On 30 October 2024, UK Chancellor of the Exchequer, Rachel Reeves, delivered the much anticipated and speculated upon Autumn Budget.
As expected, the Government have confirmed the radical changes to the taxation of UK resident non-domiciled individuals and structures established by them.
We have summarised the key changes relevant to trusts below.
If you are unsure as to whether these changes affect any of your existing structures, we strongly advise you to seek guidance as soon as possible to ensure, where appropriate, bespoke advice is obtained.
Abolition of the remittance basis of taxation
Currently, UK resident and non-UK domiciled individuals (RNDs) can elect to be taxed on the remittance basis of taxation which allows them to shelter their non-UK income and gains from UK income tax and capital gains tax (CGT) provided they are not “remitted” (broadly, brought in) to the UK. This beneficial regime is generally available to RNDs for the first 15 years of their UK tax residency.
From 6 April 2025, the remittance basis of taxation will be abolished in its entirety. It will be replaced by a new foreign income and gain (FIG) regime under which individuals will be exempt from UK income tax and CGT in respect of foreign income and gains for the first 4 years of UK tax residency, regardless of whether the income and gains are remitted to the UK. Following this period, RNDs will be taxed on all income and gains on an arising basis.
Certain transitional arrangements will be available to existing RNDs who have elected to be taxed on the remittance basis but do not qualify for the new FIG regime (including a facility allowing foreign income and gains to be brought into the UK at a reduced rate for a set period, and the option to rebase assets at 2017 values for CGT purposes).
The end of the protected trust regime
Certain generous trust protections have been available since April 2017 (known as the protected trust regime). Broadly, these shield an RND settlor of a non-UK resident trust from liability to UK income tax and CGT on foreign income and gains which arise in a trust provided certain conditions are met with the effect that tax can be deferred on such income and gains until distributions are made to UK resident persons.
This regime will cease to apply from 6 April 2025 such that income and gains within a trust will be taxable on a UK resident settlor on an arising basis, unless they qualify for the FIG regime or they (and certain family members) cease to benefit from the trust. In practice, steps can be considered to avoid direct taxation on trust income by excluding the settlor (and their spouse) from benefit, but this is unrealistic for CGT purposes given the class of family members that need to be excluded to achieve the same result. Where there has been no intention to avoid UK tax involved in the establishment of a trust, advice should also be obtained to establish whether the same attribution-rules can be disapplied by reliance on the so-called ‘motive defence’.
A restriction to the availability of excluded property relief for trusts
Currently, individuals who are not domiciled or deemed domiciled in the UK are generally only subject to inheritance tax (IHT) in respect of their UK situated assets (or non-UK situated assets which derive their value from UK residential property). Such individuals are also able to permanently shelter their non-UK assets from IHT by establishing trusts (known as excluded property trusts) prior to becoming deemed domiciled after a period of 15 years in the UK.
From 6 April 2025, domicile will (for the most part) cease to be a relevant concept for IHT. Instead, exposure to IHT will depend on residence – an individual’s estate (and trusts established by them) will be within the scope of IHT when a person becomes a Long-Term Resident in the UK. With effect from 6 April 2025 (and subject to transitional rules for non-domiciled individuals who are non-UK tax resident in 2025/26), an individual will be Long-Term Resident once they have been UK tax resident for 10 out of the preceding 20 tax years. After an individual has left the UK, the worldwide basis for IHT will continue to apply for a period ranging from 3 to 10 years subject to the time spent in the UK prior to leaving (the IHT tail).
From 6 April 2025, the long-term protection from IHT of excluded property trusts may cease to apply. Trusts will only be excluded property (and not subject to IHT) where the assets held are non-UK situs and the settlor is not Long-Term Resident at the time of the IHT chargeable event including on ten year anniversaries of a trust, capital distributions from a trust and (unless the settlor has been excluded from benefit) on a settlor’s death.
Importantly, for excluded property trusts established before 30 October 2024, a charge will not be imposed on a settlor’s death (even if the settlor can benefit from the trust). This will come as a welcome relief to UK-resident non-domiciled individuals who established their excluded property trusts prior to the Budget.
Restrictions to business and agricultural property relief
Currently, IHT relief (at 100% or 50%) is available for certain classes of business assets and agricultural property. This relief extends to trusts which comprise such assets (relieving them from the IHT relevant property regime charges).
From 6 April 2026, where assets would have qualified for 100% relief (such as shares in a private trading company), relief will be capped at £1m on the combined value of business interests (and agricultural property). Any assets that would currently enjoy 100% relief and exceed that £1m limit will receive only 50% relief. The £1m limit will apply equally to trusts when assessing the relevant property regime charges.
Advanced planning is critical
While the removal of domicile as a concept relevant for tax purposes is welcome given its difficulty in factual application, these changes represent a significant change to the taxation of RNDs and trusts established by them from which there will be both winners and losers.
Notwithstanding that, it is also important to remember that there are numerous non-tax reasons for establishing a trust, including succession planning and wealth and asset protection. In addition, there is a need to note that the changes announced during the Budget are unlike to have any practical impact on trusts where the settlor is no longer living or where the settlor is not (and has no intention of becoming) a Long-Term Resident.
Careful planning well in advance of 6 April 2025 for those impacted is key.
Important information
The information contained in this briefing is based on the proposals announced on the date of publication at may change before the legislation is enacted by Parliament. The briefing is provided for general information only and should not be relied upon in relation to any specific circumstances. Nothing in this briefing constitutes legal or tax advice and Accuro accepts no responsibility for any loss arising from action taken by persons using this marketing material.
Please contact Simon Hart or Radhika Mehta should you wish to discuss these changes further.