The Chancellor of the Exchequer Rachel Reeves delivered her first Budget yesterday under the new Labour Government. After much speculation the Budget has brought about clarity in various tax issues that may affect you in the coming years. As predicted, there have been a number of significant tax increases and we have  summarised some of the changes below.

• One of the major changes announced is the abolition of the remittance basis of taxation from 6^th April 2025. This will be replaced by the Foreign income and gains (FIG) regime, which will allow new arrivals to the UK (individuals who have not been UK resident in the last 10 tax years) to claim 100% relief on foreign income and gains in the first 4 years of UK residence.
• The protection from tax on foreign income and gains arising within settlor-interested trust structures will no longer be available for non-domiciled and deemed domiciled individuals who do not qualify for the four year foreign income and gains regime.
• A Temporary Repatriation Facility (the Facility) will be available for individuals who have previously claimed the remittance basis. This will be available for a limited period of 3 years to allow taxpayers to remit foreign income and gains that arose prior to the changes at a reduced tax rate.
• Other major changes include the increase of capital gains tax for disposals or assets that are not residential properties. The basic rate of 10% will increase to 18% and the 20% rate will increase to 24%. No changes will be made to the rates applying to the disposal of residential properties of 18% and 24%.
• The rate of capital gains tax that applies to carried interest will increase from 18% and 28% to a flat rate of 32%.
• There are no changes to the Inheritance tax nil rate band, however the Budget confirms that unused pension funds and death benefits will form part of a person’s estate for IHT purposes from 6^th April 2027.
• Agricultural Property Relief and Business Property Relief will be capped at a limit of £1 million.
• Other matters that may also be relevant include the introduction of VAT on private school fees from 1^st January 2025 and the increase of stamp duty on second homes from 3% above the standard rates to 5% above the standard rates which will come into effect today.

We have addressed these changes in more details in our article below:

Autumn Budget Summary 2024

Should you wish to discuss any of these changes or would like to understand how the changes may impact you, please do get in touch.

Americans who choose to renounce their U.S. citizenship currently face a fee of $2,350. Although categorized as a fee for obtaining a Certificate of Loss of Nationality (CLN), many consider it a form of taxation on expatriation. In response to pressure from the public and organizations representing Americans abroad, the U.S. government has announced plans to reduce this fee to a more manageable $450.

In October 2023, the government issued a Notice of Proposed Rule Change, inviting feedback from interested parties. Following this, a rule was published in Spring 2024 to advance the process.

On August 24, 2024, the Association of Americans Resident Overseas (AARO) shared on Twitter/X that the State Department will implement the proposed fee reduction in September.

Many U.S. citizens contemplating renunciation are motivated by the burdensome tax obligations imposed on Americans living overseas. However, it’s essential to recognize that this decision is significant and irreversible. Renouncing citizenship means losing the right to live in the U.S. without immigration restrictions, the ability to vote in elections, and access to protection from U.S. embassies and consulates abroad.

Please let us know if you would like to discuss any of these issues.

The US/UK estate and gift tax treaty was implemented to avoid double taxation of gifts and estates of US citizens and domiciles and UK domiciles by allowing only one country to impose its tax and the other to allow a credit against the taxes already paid.

However, uncertainty has arisen regarding this tax treaty due to the potential changes our government may soon implement. Below, we have outlined the key points, upcoming changes and potential consequences which may occur in the near future:

Key points:

• Domicile Status:
  • US citizens residing in the US and domiciled in the UK are ‘domiciled’ in both countries for tax purposes. ‘Tie-breaker’ provisions in the Treaty determine primary taxing rights based on residency and nationality.
• US Citizens’ Tax Treatment:
  • If a US citizen is not a UK national and has not been a UK tax resident for 7 of the last 10 years, they are treated as ‘treaty domiciled’ in the US. This status limits exposure to UK Inheritance Tax (IHT) to UK real estate and certain business properties.
• UK Nationals:
  • If a US citizen is also a UK national, the UK retains taxing rights over all UK property, regardless of treaty domicile status.
• Treaty Protected Trusts:
  • US ‘treaty domiciled’ individuals who are not UK nationals can establish ‘treaty protected trusts’ to shield assets from UK IHT. Assets in these trusts are exempt from UK IHT if the settlor was treaty domiciled in the US at the time of settlement.
• Potential for Renunciation:
  • Some individuals may consider renouncing UK nationality to benefit from treaty provisions, but this requires careful consideration of implications.

Upcoming changes to the UK’s IHT Regime:

• New IHT Regime (Effective 6 April 2025):
  • UK IHT liability will shift from domicile status to residence status.
• • Residents in the UK for 10 years will be liable for IHT on worldwide assets, remaining liable for 10 years after leaving the UK.
• Impact on Trusts:
  • The IHT position of trust assets will be determined by the settlor’s residence at the time of the IHT charge, not their domicile at the time of settlement.

Upcoming changes to the UK’s IHT Regime:

• Interaction with Treaty Provisions:
  • Unclear how Treaty domicile-based provisions will align with the new residence-based IHT system.
• Potential Government Actions:
  • The UK government may amend legislation to align treaty concepts with the new residence test, possibly affecting ‘treaty protected trusts.’
• • Amendments to the Treaty may require re-negotiation, potentially preserving the current protections for the medium-long term.

What is Inheritance Tax?

Inheritance Tax (IHT) is a tax levied at a rate of 40% on the estate of an individual who has passed away. It applies to the value of any property and assets exceeding the nil rate band threshold of £325,000. This threshold can be transferred to a spouse or civil partner upon death, effectively doubling the nil rate band to £650,000. In addition to the standard nil rate band, there is a Residence Nil Rate Band (RNRB), which offers an additional allowance of £175,000 when passing on a family home to direct descendants. This means that when combined with the standard nil rate band, an individual can potentially benefit from up to £500,000 in IHT relief. However, if the estate’s value exceeds £2 million, the nil rate band is reduced by £1 for every £2 over that limit.

Strategies for Mitigating Inheritance Tax

Gifting Property of Main Residence: One effective strategy for reducing potential IHT liability is to gift property, particularly the main residence, to children or other beneficiaries. This can be accomplished through a Deed of Gift, which legally transfers ownership of the property.

The IHT liability on the gifted property diminishes over time, following the seven-year rule: the tax due on the property decreases each year and is eliminated entirely after seven years. However, the donor must not continue to reside in or benefit from the property unless they pay the recipient rent at the market rate to maintain the IHT exemption or shares the property with the other owner.

If the donor passes away within three to seven years of the gift, IHT may still apply but will be subject to tapered relief, which reduces the tax burden based on the number of years since the gift was made.

Gifting Property That Is Not Your Main Residence: When it comes to gifting properties that are not the main residence, such as buy-to-let properties or vacation homes, the situation differs. In this case, Capital Gains Tax (CGT) becomes applicable, as Private Residence Relief (PPR) does not apply. For higher rate taxpayers, the CGT rate is currently set at 24%.

Given the current political climate, there is speculation that CGT rates may increase in the upcoming Autumn Budget. Prime Minister Keir Starmer has characterized these potential changes as “painful,” prompting individuals to consider transferring property to their children as soon as possible to avoid both IHT and potentially higher CGT rates.

The calculation of CGT is based on the difference between the property’s value at the time of purchase and its value at the time of gifting. Thus, early action may help mitigate both tax liabilities significantly.

Government officials have been briefing the press that the UK chancellor, Rachel Reeves, is prepared to revisit the detail of expected radical reforms to the taxation of non-UK domiciliaries. This news is likely to be welcomed by current UK taxpayers and those planning to relocate to the UK, as the uncertainty surrounding these changes has complicated personal financial planning for the past eight months.

However, recent media reports suggest the Office for Budget Responsibility (OBR) now believes the reforms could result in a net loss for the Treasury. This isn’t entirely surprising, given that non-domiciled individuals, by their very nature, often have global connections and can easily relocate if the UK becomes less appealing.

Chancellor Rachel Reeves is now faced with three options:

1. Push forward with the original plan: Given her public comments about the UK’s financial state and Labour’s commitment to balancing the books, moving ahead despite the OBR’s negative outlook could lead to criticism about her decision-making.
2. Drop the changes: This would be politically challenging, as Reeves has consistently supported the general principles of the reforms, and Labour has already allocated the anticipated revenue. Additionally, some parts of the reforms, such as changing inheritance tax from a domicile-based to a residence-based system, are seen as sensible.
3. Revise the proposals: The most likely course of action is to adjust the reforms based on OBR estimates, aiming to balance fairness with maintaining the UK’s competitive edge.

Other countries, such as Italy, Greece, Spain, and Switzerland, have created tailored tax regimes to attract UHNW individuals by offering flat tax rates or special exemptions.

For the UK to remain competitive in attracting these individuals—and the tax revenues they bring—the Chancellor may need to consider similar strategies. The design of the new tax regime will play a crucial role in determining whether the UK remains a desirable destination for global wealth and investment.

With the new Labour government in charge, we know that there will be further changes to non-UK Trusts in addition to what the conservatives had proposed. I have detailed the key aspects below.

• Labour have indicated there would be no grandfathering of existing trusts. At this stage, it is safe to assume that even existing excluded property trusts will no longer benefit from IHT protection from April 2025.
• If the settlor is a long-term UK resident and also a beneficiary of the trust, then not only will trust assets become subject to periodic IHT charges but they will also form part of the settlor’s estate on death and therefore subject to inheritance tax at 40%. This is a very significant change and could have enormous implications for many trusts, particularly where the settlor is older or in poor health and so the risk is greater.
• Regarding income tax and capital gains tax, from 6 April 2025, foreign income and gains within trusts will be taxable on the settlor on an arising basis as if they owned the trust assets personally.
• Serious consideration should now be given to whether the settlor can afford to give up being a beneficiary of the trust.
• Ideally, any planning steps would be deferred until after draft legislation has been published. However, given the potentially significant tax implications, the trustees and the settlor may not have the luxury of waiting.
• Any restructuring implemented after Labour’s first budget, likely to be in September, may be too late if anti-forestalling measures are announced.
• Additionally for any non-doms with personal assets, they should consider steps they need to take to put themselves into a better tax position.

Please let us know if you would like to discuss any of these issues.

A non-dom businessman fell foul of the complex remittance basis rules. However, errors by HMRC rendered their discovery assessment invalid and saved the taxpayer a sizeable proportion of the tax.

In Afzal Alimahomed vs HMRC [2024] UKFTT (TC) 432, it was not in dispute that the transactions in question related to foreign income and gains. Therefore, the issue of whether income had been remitted was central to Alimahomed’s dispute with HMRC.

Alimahomed had transferred sums from an Isle of Man bank account to his son, a university student in the UK at the time. He made further bank transfers directly to his son’s university and landlord in respect of his son’s tuition and accommodation expenses. He argued that Condition A of section 809L Income Tax Act 2007 was not satisfied because he had not brought money into the UK, for two reasons.

First, a bank transfer is not legally a transfer of money. Instead, there is a debit against Alimahomed’s account and a corresponding credit in the recipient’s account. From a legal perspective, nothing had been transferred. Secondly, by initiating a bank transfer, Alimahomed had not brought money to the UK but had simply sent it to the UK, which fell outside the statutory definition.

Given these submissions would exclude all bank transfers from being taxable on the remittance basis, it is unsurprising that the first tier tribunal (FTT) disagreed. It held that bringing money to the UK includes executing the transfer or transmission of money by electronic bank transfer.

Alimahomed paid his son’s university and accommodation expenses, and purchased various items of jewellery, using a Dubai credit card. The balance of that card was paid from an account that contained overseas income and capital gains.

Under section 809L, the payment of the balance is only taxable as a remittance if it is a “relevant debt”, meaning that the debt relates to property received in the UK or services provided in the UK to or for the benefit of Alimahomed.

The taxpayer argued that any enjoyment of the services or property in the UK was by other people and therefore the credit card balance was not a relevant debt. Again, the FTT rejected his arguments, although its reasoning appears to contain a significant omission.

The FTT held that the use of a credit card to make purchases of any property in the UK creates a relevant debt, which is sufficient to dispose of the various gifts. With respect to the services, the FTT’s reasoning is thin. It concluded that, by paying for them, Alimahomed must have created a relevant debt. It does not address the requirement in section 809L that the services must be provided to or for the benefit of Alimahomed or explain how this requirement is satisfied.

Finally, Alimahomed attempted to argue that the jewellery he had purchased for himself, and his wife was exempt property under section 809X ITA 2007 because they were items for personal use. The FTT held that the exemption had no application where it is the satisfaction of the credit card debt which amounted to a remittance.

Alimahomed argued that the discovery assessment in relation to the 2015/16 tax year was invalid because HMRC had failed to prove their case. This was irrelevant in respect of the 2016/17 tax year, which was dealt with by issuing a closure notice.

HMRC is required to prove that a discovery assessment was validly issued in accordance with section 29 TMA 1970. In their statement of case, HMRC alleged that the discovery assessment was valid because the loss of tax had been brought about deliberately by Alimahomed.

In the hearing, HMRC abandoned that argument but made no formal application to amend its statement of case. The FTT held that HMRC could not depart from the case it had originally set out and had failed to demonstrate the validity of the discovery assessment. Therefore, the appeal was partially allowed in respect of the discovery assessment, worth just under £90,000.

Non-doms will need to be careful to avoid inadvertent remittances creating accidental tax charges.

Benoît d’Angelin, a non-domiciled investment banker originally from France and currently residing in Italy, has lost his appeal against a £675,000 tax bill in the UK. Despite legal advice that his £1.5 million investment in his UK company, d’Angelin & Co, would qualify for business investment relief, HMRC deemed his use of director loans for personal expenses as a breach of tax provisions.

Case Background:

– In 2016, d’Angelin, a UK resident but not domiciled, invested £1.5 million of his foreign income into his UK company, intending to benefit from business investment relief.

– He used a director’s loan account for £75,000 in personal expenses, including private jet hire, a 79p iTunes subscription, and gifts for his wife.

HMRC’s Position:

– HMRC argued that these personal expenses violated the “remittance basis” provisions of the Income Tax Act 2007.

– Consequently, the entire £1.5 million investment was deemed taxable, leading to a £675,000 tax bill.

Legal Proceedings:

– A closure notice was issued in June 2022, and d’Angelin appealed in November 2022.

– A penalty assessment of £101,295 for late payment of 2018/19 taxes was issued but later cancelled by HMRC due to an error.

Arguments and Judgment:

– d’Angelin’s representative, Michael Firth KC, contended that the extraction of value rule should refer to net value, and that the director’s loan was a standard business practice.

– HMRC maintained that any personal expense covered by the company constitutes a breach.

– Tribunal judge Christopher McNall agreed with HMRC, emphasizing that the purpose of the rule is to restrict foreign income usage strictly.

Conclusion:

– The tribunal concluded that d’Angelin’s actions were exactly what the extraction of value rule aims to prevent, leading to the loss of relief.

– The appeal was dismissed, leaving d’Angelin liable for the full £675,000 tax bill.

d’Angelin’s belief that his method was standard within his industry was acknowledged but ultimately insufficient to overturn the decision. Despite being advised of potential risks by his legal advisors, the tribunal found no grounds to exempt him from the tax liability.