Post Budget update for Non-Dom, IHT and Trusts

Post Budget update for Non-Dom, IHT and Trusts
Following the UK Budget at the end of October, please see below a summary of the changes that have been announced and released in over 100 pages of draft legislation by the government in relation to Non-Dom, IHT and Trusts. It should be noted that there may be changes to the draft legislation before this is finalised. In addition, the various rules are very complex – we have provided an overview of the key points, however a detailed review should be conducted before taking action.
The implications of these new rules will vary depending on your specific circumstances, please reach out to your usual Frontier contact if you would like a consultation to review your affairs.

Non Dom Regime
From 6 April 2025 the non-dom regime will officially come to an end, being replaced with a residency based system whereby an individual who is resident for 10 of the last 20 years will be considered a “Long Term Resident”.
The remittance basis of taxation will no longer apply and this is being replaced by a 4 year foreign income and gain exemption along with a temporary repatriation facility for individuals that previously benefited from the remittance basis.

4 Year foreign income and gains (FIG) exemption
Where an individual becomes resident in the UK, provided they have been non-resident for the previous 10 years they will be eligible for this relief in the first four years of UK residency. This relief will be available for UK citizens along with foreign nationals.
This exemption from foreign income and gains allows individuals to remit these amounts earned from the qualifying years to the UK without tax charge. For individuals that have previously benefited from the remittance basis pre 6 April 2025, care must be taken to avoid remitting income and gains prior to this date unless utilising the temporary repatriation facility noted below.
It is important to note that years of residency for this relief will be calculated in accordance with the UK Statutory Residence Test only and therefore years of treaty non-residence will not be allowable.
The relief period begins 6 April 2025 – As a practical example, if an individual becomes resident in the UK for the tax year ending 5 April 2025, they would be eligible for this relief for the following 3 tax years. Where individuals have already been resident in the UK for 4 tax years prior to 6 April 2025 this relief will not be available.

Temporary Repatriation Facility (TRF)
The TRF will be available for individuals who were non-UK domiciled and used the remittance basis prior to 6 April 2025.
Under this facility, taxpayers will be able to remit foreign income and gains previously protected by the remittance basis prior to 5 April 2025 to the UK at a lower tax rate as follows:
2025/26 and 2026/27 – 12% Rate
2027/28 – 15% rate
From 2028/29, remittances of pre 6 April 2025 foreign income and gains will be taxed at normal rates.
With review of the relevant structure and circumstances, it is also possible for settlors or beneficiaries of offshore trusts to benefit from this facility.
Business investment relief (which provides a mechanism of remitting foreign income and gains for qualifying investments without a charge to UK tax) will also be abolished for new investments when the TRF period ends on 5 April 2028.

Capital Gains Tax Rebasing
Where individuals that have never been UK domiciled or UK deemed domiciled before 5 April 2025 and have claimed the remittance basis dispose of foreign assets that they held at 5 April 2017, an election is available to rebase these assets at their 5 April 2017 value for capital gains tax purposes.

Overseas Workday Relief (OWR)
Currently, OWR is available to non-domiciled individuals in their first three years of UK residence. The mechanism for the relief is that earnings in respect of non-UK workdays can be exempted from UK tax providing certain conditions are met and that the overseas earnings are not remitted to the UK.
From 6 April 2025, the rules will be simplified in that eligibility will be based on the residency status of an individual and not domicile in the same way as the FIG exemption above (requiring a period of 10 years non UK residence to qualify).
For qualifying individuals, OWR can be claimed for the first 4 years of UK residency and in a relaxation of the previous rules, these earnings can be remitted to the UK.
There is a new limitation on the total amount of OWR claimable and this is capped at the lower of 30% of the qualifying employment income or £300,000.

Inheritance Tax (IHT)
In line with the changes to income and capital gains tax, inheritance tax will also be residency based from 6 April 2025.
Individuals that are resident in the UK for 10 out of the previous 20 years will be considered “Long Term Resident” and subject to UK inheritance tax on their worldwide assets.
Transitional rules apply for individuals that are considered non-domiciled or deemed domiciled in the UK at 5 April 2025 and not resident for the 2025/26 tax year. In this example the old rules will apply – the test being UK resident for 15 of the previous 20 years.
In a significant extension to the current rules, a new “tail” provision will apply to individuals that leave the UK. Where an individual has been resident for 20 years, they will remain subject to UK inheritance tax for 10 years.
There is a scaling down of the tail provisions where an individual has been UK resident between 10 and 19 years.

IHT Tax Treaties
Given the expansion on the scope of UK inheritance tax, international inheritance tax treaties will likely become a more important part of planning. The UK currently has inheritance/estate tax treaties with the following countries: France, Italy, India, Pakistan, Republic of Ireland, South Africa, USA, Netherlands, Sweden and New Zealand.
In the case of the UK/US Estate Tax Treaty – there may be some protections for US citizens that do not have UK nationality provided they have not been UK resident for more than 7 of the past 10 years. Additionally, the treaty tie-breaker provisions may provide relief in some cases.
Most of the UK IHT/Estate tax treaties were originally entered into pre 1982 so it will be interesting to see how these align with the new domestic UK IHT rules. There may be legislative changes or even re-negotiation of treaties to bring more clarity on these issues.

Agricultural Property/Business Property relief and Pensions
Other important updates are the planned inclusion of pensions in a taxpayers estate for IHT from 6 April 2027 and the reduction of Agricultural Property Relief (APR) and Business Property Relief (BPR) being restricted from 6 April 2026 (full exemption for up to £1m and then 50% relief thereafter). It should be noted that there are specific requirements to qualify for BPR/APR reliefs.

Trusts
Income/Capital Gains tax
Common planning for non-domiciled individuals was to create an excluded property trust which consists of non-UK assets before becoming UK deemed domiciled – for the purpose of affording protection against UK inheritance tax on these assets. In conjunction, income and capital gains tax protections were available for these qualifying structures. From 6 April 2025 – these trust protections are being removed and the implications are as follows:
For foreign settlor interested trusts – where the settlor is UK resident, they will be subject to tax on the worldwide income and gains of the trust. The 4 year FIG exemption can apply to this if the settlor qualifies.
For foreign trusts that are not considered settlor interested, beneficiaries will be taxed on distributions in accordance with the current rules.
It is important to note that there is a mismatch in definitions of settlor interested for income tax and capital gains tax.
For income tax, to be a non-settlor interested structure – the settlor and their spouse would need to be excluded from benefit.
For capital gains tax, to be a non-settlor interested structure – the settlor, their spouse, children and grandchildren would need to be excluded.
Given that these structures are typically put in place for future generations wealth planning, where a settlor is UK resident, under the current draft legislation it will likely not be practical to achieve the non settlor status for capital gains tax. Whether this is brought in line with income tax in the final legislation remains to be seen.
The Temporary Repatriation Facility may be used in certain circumstances in relation to stockpiled income and gains within a settlement where this applies to pre 6 April 2025.
The government is currently consulting on the application of anti-avoidance provisions and this is expected to be announced in 2026/27.

Potential planning

• Consider crystallising gains within settlor interested structures and/or making distributions before 6 April 2025 if the remittance basis is still available.
• UK Residency planning for the settlor and long-term intentions.
• Whether it is practical for the settlor to be excluded from the settlement
• Restructuring assets within a settlement to favour income or gains depending on the circumstances. For example, in a foreign non-settlor interested trust, where the settlor is still caught by the capital gains tax provisions, it may be favourable to gear the trust investments to income producing assets. For a settlor interested trust it may be more favourable to gear the trust to long term capital gains investments for tax deferral.
• Consider the application of the 4 year FIG exemption if applicable

It is important to note that there is no one size fits all and the individual circumstances of each settlement would need to be reviewed in detail before suitable planning can be implemented.

Inheritance Tax (IHT)
From 6 April 2025 the IHT status of non-UK property within a settlement will not be fixed in relation to the settlors status at the time the property was settled. Instead, the non-UK property will be subject to IHT based on whether the settlor is currently “long term resident” in the UK – meaning they have been resident in the UK for 10 of the previous 20 years.
The taxable events for inheritance tax purposes, if the settlor is long term resident are as follows:

1. When assets are settled into a trust
2. At the 10 year anniversary of the settlement
3. Exit charge when either the assets are distributed from the trust or the long term resident becomes non-UK resident
4. The death of the settlor – if the gift with reservation of benefit rules apply.

Gift with reservation of benefit
Where a settlement is made and the settlor remains a beneficiary of the settlement – the settled assets will remain in the settlors personal estate for IHT purposes. There is an exemption from this rule for previously excluded property trusts settled before 30 October 2024 even if the settlor remains a beneficiary post 6 April 2025.

10 year charge and exit charge
Under the relevant property regime, from 6 April 2025, trusts that had protected status under excluded property will lose those protections and become subject to the 10 year charge and exit charge where the settlor is long term UK resident. These charges are calculated up to 6 % of the value of the trust assets held at the chargeable date. There will be apportionment relief in relation to the number of years in the period that the assets are UK relevant property.
There has been clarification of the rules for when a settlor passes away and these are broadly:
Where the settlor passes away before 6 April 2025 and the trust was an excluded property trust – the trust will remain outside of IHT for the remainder of the trust.
Where the settlor passes away on or after 6 April 2025 and the settlor was long term resident in the UK, the trust will continue to be within the charge to IHT moving forward.

Potential planning

1. Review the current status of the trust and whether the gift with reservation of benefit rules will apply

 

1. Consider the long term residency intentions for the settlor

 

1. Review double tax treaties – for example there may be an opportunity to exclude trusts from UK IHT under the UK/US IHT treaty where the settlor is not a UK citizen.

 

1. There remains a window of opportunity for individuals wishing to set up a non-settlor interested foreign trust before 5 April 2025 provided they are not currently deemed domicile and avoid the initial IHT charge on settling the trust – the 10 year charge and exit charge when long term resident would still apply.