UK Budget 2024 – what changes in taxation are proposed and expected

Following the 6^th March 2024 announcement of the UK Spring Budget 2024, please see below the detailed review of the upcoming taxation changes and amendments.

Abolition Of The Non-Dom Status And The Remittance Basis Regime

After much speculation in this area, the Chancellor has taken the bold step to abolish the current non-UK domiciled tax regime from 6 April 2025.  There will be a limited replacement for individuals coming to the UK for the first four tax years of residence, to be known as the foreign income and gains (FIG) regime.

Many of the proposed rule changes outlined in the Budget are due to come into effect from 6 April 2025, and proper legislation and detailed guidance on the proposals is not yet available. With sweeping changes such as those proposed for non-doms, the publication of the required legislation and guidance will take time and their implications will then need to be carefully considered on a case-by-case basis. While we outline below the rules as proposed today, we do not yet have any detailed legislation and furthermore there is a general election between now and the implementation date. As such, acting now on this information would generally be unwise, other than possibly being ready to quickly put assets into trust. For now, we must see out the consultation process and await the draft legislation before making any detailed plans for clients.

FIG Regime – Overview

The current remittance basis regime available to non-doms in relation to income and capital gains will be replaced with the proposed four-year FIG regime.  The regime will be available to new arrivals to the UK and to individuals who become UK resident after a period of ten years of non-UK residence.

Individuals qualifying under the new regime will not pay any tax on their foreign income or gains (FIGs) for the first four years after becoming UK resident (irrespective of any periods of non-UK residence in that window) and will be free to bring any FIGs into the UK without a further tax charge arising.  This is significantly more generous than the current regime for non-doms in their first four years of residence.

UK source income and gains will remain subject to UK tax as they arise, as is currently the case for all non-domiciled individuals.  Once the fourth tax year of residence has elapsed, the FIG regime will cease to apply, and the individual will then be taxed in the UK on their worldwide income and gains.

There will be a requirement for the new FIG regime to be claimed by individuals on a year-by-year basis and individuals who choose to claim it will lose their entitlement to the personal allowance and capital gains annual exemption (similar to the current remittance basis rules).  While the four year FIG regime seems like quite a gift, inevitably there will be some clients it will not suit, for example where they have substantial foreign tax credits and/ or need to consider treaty residence issues.

Transitional provisions

There are transitional measures for individuals who will not have completed four years of UK residence on 6 April 2025 to the effect that they can apply the FIG regime for the remainder of the four-year period.

For existing remittance basis users who have exceeded four tax years of UK residence as of 6 April 2025, there is a transitional provision applying for one tax year which allows a reduction in the amount of foreign income subject to UK tax.  In the first tax year (6 April 2025 – 5 April 2026), taxpayers transitioning from the remittance basis will benefit from a one-year temporary reduction which will see only 50% of foreign income subject to UK tax. The same reduction will not be available for foreign chargeable gains in that period.

Transitional measures for foreign capital gains have instead been provided for by way of a rebasing election.  Where an individual does not, or subsequently ceases to, qualify for the four-year FIG regime and has previously claimed the remittance basis, the disposal of a foreign asset after 5 April 2025 which they held at 5 April 2019, can be rebased to its value as at 5 April 2019.  Individuals must not be domiciled or deemed domiciled on 5 April 2025 in order to apply this rebasing.

Overseas workday relief

Relief under this regime will continue to apply for employees who qualify and elect to use the FIG regime, although it will in fact be much more flexible, not least because the foreign employment income will be able to be remitted without a tax charge.  Mercifully, therefore, the complications of the need to keep a separate bank account operated under the special mixed fund rules will become obsolete.

Temporary Repatriation Facility (TRF)

Perhaps the most interesting aspect of the proposed rules for taxpayers already in the UK and who have claimed the remittance basis in the past is the opportunity to bring historic funds to the UK with a reduced tax rate. In this regard, a 24-month window of opportunity (starting on 6^th April 2025) has been announced in respect of remitting previously earned foreign income and gains.

For income and gains on personally held assets arising in prior periods where the remittance basis has been claimed, a flat rate tax of 12% will be introduced for remittances of these funds during tax years 2025/26 and 2026/27.  There will be a relaxation in the mixed fund identification rules to enable individuals to take advantage of this facility for the duration it is available.

Any remittances of income and gains arising in periods where the remittance basis was claimed and which are not remitted under the above TRF initiative will continue to be taxed using existing rules if remitted to the UK after 5 April 2025.

Business Investment Relief will continue to apply when investing historic unremitted income and gains, but will of course become less relevant under the new FIG regime. 

Offshore trusts

Moving purely to a residence based system will also have knock on effects for trusts.

The IHT position of trusts created before the new rules are introduced on 6 April 2025 is expected to remain unchanged, meaning that trusts settled by non-doms and holding non-UK situs assets will not be subject to the ten year charge regime, or IHT on the death of the settlor.

Currently, foreign source income and most non-UK property gains realised in trusts settled by non-doms are protected from settlor taxation under the protected settlements rules. With the new rules it appears that for settlor-interested trusts:

• For the first four years of settlor residence (assuming the settlor was non-resident in the ten years prior), trust FIGs will not be taxed on the settlor
• Once the settlor has been in the UK for four years, all trust income and gains will be taxable on the settlor unless the settlor is excluded from benefit (which might be achievable for income tax purposes but for capital gains tax purposes is difficult because this means excluding a wide family group, including adult children / grandchildren)

There is currently no comment in the documents available on how income and gains would be taxed for trusts where the settlor is not resident in the UK, or perhaps has died, although it has been noted that the onward gifting regime will be modified to take account of the proposed FIG rules. It would surely not be the case that the income and gains falls out of charge, but most likely there will still be a requirement to track the income and gains of the trust to then match to beneficiary distributions (i.e. much in the same way as the current rules operate, albeit beneficiaries will not be able to claim the remittance basis once they have been UK tax resident for the 4 years).

Inheritance tax (IHT)

The move away from domicile for IHT is going to prove more difficult for the government to legislate, and this is reflected in the fact that there is little detail on their proposals at this stage. There will be a consultation on the proposals in due course. Currently the government’s proposal is:

• IHT continues to be charged on UK situs assets for all individuals as is currently the case
• Individuals will be charged to IHT on worldwide assets once they have been resident in the UK for ten years
• There will be a ten year tail meaning that those who have been caught by the IHT rules continue to be subject to UK IHT on worldwide assets for ten years after they leave the UK
• As noted above, grandfathering seems to be available for IHT purposes, for excluded property trusts settled by non-doms before 6 April 2025. However, the IHT future for trusts settled by non-doms after that date is not clear

It must be stressed that the proposals in relation to IHT are heavily caveated and will no doubt be discussed extensively with interest groups and representative bodies before final legislation in this area is published.

What to do now

These proposed changes are very significant for anyone who has currently or historically benefitted from the non-dom regime. The question is therefore what to do now?

The first thing to do is to sit tight and see what the detail of these rules hold in due course. If they do come into force, this won’t be until 6 April 2025.  However, they will need to undergo detailed consultation and possibly even a change of government before then.  This means that any planning and preparation for the new regime can happen in the 2024/25 tax year. One possible exception, however, is that non-dom clients may wish to consider starting the process of creating a trust with a nominal amount, since this process can take time.  Once such a ‘pilot’ trust is created it is then easier to add further assets once we have clarity on the rules.

Further Reductions To National Insurance Contributions

Following the changes made at the Autumn Statement 2023, the Chancellor continues his remit of “making work pay”, aiming to tackle the additional tax charge that National Insurance Contributions (NICs) present for working people.

NICs for employees

The Chancellor announced a further 2% cut in the main rate of employee NICs from 10% to 8% from 6 April 2024.  Contributions on earnings over £52,270 will continue at a rate of 2%.

NICs for the self employed

Likewise, the Chancellor announced a further 2% cut in the main rate of self-employed NICs.  The previously announced 1% reduction had been due to take effect from 6 April 2024, and today’s announcement means that from that date the main rate of Class 4 NICs for the self employed will now be reduced from 9% to 6%.  Contributions on earnings over £52,270 will continue at a rate of 2%.

The government will also consult on how it will deliver the abolition of Class 2 NICs, which had previously been announced in the Autumn Statement 2023.

National Insurance Contributions for employers

Conspicuously absent from the announcements on reductions in NICs was any change to the rate of National Insurance payable by employers, which remains at 13.8%.

The future of NICs

Given the Chancellor’s long-term ambition to end the recognised unfairness that National Insurance presents to workers, he has stated that further reductions to NICs will continue as public finances allow.  The implications for the state pension, which is calculated based on qualifying years on your National Insurance record, is still to be seen.

Residential Property - Capital Gains Tax (CGT)

CGT on the disposal of residential property is currently charged at 18% for gains within the basic rate band, and 28% for gains exceeding this threshold (8% higher than gains on most other assets).

Proposed changes

The government has suggested that this difference in tax rate may be stifling the property market and a lower rate may not only help increase property sales but also the overall tax take from property disposals.  Today the Chancellor therefore announced that from 6 April 2024, the 28% residential property rate will reduce to 24% for individuals, trustees and personal representatives.

Residential property gains falling within the basic rate band will continue to be taxed at 18%.  Carried interest gains will continue to fall within the current 28% rate.

High Income Child Benefit Charge (HICBC)

Currently where one or both members of a couple living together has claimed child benefit, and one member has income exceeding £50,000 then child benefit is withdrawn by a charge to income tax. This is known as HICBC.

There is a taper where a taxpayer has income between £50,000 and £60,000 so where income exceeds £60,000 then entitlement is withdrawn in full. Income refers to ‘adjusted net income’ which is effectively a taxpayer’s income less gross pension contributions and qualifying gift aid donations made in that year.

Proposed Changes – 6 April 2024

The government have announced that from 6 April 2024, the threshold will increase from £50,000 to £60,000 and the taper will instead apply between £60,000 to £80,000.

Further consultations

The government will consult with the view to administer the HICBC on a household basis rather than an individual basis.  This is to balance the much reported unfairness that arises where a household where each member has income of, say, £49,000 is not subject to HICBC, whereas a household where one member earns £98,000 and the other £nil, HICBC operates such that child benefit is withdrawn in full.

Changes To The Taxation Of Furnished Holiday Lets

First introduced in the 1980s and last changed in 2011, the current Furnished Holiday Lettings (FHLs) rules provide tax advantages for property let as a short-term holiday let, rather than as long-term residential property accommodation. The government is concerned that the proliferation of FHLs, especially in coastal areas, is reducing the availability of long-term residential accommodation for local residents. The given announcement is aimed at making FHLs less attractive to property owners, however in our experience, their attraction is not so much the tax advantages but the greater income earning potential. We are therefore not convinced that the given announcement will have the desired affect in coastal areas.

Abolishment from April 2025

The Chancellor announced that the Furnished Holiday Lettings tax regime will be abolished from April 2025, and income from short-term holiday lets will be taxed in the same way as residential property.

Currently, FHLs are not subject to the same interest relief restrictions for mortgage interest that residential landlords have been subject to since April 2017.  The allocation of profits and losses from FHL businesses operated by married couples or civil partners are also currently more flexible than the allocation rules available to jointly owned residential lettings.  No specific details have been announced yet, but one would assume that both of these benefits will be abolished from April 2025.

Draft legislation is yet to be published, but an anti-forestalling rule will be introduced with effect from 6 March 2024 to prevent the use of unconditional contracts to obtain capital gains relief under the current FHL rules. The current rules enable the disposal of FHL properties to benefit from some business asset-related capital gains tax reliefs in some cases, but those reliefs will not be available from April 2025.

Implications for other taxes

Residential property income is exempt from VAT, however, income received from “the grant of any interest in, right over or licence to occupy holiday accommodation” is specifically subject to VAT.  The guidance published by HMRC today does not consider the VAT position, but unless the VAT legislation is changed, it is likely the income would continue to be subject to VAT, if the VAT registration threshold is breached.

In certain limited circumstances, FHLs can qualifying as a business for the purpose of inheritance tax, and therefore obtain IHT relief at 100%, although this position is usually strongly contested by HMRC.  As with the VAT position, the IHT position has not been considered by the newly published guidance.

VAT

With very few changes to business taxes, VAT changes were kept to a minimum.

Thresholds

Last changed in April 2017, the Chancellor has finally made the welcome decision to raise the registration threshold to £90,000 from £85,000 with effect from 1 April 2024.  Had this been increased on an inflationary basis over the same period this would equate to circa £108,000.  Even though this is a welcome change, as the threshold has not increased at the same speed as inflation it has brought more businesses into VAT reporting than otherwise would have had the threshold kept pace.

In line with this change the VAT deregistration limit also rises by £5,000 to £88,000 on 1 April 2024 up from £83,000.

DIY House Builders Scheme

In our experience, to make a claim under the DIY House Builders VAT Scheme is one of the most onerous VAT reclaims an individual can make due to its various and detailed documentation, procedural and time limit requirements that are fully enforced to the minute by HMRC.

Following digitisation of the DIY Housebuilders Scheme, once the Spring Finance Bill 2024 has been brought into legislation, HMRC are set to be given further powers to request additional documentation in support of the claim.  This will make administration of the project even more important.  The main reason for this change is because, as part of digitisation, you are not required to submit all invoices and documentation with the application as previously required by paper.  HMRC will now only ask for a sample of documents to review and will carry out a risk-based assessment before making the repayment or asking for further information.  It seems to us that this will only add to the delays in obtaining a refund as there will be a greater number of requests than we have previously experienced.

One pleasing part of previous changes to this scheme is that claimants are able to use a digital portal to make a claim and there will be an extension in the time limit for claimants to make a claim under the scheme from 3 months to 6 months from the completion date of the build.

Stamp Duty Land Tax (SDLT)

Multiple Dwellings Relief (MDR)

Where two or more properties are purchased in the same transaction, or in circumstances which make the transactions ‘linked’, it has been possible to average the purchase prices of the properties and save SDLT. After commissioning an evaluation on the effectiveness of this relief, the government has decided to abolish the relief altogether from 1 June 2024 since it was not achieving its policy objective. Where six or more properties are bought together, the lower non-residential rates can still apply.

Mixed use property transactions

Fortunately, though, the mixed use property transactions rules have survived further consultation. The government consulted on whether to change the rules for mixed use property transactions (where the lower, non-residential rates, can apply to the whole purchase price if there is a non-residential element to the purchase), but has ultimately decided to take no action. Given the success HMRC have anyway had in the courts, great caution would befit any potential purchaser looking to use this relief.

Inheritance Tax (IHT)

There was much speculation in advance of the Spring Budget 2024 (and, indeed, the Autumn Statement 2023!) that changes would be introduced to IHT to shore up the Conservatives voting base ahead of the next general election.  Many will be disappointed, therefore, that IHT remains in place at 40%, although there are some changes which will in particular impact our rural/farming clients.  

Ease the payment of Inheritance Tax before probate for confirmation

Personal Representatives are required to pay all or part of the IHT due before they can apply for probate.  However, in cases where it is impossible to raise all the funds due, HMRC does have powers to postpone payment, referred to as a “grant on credit”.

Previously, Personal Representatives were required to have sought commercial loans to pay inheritance tax before applying to obtain a “grant on credit” from HMRC.  However, from 1 April 2024, this requirement has been removed.

Agricultural Property Relief (APR) On Environmental Land Management

HMRC had previously consulted on APR, and as a result, legislation will be introduced to extend its scope to environmental land management from 6 April 2025. From that date, land managed under an environmental agreement with, or on behalf of, the government, devolved administrations, public bodies, local authorities, or approved responsible bodies will qualify for APR.

This will be welcomed by many farmers who are looking to adapt the way in which they use land to qualify for Environmental Land Management schemes (ELMs), which put an emphasis on encouraging the provision of environmental goods and services alongside food production, and as such can sometimes be incompatible with APR.

APR on non-UK farms

As was announced in the Spring Budget 2023, from 6 April 2024, APR (and woodlands relief) will be restricted to property situated in the UK.  Previously, relief was also available on property located in the European Economic Area (EEA), the Channel Islands and the Isle of Man.

Private Intermittent Securities And Capital Exchange System (PISCES)

The government is looking at the development of a new platform for the trading of private shares, to be known as PISCES.  Consultation has been opened, with the intention that PISCES will operate as a secondary market to facilitate the trading of existing shares on an intermittent basis, rather than for raising capital through the issuance of new shares.

It is anticipated that PISCES will be an interesting tool for private equity investors, though hopefully with the added benefit of introducing small cap companies into a more regulated world, ahead of for example a future AIM-listing.  PISCES is intended to be a natural progression for companies that intend to eventually issue securities as part of an IPO, and allow potential investors to have greater confidence in their valuation.

PISCES would be available for companies whose shares are not admitted to public markets and would be open to UK-based private and public limited companies (PLCs) and overseas companies.

Given the greater risk of investing in non-listed companies, the intention is that PISCES is only available for progressional and institutional investors such as private equity firms. At a later date, PISCES may open to high-net worth investors or self-certified sophisticated investors.

We will follow the consultation process on PISCES with interest and very much hope that it will hit its mark in terms of increasing opportunities in the small cap sector.

Tax Administration And Other Measures

As is now tradition, the government will bring forward a further set of tax administration and maintenance announcements on “Tax Administration and Maintenance Day”, due to be held on 18 April 2024.  This Budget was light on tax administration matters compared to recent budgets.

Strengthening the regulatory framework and improving registration

We welcome a consultation on possibilities to strengthen regulatory framework which aims to ensure that tax practitioners are held to a higher professional standard to help mitigate substandard advice and services to clients.

Currently tax practitioners do not necessarily have to belong to a professional body, and we consider that this is not always in the best interests of either HMRC or the taxpayer.

HMRC are now consulting on options to strengthen the regulatory framework to establish better accountability, better standards and improved monitoring in the tax advice framework and mandating agent registration with HMRC.

Tackling non-compliance in the umbrella company market

An update on HMRC’s progress on its work to tackle non-compliance in the umbrella company market is expected shortly.

The main objectives of this work is to attempt to level the playing field for employees in the umbrella company market and help improve employee rights.

UK Individual Savings Account (ISA)

In light of the popularity of existing ISAs, the government is proposing to introduce a new ISA with an additional allowance of £5,000 per year, which offers a tax free saving opportunity supporting investment in the UK. A consultation with details will follow at a later stage.

Alcohol Duty

The government will freeze alcohol duty from 1 August 2024 until 1 February 2025, which is a six-month extension to the freeze previously announced at the Autumn Statement 2023.