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Speaker
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Transcript
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Edward Hayes, Partner
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[Music] Hello and welcome back to Death & Taxes, a Private Wealth podcast from Burges Salmon. My name is Edward Hayes and I'm delighted to be joined today by my colleague Emma Heelis-Adams, to discuss the Budget implications for non-doms and international clients. Welcome to the podcast Emma.
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Emma Heelis-Adams, Partner
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Hi Ed, thank you very much for having me.
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Ed
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Well it's good to have you on board.
[Music] There's lots of commentary out there from all sorts of people, including us, about what these changes are and what they might mean in various different circumstances, but we thought the goal of this podcast is to run through different categories of individual non-doms and perhaps those coming to the UK and talk about particular aspects of these new rules that will impact them and how they might see, kind of, different consequences to these changes going through.
We'll begin with a very high level summary of the newest announcements and then we'll get right into the different types of people and what each of them should be thinking about.
So as a reminder, some of the important changes we'll be seeing from next year are the replacement of the remittance basis with a four-year FIG regime, in the first four years of UK tax residence and that will allow people to claim tax relief on their foreign income and gains in that period and they can bring those foreign income and gains into the UK without further taxation. There is also a temporary repatriation facility available for those who have existing foreign income and gains as of the 5th of April 2025, they can bring those into the UK, well or indeed designate them, that's probably important to be clear on that point they don't have to physically bring them in, in the tax years 25/26 to 27/28 and be taxed on a flat rate of 12% or 15% depending on the year.
In relation to Inheritance Tax, we're going to move away from domicile as the key connecting factor and instead we'll have a residency test. So broadly speaking you'll be exposed to Inheritance Tax on your worldwide assets once you've completed 10 years of UK tax residence, they don't all have to be consecutive, the test is 10 of the 20 proceeding tax years. But for many people who come to the UK and then do have consecutive years that exposure will begin in the start of their 11th tax year of UK residents.
In relation to trusts, settlors of trusts who are living and UK resident are will be exposed in many cases to Income Tax and Capital Gains Tax on income and gains in their structures from the 6th of April 2025 and the Inheritance Tax status of trust will be linked to the Inheritance Tax status of the settlor from that date. Right, that's the really high-level recap. You can go on our website for much more detail if you search for the UK's proposals for non-doms and their structures then we've got an article that runs through lots of these things. But let's get into how this is going to impact different types of people. So Emma, for existing non-doms who've actually already left or maybe leaving this year what are the key things that they'll be thinking about?
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Emma
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Thanks Ed. So the key thing for people who were taxed as non-doms previously and then have already left the UK, the key thing for them to understand is that some of them could still be caught by these new rules even though they're no longer resident in the UK and it'll be really important to take advice in relation to that. So if you left the UK in the - or you were non-resident by the 2022/23 tax year, then you shouldn't have any exposure under these new rules and so you're probably clear. But if you left the UK in the 23/24 tax year, so that's the last UK tax year, then you might be caught by the rules in relation to Inheritance Tax, which might mean that you have exposure to Inheritance Tax on your worldwide estate, it might mean that trusts that you've created might have an Inheritance Tax exposure and that's even though you've already left.
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Ed
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How long does that last Em, in terms of length of exposure?
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Emma
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So for those who've already left by now effectively, you're looking at a three-year exposure in broad terms, but what might be critical is that a trust that you've created might have an exit charge, a tax liability when you then cease to have your personal exposure to Inheritance Tax. So, and this exit charge is a charge on the the entire value of the trust fund at a maximum rate of 6%.
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Ed
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And am I right that in most cases because that three-year tail will run and some of that for some people will have begun running before the 6th of April 2025 and some it will run, you know, from that date. So your kind of maximum exposure if you already gone is 3 years, for many it would be less. That exit charge is likely to be between 0.6% and 0.8% is that right?
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Emma
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Yeah that is right, so it's pro-rated so the maximum on an exit charge is usually 6% but it is pro-rated depending on how long the trust has been within the Inheritance Tax regime. So it will be likely, as you say, a much lower percentage but still an actual tax liability and a return will need to be filed the calculations for those tax liabilities can be complex so there will be a bit of work to be done there at the point of sort of leaving the Inheritance Tax, what's been referred to as the tail.
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Ed
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Great, so those who've already left the UK, or are leaving this year or possibly even early next year, the key message is have a look at your Inheritance Tax exposure, have a think about how that could impact your trusts and do take advice. Don't think just because you're out of the country when the Budget statements were made that these don't impact you. I think that's very helpful, thank you Emma.
On the second category, so existing non-doms who are in the UK at the moment and they're weighing up their options they're considering, do I stay in the UK as long as I was going to? Of course it's important for everyone to remember by definition non-doms are going to go at some point, but it's the length of that stay that many will be considering as a result of these Budget announcements. Emma, what would you be saying to clients in that position what are the key things to weigh up here?
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Emma
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So the key thing to weigh up is really how long have you already been in the UK and what are your plans for when you want to leave and those things can make a very big difference to your UK tax exposure, and even small differences in the length of time that you've already been here can have quite a big impact on your exposure.
There are some concessions in the rules that will hopefully give people, sort of some categories of people, sort of pause for thought and that they won't be just deciding to leave immediately. But the key question really for most clients, is whether they're going to try to become non-resident in the current tax year so that's 2024/25, or next tax year '25/26, or whether they're going to stay longer than that into the '26/27 tax year. And for many non-doms that could make a really big difference to their Inheritance Tax tail. It might go from being three years, if you leave in the current tax year, or next tax year, to being 10 years if you leave the year after. So that's a really significant difference and that's because there are some transitional rules that will apply if you become non-resident in the current tax year or next tax year.
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Ed
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And is it worth saying there, Emma, that to become non-resident you you tend to have to leave quite early in the tax year. We see this trap, don't we? That people think, oh I'll become non-UK resident in '25/26 but you've got to get out pretty quickly often for that to be the case.
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Emma
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Yeah absolutely, you will, you need to be thinking of leaving around April 2025. So that gives, you know, four or five months to really, you know, have a course of action and put it into effect. You may be able to stay for, you know, into May maybe possibly into June, but you really need to be very careful about that and certainly take advice on how many days you can spend in the UK in the '25 tax year without being UK resident. For a lot of people that will effectively mean looking at leaving next April.
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Ed
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And for those who are going to stay and at least for, you know, a few more years yet what should they be thinking about in terms of the way these new rules are going to impact them, what are the big points?
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Emma
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So first of all, if you're currently able to claim the remittance basis you're going to have a really significant change exposure to UK Income Tax and Capital Gains Tax if you've already been in the UK for more than four years. So you might want to do some planning around that, you know, looking at things such as investment parameters, you might want to invest for gains for example rather than Income Tax because rates of Capital Gains Tax are lower than Income Tax. Some clients might want to look at certain investment wrappers that will effectively allow you to defer tax.
You should also look at if you've got assets held in structures. In some cases you might want to make changes to the terms of those structures, so for example, if you've got a trust you might want to look at excluding certain beneficiaries and that might mean in some cases that not all of the Income and Gains in the structure are attributed to you. So that's Income Tax and Capital Gains Tax.
For Inheritance tax if you're going to be caught and have exposure to worldwide Inheritance Tax then you might want to consider various planning options that have been traditionally used by UK individuals, those who are domiciled in the UK. And that might be things such as making gifts, life insurance, and things such as family investment companies.
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Ed
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And of course it's not all bad news is it, for those who are in the UK and are are going to be staying for some years yet, actually the temporary repatriation facility is potentially a very useful mechanism for them. Do you mind just talking us through roughly how that will work?
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Emma
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Yeah absolutely. So this - the idea behind this is that there are lots of people who've claimed the remittance basis in the past and they have foreign income and gains out side of the UK that have never been subject to UK tax and, you know, from a policy point of view the UK government would like those people to bring some of that money into the UK and to try to make that attractive there is a flat rate of tax which is 12% for the first couple of years and then it increases to 15%. And the idea is that you don't actually have to bring the funds into the UK you can designate an amount that is your foreign income and gains outside of the UK, pay the tax on it but you might not want to bring it immediately into the UK, it might be invested in other assets for example, but what you've effectively done is then paid the tax on that the income and gains and then you can bring it to the UK at some point in the future.
And for a lot of clients that will be attractive, for a couple of reasons. One, because it's a lower rate of tax than might otherwise apply to your foreign income and gains, and secondly because you can, if you want to, take a more relaxed approach to how you calculate the income and gains. So at the moment if somebody wants to bring foreign income and gains into the UK they have to normally do quite complicated exercise to work out exactly what income and what gains they have.
Under this new approach you could estimate a little bit more and if you think you have a certain amount you might then just put a little bit extra on top of that to make sure you've got, you know, a bit of clearance and then not have to go through that complicated process which can be, you know, time consuming and costly and then feel free to bring that that money into the UK without sort of being worried that you haven't undertaken the correct calculations.
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Ed
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It certainly looks like a more pragmatic solution to this problem, doesn't it? Some of the things we've seen in the past like business investment relief which maybe sound good on paper but actually a nightmare to use, this actually looks like quite a well-designed mechanism. So hopefully we'll see clients taking advantage of that and of course the as much as there were unpleasant surprises for some in the Budget.
I suppose one pleasant surprise was the fact that we we can actually see trust distributions during this temporary repatriation facility window, which could benefit. Do you mind roughly summarizing how that would work?
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Emma
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Yeah absolutely. So, when I was talking before about how the temporary repatriation facility might work I was talking about income and gains that an individual might having in their own personal name at the moment, but the rules can also apply to distributions that you receive from a trust.
So if you have a non-UK trust that has income and gains that haven't been subject to tax in the UK, when a UK beneficiary receives distributions from that trust they may have income and capital gains tax liabilities, depending on the income and gains that have arisen in that trust and those distributions that a beneficiary receives can also benefit from the temporary repatriation facility, so you might want to look at taking a distribution from a trust paying a flat rate of 12% and then being able to bring it into the UK.
So we are likely to see, I think, a number of beneficiaries taking advantage of that and asking trustees for distributions over the next year or so.
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Ed
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And on timing for those people of course it's, you know, we want to stress, don't we, that some of this planning you'll be doing kind of early next tax year, some of this planning will be doing late this tax year. We'll see things like trustees wanting to rebase assets to make sure the gains are pre-6 April 2025 and then distribute those gains effectively afterwards they can benefit from this TRF 12% window.
So the message for existing non-doms who are considering their options is, you know, do take advice right now. Don't feel just because, you know, you're going to stay for a few more years you can defer that advice until next year or later. You know, there are things that should be done probably before the end of this tax year at least to set you up for future tax years.
So we've covered existing non-doms who have left, or are leaving very shortly, and existing non-doms who think they'll be staying, at least for a few more years. How about those coming to the UK? Obviously their position is going be very different to what it used to be. What do they need to be thinking about?
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Emma
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So I think here there are actually - there is some good news because the new rules are somewhat simpler than the old regime. The old regime was based on the concept of domicile and to a lot of people from many jurisdictions around the world, the concept of domicile was quite alien and it was quite difficult for clients to understand what it meant. In a lot of cases we're now removing that concept of domicile and the connecting factor will be residence in the UK and I think people find residence much easier to understand. We have the statutory residence test which in most cases gives you a pretty clear answer as to whether you're UK resident or not and allows you to to plan in a much more straightforward way than you might have been able to when you had to consider domicile. So that will be good for clients in terms of having more certainty.
I also think the new rules will be easier to make use of in practice. In the past, with the remittance basis that worked by saying that you had to keep your foreign income and gains outside of the UK if you didn't want to pay UK tax on it and that led to many clients having complicated segregated accounts. So accounts segregating income from capital, multiple different accounts, some quite complicated arrangements there and actually this new regime, the four-year FIG regime, allows you to not pay any tax on your foreign income and gains and bring that money into the UK and I think that will take away a lot of the need for segregation and make things easier going forwards. The downside, obviously, is it's only a four-year regime as opposed to fifteen years at the moment.
One category of winners, if you want to think of the Budget in terms of winners and losers, are actually existing UK expats, because under the old regime a lot of expats would still have had exposure to UK tax, particularly Inheritance Tax based on their domicile and it was often quite difficult to argue that somebody who was originally from the UK had lost their UK domicile and certainly it was sort of a grey area and created quite a bit of uncertainty.
Under these new rules, once the UK expat has been outside of the UK for 10 tax years they will be clear that they are no longer in scope of UK Inheritance Tax, but also if they want to come back to the UK they will be able to take advantage of these new rules. So they can use the four-year FIG regime and they won't have exposure to worldwide Inheritance Tax until they've been in the UK for 10 years. So that is good news effectively for the expat community and I think we will see some expats who start to think about moving back to the UK and being able to do that in a more straightforward and advantageous way for tax purposes than they could have done in the past.
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Ed
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Okay, well I'm always a big fan of positives that we can find the silver lining so good to hear that there are some there.
In terms of some of the fiddlier points for new arrivals, so comparing this regime to the old regime, you've mentioned already that it's obviously much shorter but I'm conscious there are other, I suppose, practical aspects which make it in some ways less favourable as well.
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Emma
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Yes, there are some downsides as well. The first is that you will, under the new regime, need to report everything. So your foreign income and gains, that you don't want to be subject to tax in the UK, you still have to report that whereas under the current remittance basis you didn't have to report anything that was being kept outside of the UK. So there's a significant increase in the compliance burden in terms of what needs to be reported.
There is also a shorter time period in order to make the claim to take advantage of the four-year FIG regime. So, the claim needs to be made by the end of January in the second year after the end of the relevant tax year. So you've effectively got a couple of years to make a claim whereas under the existing regime you had four years. So people do need to take advice in good time if they're planning on taking advantage of the new regime, to make sure they don't miss the boat from a timing point of view.
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Ed
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And on the pre-arrival plan, I've certainly spoken to some people who've kind of been saying oh brilliant we don't need to do pre-arrival planning anymore, you don't need to set up segregated accounts and so forth before you come into the UK, and obviously that's a bit simplistic do you mind kind of talking us through why?
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Emma
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Absolutely, so there are some sort of key timing windows that you still need to be aware of. So for example, actually once you're in the UK and if you're planning on staying for more than four years, in that fourth year of residence you might want to consider rebasing assets because at the point of rebasing them in your fourth year you won't pay any Capital Gains Tax and then moving forward you'll have a higher base cost and then there's also certain things you might want to do before you arrive. So in the past, as you say, people would have done quite a bit of pre-arrival planning. Things such as creating segregated clean capital accounts but there are still things to be aware of.
So for example, if you move to the UK and you have a personal company and maybe you're the sole director of that company. When you move to the UK, that company may well become managed and controlled in the UK, if you're the sole director, that means that the company is subject to Corporation Tax on its profits and the company itself won't benefit from the four-year FIG regime. So any income and gains realized within that company are going to be subject to UK Corporation Tax. So it's quite important to take steps before arriving in the UK, such as considering whether you are going to wind up that company or appoint somebody else as director, so that it doesn't become UK managed and controlled.
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Ed
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Right and there are of course other traps like personal portfolio bonds and all sorts, you know, our key message to clients is don't think that there's no need for pre-arrival planning anymore. But it is good to see that this new regime, I think, will be simpler for clients, it'll be easier to understand. Actually the risk of human error has been reduced somewhat and I think that's a quite attractive aspect for clients, us, and other advisers, like bankers and so forth.
So, we've covered off now people who are, kind of, leaving the UK, people who are non-doms who are staying in the UK, people arriving into the UK. Some people who could be in any one of those categories I suppose and who might find that their position is slightly different to what we've described previously are those who are connected to countries which have an estate tax treaty with the UK. So if you don't mind just quickly explaining why that's relevant, how it could be important? That would be fantastic.
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Emma
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Yes, so double tax treaties are are very important, the UK has a number of double tax treaties in relation to Inheritance Tax and estate taxes for example, with the US and India, Italy, France, and so on and the effect of those double tax treaties can mean that in practice the rules are changed quite dramatically by the treaty and so you are taxed in a different way to what you would be if the treaty wasn't there. So by way of example, the changes to the Inheritance Tax treatment of trusts will be almost completely nullified for some US persons because of the US/UK double tax treaty. Others might find that they don't have any tail for Inheritance Tax purposes when they leave the UK, or that some of their worldwide assets are not actually exposed to UK Inheritance Tax.
And the other thing to think about there is a lot of these treaties use the concept of domicile and that won't change so you will still have domicile being a relevant concept for some tax purposes because of the double tax treaties, and the government has confirmed that there is no intention to change any of those treaties at this point in time.
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Ed
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And of course for succession law it's very important as well, isn't it? Any of our clients who have assets or family in different jurisdictions, as much as we might wish that domicile were no longer relevant, we will still need to consider it and form a view on that.
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Emma
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Yes that's right in relation to domicile it will still be relevant for a number of non-tax purposes.
Another thing that we're also quite wary of is existing non-doms taking the position that, although they have been non-domiciled to date, they are now going to change their minds and say that they are actually domiciled in the UK and you might see people wanting to do that, for example, to take advantage of the UK succession laws which might allow them to leave their assets more freely when they die than they might be otherwise able to do in in a country where they're domiciled, if they're domiciled outside of the UK. So we think some clients might think about saying that their domicile has changed.
Where we are a little nervous about that is we expect HMRC to be a bit suspicious of it and to be interested in investigating the individual's historic domicile status, and if you've been relying on being non-domiciled for a number of years to take advantage of the tax regime and then suddenly you decide that you're UK domiciled that doesn't preclude HMRC from carrying out an investigation into the historic tax years. So just be quite wary of that, I think, and certainly take advice if you're thinking of making any statements that suggest that your actual domicile has changed.
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Ed
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And we've kind of seen HMRC do this in the past, haven't we? Because back in 2017 when deemed domicile became a concept we all had to worry about much more, I think a lot of people assumed that given actual domicile had lost some of its relevance that HMRC would maybe focused less on actual domicile we'd see fewer domicile inquiries and instead we saw more in the aftermath of that and I think we're now thinking that actually that's going to be the case here. It's a really important, practical point for people to be aware of there and thank you very much for that.
So to quickly recap, if you're someone who's leaving the UK now, or has left recently, we think the key point is have a think about your Inheritance Tax exposure and the way that could impact both you personally but also your trust structures.
If you're someone who is weighing up whether to go or whether to stay, or indeed has decided to stay, then it's really important to take advice in the very near future to determine what you might need to do before the end of this tax year and what options might be open to you going forwards to mitigate some of the more negative impacts of the Budget, but also take advantage of what are in some cases actually very favourable reliefs and opportunities.
We've also for new arrivals got a, you know, very big change on what we would be saying to new arrivals before they came to the UK. Pre-arrival planning is still absolutely key but then what you have open to you once you move here, yes it's a kind of less extensive relief in terms of the time it's available for, but actually it's much more certain in its application it's much simpler in how it will operate. There will be plenty of people I imagine who prefer this new regime just because of the manner in which they'll be able to take advantage of it even if it is not available for as long as the remittance basis used to be.
And then of course if you're from a country that has a, particularly an estate tax treaty, with the UK do make sure that your advisers are helping you work out the implications of that because it could change your position very materially.
So it's for me to say, thank you very much to Emma for joining us and for all your wisdom. I think in conclusion, the impact of these changes is going to vary enormously from individual to individual, and from family to family. Hopefully some of the messages we've put out today will resonate with people and will help them kind of identify what they need to focus on, both personally and and with their advisers and we look forward to bringing you another podcast in the near future.
Thank you very much Emma.
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Emma
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Thank you Ed.
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Ed
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[Music] Thanks again for listening to this episode of Death & Taxes, the Private Wealth podcast from Burges Salmon. You can listen to our previous episodes and get in touch with the team at Burges Salmon on our website or on our LinkedIn page.
We'll be publishing a new episode every Friday between now and Christmas and the next episode focuses on entrepreneurs and business owners, so don't forget to subscribe and thank you again for listening. [Music]
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