At the Autumn Budget, the Chancellor announced wide-ranging changes to the UK’s tax system, including, among other things, the abolition and replacement of the remittance basis, overhaul of business and agricultural property relief from inheritance tax, increases in capital gains tax rates, and the jettisoning of the concept of domicile from the tax system altogether.
Some of these changes came into effect immediately (or the following day) and others will be introduced from 6 April 2025 or 2026. We covered the headline announcements here. With the dust still settling on the most consequential overhaul of UK taxes in years, many affected individuals will now be turning to the question of how to plan their affairs going forward.
In this article, we have set out some of the considerations which taxpayers may have when they look to revisit their tax planning in light of the new rules. Any material estate planning should only be carried out with specialist advice. If you would like to discuss your tax affairs and how best to plan under the new rules for yourself, your family or your business, please get in touch and we will be happy to discuss this with you.
FIG regime
The new foreign income and gains (‘FIG’) regime will allow new arrivals to the UK (being individuals who have not been UK tax resident in any of the previous 10 tax years) to make a claim to be taxed (generally) only on their UK source income and gains for a period of four consecutive tax years. Whilst the FIG regime will only be available from 6 April 2025, the ‘four-year clock’ will start to run down from every taxpayer’s first year of UK tax residence. For example, an individual who became UK tax resident for the first time in the 2022/23 tax year could claim the FIG regime for a single year in 2025/26.
Those eligible for the FIG regime who intend to stay in the UK for the medium to long term will be able to generate ‘clean capital’ (i.e. funds which if brought to the UK would not trigger any tax) while UK tax resident, by accelerating income and gains (e.g. by way of dividends, trust distributions or the sale or rebasing of assets) while the FIG regime remains available to them. This contrasts with the position for current remittance basis users, whose clean capital planning generally needs to be carried out in advance of their arrival and is often left too late.
It is worth noting that taxpayers must claim the FIG regime for each tax year that they want it to apply in their self-assessment tax return. As part of this, taxpayers will need to quantify the amount of income and gains for which the relief is claimed. Individuals will remain subject to tax on such amounts of their FIG as are not quantified and included in their return. For those with diverse international holdings, identifying all income and gains in order to report them fully will likely be a complex and somewhat burdensome exercise, by contrast with the current remittance basis system which does not impose such a requirement, and so an audit or simplification of current holdings would be advisable prior to taking up UK tax residence after 6 April 2025.
Temporary repatriation facility
The temporary repatriation facility (‘TRF’) will allow former remittance basis users to bring to the UK unremitted income and gains (i.e. the accrued income and gains historically protected from UK tax by the remittance basis) for a flat 12% rate of tax. The facility will last for three years from 6 April 2025, with the rate of tax rising to 15% for remittances made in the third year.
Those eligible to make use of the TRF should take stock now of their unremitted income and gains and the extent to which any further non-UK source income and gains could be accelerated prior to 6 April 2025 while being sheltered by the remittance basis in anticipation of being remitted at a low rate under the TRF in the next or subsequent tax year. This ‘use it or lose it’ facility is arguably extremely generous for those taxpayers currently sitting on historic unremitted funds which, if remitted under the current rules, would be taxed at rates of up to 45%. Those who stand to benefit most from the TRF are likely long-term UK residents whose pots of ‘clean capital’ are low or exhausted and who must now look to fund their lifestyle costs from other, taxable sources, including receipt of trust distributions. No doubt the previous government had this in mind when it devised the TRF, knowing that in the case of long-term UK residents who are unlikely ever to leave, the goal should be to incentivise bringing funds held offshore into the UK where they can be spent (and taxed).
An important feature of the TRF system is that taxpayers will be able to ‘designate’ foreign income and gains to be subject to a TRF charge. This means that the relevant income and/or gains will not have to be actually remitted to the UK in order to benefit from the TRF. This allows a deal of flexibility for illiquid assets which cannot otherwise be remitted within the three-year TRF window. For example, if a former remittance basis taxpayer had sold, say, some non-UK shares at a gain and then reinvested the proceeds in a non-UK property, the taxpayer should be able to simply ‘designate’ that part of the property’s value which is attributable to the historic gain so that it can be taxed at the beneficial TRF rate. Of course, this would only be advisable if the taxpayer expected to want or need to remit to the UK the proceeds from the sale of that property in the future (at which point the historic gain would be taxed at normal capital gains tax rates) and had sufficient funds available to pay the TRF charge – but it is clear that this designation system will have a variety of applications for different taxpayers depending on their circumstances, and is a welcome feature.
Inheritance Tax – Residence-based system
From 6 April 2025, a new residence-based system will treat an individual’s worldwide estate as within the scope of UK inheritance tax (‘IHT’) if that individual has been UK tax resident for 10 out of the previous 20 tax years. Such individuals are being termed ‘long-term residents’ for IHT purposes. The former domicile-based system will be abolished from that date onwards.
Those individuals who will not be long-term residents from 6 April 2025, but who will become so in the near future, might take the opportunity to gift non-UK assets in order to remove value from their estate before it falls within the scope of IHT (if an individual makes a gift whilst long-term resident, they will have to survive for seven years for the value of that gift to fall completely outside of their estate for IHT purposes). As an alternative to outright gifts, such individuals may consider establishing investment holding structures, such as a family limited partnership or a family investment company, in order to remove some or all of the value of the gifted assets from their estate while retaining control over how those assets are managed, invested and paid out to the ultimate recipients.
For UK long-term expatriates who may be considering returning to the UK, the new residence-based system could be significantly more attractive than the current rules. Under the current rules, such returners (assuming they had a UK domicile of origin) are automatically treated as domiciled in the UK from their second year of UK tax residence, with their worldwide estate falling within the scope of IHT from that point. Under the new system, assuming they have been non-UK tax resident for over ten years, their non-UK situate assets should fall outside the UK IHT net, presenting a wide window of opportunity for passing on value to the next generation.
Trusts
The reform to the taxation of trusts settled by non-UK domiciliaries will be significant. By way of brief overview, from 6 April 2025 onwards, whether a trust is within the scope of the IHT charges will depend on whether the settlor is a long-term resident. Under the ‘relevant property regime’ (as the IHT rules relating to certain trusts are known), IHT is chargeable on every 10-year anniversary of the trust’s creation (generally at a rate of 6%) and when assets leave the trust (at a fraction of that rate). Under the new residence-based IHT system, trusts will come in and out of the relevant property regime depending on the long-term residence position of the settlor. Should a trust leave the relevant property regime following the settlor ceasing to be a ‘long-term resident’, there will be an ‘exit charge’ in respect of the trust assets (likely calculated as a proportion of 6% of the trust assets, depending on how much time has passed since the trust’s last 10-year anniversary).
In addition, from 6 April 2025 onwards, the income and gains arising within ‘settlor-interested trusts’ will be taxed on the settlor on an arising basis if they are UK tax resident and not within the FIG regime.
With the above changes in mind, trustees and settlors should take advice as soon as possible as to how best to mitigate these potential ongoing tax charges. In particular, trustees should consider their obligations to protect the value of the trust fund for beneficiaries in light of the options which will be made available by the UK legislature, such as the TRF.
To protect the settlor from ongoing income tax charges as income arises within the trust fund, some trustees may consider permanently excluding from benefit the settlor, their spouse/civil partner and their minor children. A decision might then be made to favour income-producing investments rather than those which generate chargeable gains, to limit the capital gains tax charges which would generally still fall on the settlor (and which are more difficult to turn off). Such decisions become as much a question of investment choice as they are of tax planning and so trustees will need to draw on a range of appropriately qualified professional advisors in order to make decisions which best protect the value of the trust fund.
Alternative strategies for protecting the settlor from ongoing taxation may be the use of tax deferral products held at trust level. Insurance bonds, for example, generally allow for the tax-free rolling up of investment returns, subject to a number of restrictions on what may be held within the bond and who may direct the investments. When the gains on such insurance bonds are ultimately realised, they are taxed at income tax levels directly on the settlor of the trust, as the quid pro quo for the tax deferral enjoyed until that point.
The trustees could also consider terminating the trust altogether, if its continued existence proves inefficient under the new rules. Trustees will need to consider whether any beneficiaries would benefit from the TRF, which will apply to certain types of trust distributions (broadly, distributions of capital rather than income). If the trustees are able to make capital distributions to such beneficiaries, there will be a golden opportunity to ‘clean up’ historic income and gains accrued within the trust fund, with those income and gains being taxed at a rate of only 12%. Any beneficiary receiving such a distribution will need to then consider their own IHT planning if they are, or expect to become, a long-term resident for IHT purposes.
IHT reliefs for business and agricultural property
Among the major reforms to IHT will be the restriction of business and agricultural property reliefs. From 6 April 2026, the existing 100% reliefs for certain types of business and agricultural property will be capped at £1m combined. Any assets that would currently enjoy 100% relief and exceed that £1m limit will receive only 50% relief, leading to an effective IHT rate on those assets of 20% (not the usual 40%).
Those who own affected assets will likely wish to consider the cost of taking out life insurance to cover the new IHT cost which would be triggered on their death. They may also consider gifting assets to their children earlier than they otherwise would have, in the hope of surviving the gift for seven years, and they will need to manage capital gains tax charges which could potentially result. Donors will also need to bear in mind the ‘gift with reservation’ rules which treat gifted assets from which the original owner continues to enjoy a benefit as remaining within their estate for IHT purposes.
Should an IHT charge arise on business or agricultural property which exceeds the £1m cap, it is worth noting that the deceased’s executors will have the option of paying the tax in ten annual instalments. The annual IHT liability would amount to 2% of the value of the assets, which could be funded using liquidity from the estate, life insurance proceeds or through borrowing against the value of the property. The appropriateness of each option in any case will turn on the exact circumstances, and advice should be taken in good time so that a plan can be put in place to protect business and agricultural assets from break-up on death.
Next steps
The above are just a few of the considerations that taxpayers and trustees affected by the wide-ranging changes to the UK’s system of taxation should have in mind when considering the new landscape. Should you wish to discuss the changes and how they affect you and your family, please do get in touch.
For further information, please contact:
Ceri Vokes, Partner, Withersworldwide
ceri.vokes@withersworldwide.com
