest aspect of The Budget, towards the end. But first we'll run through some of the high level points that are worth noting as well. I mean, John do you just want to give a very high level summary of the non-dom changes before we get into the meat of them a bit later in the podcast?
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John
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Yeah I mean I guess the the two key issues for non-doms are first of all that domicile is being replaced as the test with a residence based test and then the incentive which has always been the remittance basis, the ability to keep your foreign income and gains outside the UK and not pay tax until you bring them to the UK, that's also going; being replaced with a, broadly for the first four years here, a complete exemption for people from their Foreign Income and Gains.
Various transitional rules, which we'll get into the detail of a bit later I guess, which knocks some of the harsh edges off that for people moving from one regime to the other and lots of complications for Trusts in particular.
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Edward
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And I think we're saying that the Inheritance Tax Regime is also due to change to be moved onto a residency basis or be it we have less detail on that because they've expressly said that's going to be subject to a consultation.
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Tim
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Right, and thanks both, yeah we'll come back to what all of those things mean in practical terms later on. So alongside the big changes it's worth noting some of the other important measures for clients in The Budget.
First of all for those buying and selling residential property there are two announcements. So on the buy side, the withdrawal of multiple dwellings relief for MDR from June this year is important for buyers but do note that if you're buying six or more residential properties then it's important to remember that the rules that apply now, where you will get relief for six or more properties, will continue to apply post June this year. For those selling residential properties good news, in that the rate of Capital Gains Tax will fall from 28% down to 24% from April 2025.
Also for those who own furnished holiday lets the rules will be changing there, lots of change on that front so I won't go into detail but do take note if you have furnished holiday lets and are either looking at finance cost or, buying or selling those properties. One of the bigger changes though for UK clients is the announcements around the taxation of Environmental Land Management Schemes or ELMS. So farmers and land owners have been waiting since last summer for a Government response to a consultation that was launched last year.
The Government finally responded to those changes in The Budget. Good news is that agricultural property relief, APR, will apply to Environmental Land Management Schemes but only to tax points arising after April 2025 and it's not entirely clear why that is, but good news on the whole that there's a clarity around APR. On the Business Property Relief front, or BPR, the Government did say that they weren't going to make any special concessions for Environmental Land Management Schemes, so possibly no great surprise there, but again it comes back to looking at what activities the landowner, or a person operating those schemes are carrying out and whether or not BPR would be available on general principles.
So welcome clarity, if not brilliant news. Finally, one other point raised by the consultation was around Agricultural Property Relief for landlords and there was a proposal following on from The Rock Report that there should be minimum duration requirements for tenancies for landlords. That requirement has not been adopted, so the current APR rules for landlords still endure. Whilst the Capital Taxes side has been clarified, there is still a question around the taxation of what the Government has described as Ecosystem Services Schemes and HM Treasury and HMRC are establishing a working group to look at that further, so hopefully more clarity to come on that front in the near future.
So that's a high-level summary of some of the other interesting topics from The Budget on Wednesday, but Ed, I mean, turning back to the main headline event, what should people be doing now in light of the non-dom changes?
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Edward
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Thanks Tim. The people most impacted and who need to do something really quite urgently are those who might become deemed domiciled with effect from 6 April 2024, because it looks as though they have the ability between now and then to create trust structures which will continue to benefit from excluded property status, which means they might permanently have a beneficial Inheritance Tax treatment. Now, that is subject to what Labour might do with these rules, if they were to come into power between now and April 2025, but in many ways there's not much harm for people in that situation getting something on the on the books now and then they're at least possibly going to be in a really good position going forwards.
For everyone else and that's you know people who are currently non-doms people who might be moving to the UK, actually the best course of action is probably don't do anything and and kind of wait and see so for example if you were considering remitting funds into the UK, you might well be better waiting until this new temporary repatriation facility in 25/26 and 26/27. If you were thinking of moving to the UK, there might actually be some advantages to delaying that move until 6 April 2025.
So the majority of people who might be impacted would be best served by speaking to their advisers now, working out what might happen to them and working out what they might want them to do by 6 April 2025, because that's going to be the key deadline for almost all of the planning related to this, but not actually taking any steps to implement that until much closer to time and I think the sweet spot for most of those people will be waiting until we hear from Labour what their response is i.e. will they just accept this and say, yes if we get in we'll just leave this as is, or will we make further changes if we come into power and once they have that clarity, hopefully there'll be a window between getting that greater certainty from Labour and 6 April 2025 and that will be the most important window in which to act. But of course there'll be - everyone will be trying to do that so you want to get your house in order and be ready to go as soon as you can, so that once you have all the context you're ready to implement.
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John
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I think that's right Ed and I think one of the key - likely - planning opportunities will be setting up a trust before 6th April 25, for a lot of people. But setting up a trust is a long process, it takes you know, ideally 6 months to do it, so if you wait until after the General Election, wait until the new year in January you may be too late. So you could well be better getting all your ducks in a row, possibly having the trust set up but not yet funded, so you can then take a decision on funding a bit later in particular.
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Tim
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So thanks both, that's really helpful on the immediate steps that people need to be looking at, but what are the other questions that the announcements raise?
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Edward
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So I think the key thing to bear in mind is there are three transitional rules which have been announced and I suppose these are perhaps particularly vulnerable to Labour taking power and having a different view, because actually if the Tory Party manages to put most of the core of this regime into the next Finance Act, that will theoretically be on the statute book by the time a Labour government came into power, if one does, and Labour would have to take quite active steps to really dismantle that and do something very different, but it might be easier for them to change some of the transitional rules. So bear in mind these come with a caveat, but let's assume they are implemented as advertised so there are three transitional rules to be aware of.
The first one is for people who lose access to remittance basis in the 25/26 tax year and cannot benefit from the four-year, the new four-year FIG regime. There is a kind of, one-off transitional rule to ease them into the new world and that is that only half of their foreign income will be subject to UK Income Tax in the 25/26 tax year. It doesn't affect foreign gains, so it's just foreign income, but there might well be opportunities there, for example, if you can accelerate income that know you're going to receive, and pull it into the 25/26 tax year, rather than leaving it to arise in the 26/27 tax year, you might well be able to reduce your UK Income Tax exposure.
The second transitional rule is the Capital Gains Tax rebasing rule and there are quite a few criteria that need to be satisfied to benefit from this. You need to have been someone who's not UK domiciled or deemed domiciled as of 5 April 2025, you must have claimed the remittance basis in the past and you must, in relation to the asset you want to rebase, you must have held that asset as of 5 April 2019. If you satisfy all of those criteria and you dispose of that asset on or after 6 April 2025 then you can choose to rebase the value of that asset to its value as of 5 April 2019. Again, that's another kind of good example of why, you might just want to do nothing for now, because actually if you're going to dispose of an asset that qualified for that in any case now, you wouldn't have the option of rebasing. Whereas potentially, if you wait and do it after 6 April 2025 you can rebase.
The third and probably most eye-catching of the transitional rules, is what they're calling the Temporary Repatriation Facility and the government in their papers already produced the acronym TRF, so we'll call it the TRF for the rest of this podcast for ease.
What that says, is that because the new regime will not just get rid of foreign income and gains that have arisen to date, i.e. for people who've been remittance basis users they will have generated foreign income and gains in the time they've been remittance basis users and those foreign income and gains will continue to be foreign income and gains even under the new regime but the government is going to allow people to bring that previous foreign income and gains into the country at a new beneficial flat rate of tax and that's 12% so basically if you have foreign income and gains which arise pre 6 April 2025 and then you remit foreign income and gains in 25/26 or 26/27 you'll pay a flat rate of 12% on what you omit and they've also said they're going to slightly relax the the mixed fund ordering rules to help people do that, because in practice people often don't have know exactly how much foreign income and gains they've got and it's often mixed up with various other funds so it's not easy for them to say well you that pot in that account is X amount of foreign income and X amount of foreign gains there will be something, we don't yet know what, to make it easier to make use of these rules.
Lots of this has to do with timing, so again, if you think about the impact that Temporary Repatriation Facility might have, if you were going to remit something in the near future then actually it might be much better to wait and do that in 25/26 or 26/27 and furthermore if you can affect when you have income and gains arising, it might be very advantageous to try and trigger foreign income and gains now, or at least before 6 April 2025, so that those foreign income and gains can be brought in using this new TRF later in in the tax year.
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John
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I think to add one more thing to that Ed, it's not a transitional rule as such, but in relation to Inheritance Tax, they've said there'll be a consultation because Inheritance Tax is more difficult, but one thing they sort of pre-announced on Inheritance Tax is that a Trust set up before 6th April 2025 by somebody who is not domiciled or deemed domiciled will continue to benefit from the present Excluded Property Status after 6th April 2025.
Now, there's a whole load more detail on Inheritance Tax here but just in terms of the interaction of that with the rest of the transitional rules there's going to be quite an interesting debate here, do you put your assets into a trust before 6th April 2025 but then potentially lose out on some of these temporary repatriation facility rebasing other reliefs or do you wait until after 6th April 2025 to get the other reliefs but lose out on the inheritance tax? Maybe there will be ways you can do both, we we'll need to wait and see a little bit on that but but timing is going to be everything on this and and I think capital gains are going to be easier because people can normally time their capital gains.
For a lot of people income won't be so easy to time but, for instance, if you've got your own company that you can time the dividend from there may be some opportunities to time your income and I think generally you don't want to do anything at the moment until we know where Labour are but probably bringing stuff forward ideally into 24/25 probably when it can benefit from the Temporary Repatriation Facility at 12% is going to be better than benefiting from the 50% relief in the following year which will give a sort of Income Tax rate of 22 and a half percent, better than the year after when it'll be full taxation, so there's some interesting timing questions around all of this.
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Edward
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Yes and the capital gains rebasing is another example of the same point isn't it, because you'll have a choice, if you've got an asset at the moment that you had at whatever value it was at 2019, you almost have a choice potentially between disposing of that now, realizing a foreign gain which under remittance basis probably wouldn't be taxable at all and that you might then be able to remit in 25/26 or 26/27 at 12% or waiting and realizing the gain in 25/26 when you might benefit from the rebasing but you will be subject to full Capital Gains Tax and so there'll be I think for a lot of people the key thing is to look at their current situation, work out exactly how all these different transitional rules might interact for them personally come up with a rough plan that kind of says well if the rules come in as advertised this is likely to be my best course of action and then wait for more clarity for Labour to see if - before you pulling the trigger and actually putting that into practice.
I mean, another example of something that might work but we will need more certainty before we'd be advising clients to do it, is it's not yet clear how trust distributions prior to 6 April 2025 will be treated for the purposes of the Repatriation Facility. So the technical paper that was published says that the TRF will not be available for foreign income gains arising in trust structures, but it's not clear whether that's really just saying that trustees can't bring income and gains into the UK using the TRF, or whether it will also stop a distribution from a non-UK resident trust to beneficiaries which would often, if the beneficiaries or remittance bases users, trigger foreign income gains, or give rise to foreign income gains for them individually.
The question is can they then use the TRF to bring those foreign income and gains that were generated by the distribution into the UK in 25/26 and 26/27 and benefit from the 12% rate? My guess at the moment is they probably will be able to, but it's not at all clear and I've certainly seen some commentary suggesting they won't be and I think you'd be a brave person indeed to trigger a distribution to take advantage of that until we have more clarity.
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Tim
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Thanks, the Chancellor described these changes as making the UK regime one of the most attractive in Europe, do you agree with that statement?
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Edward
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He must have some statistics that mean he can say that with a straight face, but I must admit my view is it's absolutely not, if you compare it to other regimes for new arrivals into countries in the in Europe obvious comparisons are Italy which has a 15-year regime, France which has an 8-year regime and not only that but actually you've got to bear in mind the impact that UK Inheritance Tax has on the attractiveness of this as a country to move to for those who have options as to as to where to live and it's easy to miss when you know, you're born and raised in the UK because we're so used to the idea of Inheritance Tax, but actually lots and lots of countries either don't have Inheritance Tax, or have it at a much lower rate and that includes European countries, you know, Portugal doesn't have Inheritance Tax places like Greece it's 20% rather than our 40%, you've got lots of choices if you're looking at places in Europe of where you might move to that either offer you a much more attractive regime in terms of your income and gains, or won't pull you into an Inheritance Tax net, or an equivalent, that will potentially subject all your wealth to tax on death.
I think that's something that people moving to the UK sometimes feel as particularly egregious and are particularly worried about and the the proposal at the moment under these new rules is that for someone who's been UK tax resident for 10 years, their worldwide estate will be subject to UK Inheritance Tax and I think that's that might fly under the radar a bit but will be a really important factor for people weighing up which jurisdiction to move to.
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John
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Yeah I agree, I think the four-year regime the Chancellor said it was attractive because you pay no tax at all whereas in Italy you'd have to pay the the flat rate 100 ,000 Euros that they charge you, so arguably that is attractive having said that, it takes most new arrivals several years to sort of get their affairs in order and sorted out, so by the time they've done that, dealt with the UK split year and things the four years will be gone. They also have the issue of getting into the UK in the first place these days given the lack of visa routes. So I'm not sure this is making the UK an attractive place to come and do business.
I think on the Inheritance Tax side, yes it's 10 years rather than four, which is helpful but there's this 10 tail, so once you you have done 10 years it takes 10 years then to get back out of the system. The reason they've had to do that is that, sort of, regular Brits, you know, expatriating and going living in, you know, the Costa Del Sol or something after 10 years will be out of UK Inheritance Tax, so they've needed to have this long 10 year tail to prevent people doing that, but that's the other aspect of these rules that is perhaps less commented on.
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Tim
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So thank you both, that's a fascinating discussion of the detail, but what are the key takeaways for clients and their advisors?
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Edward
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I would say, if you're becoming deemed domiciled on 6th April 2024 think immediately about whether to create an Excluded Property Trust, for anyone else impacted, contact your advisor and start thinking through any protected trusts that you're connected to. What will the impact be and and what can possibly be done to mitigate that or restructure as necessary and if you have foreign income and gains already, or have the ability to generate foreign income and gains, start thinking about how best to make use these transitional rules so as to potentially use those in the UK and/or just limit their exposure to UK taxation generally.
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Tim
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[Music] Thanks again for listening to this episode of Death & Taxes - the Private Wealth podcast from Burges Salmon.
The Private Wealth Team at Burges Salmon has a wealth of experience of the non-dom regime and the many evolutions it's been through over the years and are here to help with the changes flowing from the 6th of March announcements and though the focus of today's episode has been very much on non-dom rules and what might change for those clients we are as ever delighted to advise UK individuals and families on the broad range of their tax and succession planning.
You can listen to our previous episodes and get in touch with the team at Burges-Salmon.com, or on our LinkedIn page. We'll be publishing new episodes every fortnight on Tuesdays covering topics such as, the basics of Inheritance Tax, how the UK's immigration laws work in the Private Client context and as parties publish manifestos ahead of the expected election you can look forward to our thoughts on what their policies might mean for private clients and their advisors. Don't forget to subscribe and thanks again for listening. [Music].
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