On 29 July 2024 the Government released further information regarding its proposals for reform to the IHT regime, specifically the regime that applies to the taxation of non-UK domiciled individuals.
Whilst we wait for further details of the proposed reforms in the Autumn Budget (set for 30 October 2024) the Government has now issued draft legislation which indicates that the following key reforms will be implemented, and have affect from 6 April 2025:
- To abolish the remittance basis available to non-UK domiciled individuals and introduce a four-year foreign income and gains (“FIG”) regime, whereby there would be 100% UK tax relief on foreign income and gains for the first four years of UK tax residence only. This regime is expected to take effect from 6 April 2025 so that income and gains arising prior to 6 April 2025 are still expected to be taxed under the current remittance basis regime.
- For the purpose of establishing the exposure of an individual’s estate to Inheritance Tax (“IHT”), to change the current common law domicile-based system to a statutory system based on the existing Statutory Residence Test, whereby individuals who are tax resident in the UK for 10 years will become UK domiciled for IHT purposes. There is expected to be a 10 year ‘tail’ so that an individual will have to be a non-UK resident for 10 further years to lose their UK domicile.
- From 6 April 2025, Excluded Property Trusts (“EPTs”) (offshore trusts settled by non-UK domiciled settlors) will no longer receive preferential tax treatment if the settlor later becomes exposed to IHT. It is not yet clear whether there will be a regime to grandfather existing EPTs, with the effect of retaining their protection from IHT, but the Government has now indicated that there will be transitional reliefs (the details of which are still to be confirmed) so this does seem possible. The detail of these proposals is expected to be confirmed in the Autumn Budget.
The transitional arrangements are still to be confirmed but the following key points are expected:
- A rebasing date (to be confirmed) for affected individuals to rebase foreign capital assets.
- Any FIG arising prior to 6 April 2025 will still be taxable under the current remittance regime.
In addition, the general IHT regime is currently under Government consultation. No specific proposals have been indicated by the Government yet, but they are eagerly awaited and anticipated later this year. Professional advisors and clients alike should stay up to date with the developments in this area and, ideally, clients should be taking early steps to be onboarded with their legal and financial advisors and carrying out initial investigative work sooner rather than later, so that a proactive approach can be taken once the detail of the reforms is known.
The Seddons Private Client Team are on hand to assist with any queries that you or your clients may have about the proposals for reform and are well-placed to guide clients through this uncertain territory.
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