Despite the recent doubling of the annual lump-sum payment, it is generally thought that the change will have minimal impact on those with higher levels of wealth and may be considered an endorsement of the regime more generally by the current Italian government. All RNDs still living in the UK and even some ex-RNDs with trusts who left the UK as early as 6 April 2023 are likely to be impacted by the Budget. UK tax mitigation strategies should therefore be explored as a matter of increasing urgency. Where relocation is concerned, it comes as no surprise that Italy, among other jurisdictions, continues to take the top spot on many RND individuals' shortlists.

This article appears in the H2 edition of the Private Wealth Newsletter 2024.

Introduction

As the light and sunshine of the London summer transitions into the darkness of autumn and winter, so too has the mood of many in the RND community descended into gloom.

The Budget has confirmed the long-anticipated end to the RND regime in its present form. Under the current regime, those who are UK tax-resident but who are not considered domiciled (or deemed domiciled) in the UK (e.g., because they were born outside the UK and/or to foreign parents) have been able to elect to be taxed on the "remittance basis" of taxation. This meant that such RND individuals were only liable to UK income and capital gains tax on their UK-source income and capital gains, and not their foreign income and gains (FIG), unless such FIG were "remitted" to the UK. The current regime also permits RND individuals to use trusts to preserve the benefits of the regime with respect to UK income and capital gains tax, and to shield non-UK assets from UK inheritance tax (IHT), should they become "deemed domiciled" (i.e., resident in the UK for 15 of the prior 20 UK tax years).

Many of these benefits offered under the RND regime, particularly for those that have been in the UK for several years, are to be withdrawn from 6 April 2025. They are to be replaced with a regime that, very broadly, only protects FIG from UK income and capital gains tax for the first four years of UK tax residence and ends protection of non-UK assets from IHT after an individual has been a UK tax resident in 10 out of the prior 20 UK tax years, with extending this protection using trusts no longer an option.

As 10 years of non-UK tax residence is a prerequisite to qualify for these benefits, many high-net-worth RND individuals are getting advice on their options to reduce their UK tax exposure before 6 April 2025. In particular, many RND individuals that cannot reduce their UK tax exposure to an acceptable level are exploring whether to leave the UK altogether for sunnier, more tax-friendly climes.

When considering these options, the attraction of the Swiss forfait regime is somewhat tempered by the threat of the initiative submitted by the Swiss Young Socialists movement for the introduction of a federal gift and inheritance tax in Switzerland. This initiative would take effect on the date of the public vote, which is expected to take place sometime in 2026 or 2027. Although the general view is that the initiative is unlikely to pass, the potential magnitude of the tax implications on Swiss-resident high-net-worth individuals if the vote did pass cannot be completely ignored and may deter many considering relocation to Switzerland.

In this sense, the initiative is badly timed for RND individuals leaving the UK. Many RND individuals who are set on Switzerland as their ultimate relocation destination are getting advice on other jurisdictions (for example, Spain, Greece, Dubai, Jersey or Bahrain, to name a few) to use as "stepping stones" to Switzerland once the outcome of the public vote is secure.
Against this backdrop, Italy's preferential tax regime for new arrivers has emerged as an attractive, low-tax, low-risk alternative, making Italy the destination of choice for many RND individuals.

The "svuota Londra" offer — the Italian LSTR

Key to Italy's growing attractiveness for highnet-worth individuals is the Italian LSTR, once prophetically nicknamed the "svuota Londra" ("empty London") offer. This regime, which can be claimed for up to 15 years from and including the year of relocation by new foreign residents of Italy or returning Italians that have lived abroad for at least nine years, provides the option to pay a flat tax (originally EUR 100,000, though it recently increased to EUR 200,000 for new arrivers) annually on all foreign income and assets, with no further charge on remittance of such income or assets to Italy. Among other benefits, the regime offers an exemption from Italian gift and inheritance taxes on transfers of assets outside Italy and an exemption from reporting obligations with respect to non-Italian assets.

These benefits can be extended to cover certain close family members (e.g., spouse and children) for an additional annual flat tax payment of EUR 25,000 per family member.

This regime has proven highly attractive for internationally mobile high-net-worth individuals. Indeed, the Financial Times reports that, between 2017 to 2022, the Italian LSTR attracted 2,730 individuals, with around 1,000 individuals opting in to the LSTR in 2022 alone, a marked increase from previous years. It is speculated that the number of UK RND individuals included in these statistics is on the rise.

On 10 August 2024, Law Decree No. 113 of 9 August 2024 came into force, which doubled the EUR 100,000 flat tax on foreign income and assets to EUR 200,000. This has led to some clients voicing concerns about the regime's stability and longevity.

However, the Italian LSTR remains competitive among rival preferential tax regimes aimed at attracting wealthy investors. In addition, the tax rise only applies to individuals who transfer their residence (defined as the place where the individual has their "habitual abode") to Italy after 10 August 2024, and comes into effect for tax return filings for financial year 2024.

Although the Italian government has increased the annual fixed tax cost of the regime, the Italian LSTR itself has been stable since its introduction in 2016, and there are no signs that this is expected to change. The Italian LSTR has now outlived five different governments whose alignments ranged from the left to the right of the political spectrum, and the fact that the recent reform included no modifications of other terms of the Italian LSTR may be interpreted as an endorsement of the regime by the current government. The softening of the reform's impact on those already benefiting from the regime through grandfathering provisions is in stark contrast to the expected approach of the UK government to its own reforms affecting high-net-worth individuals.

Despite the recent doubling of the annual lump-sum payment, it is generally thought that the change will have minimal impact on those with higher levels of wealth.

The future shape of UK tax policy

Back in the UK, RNDs are seeking advice on what the Budget means for them. Contrary to the pre-Budget media speculation that the UK chancellor was intending to "water down" some of the proposed IHT reforms relating to trusts by grandfathering some existing "excluded property trusts" or phasing in the new rules over a period of time, the Budget has done quite the opposite, imposing a "tax trap" in the form of an IHT exit charge not only on some clients with existing trusts looking to leave the UK before 6 April 2025, but even on the trusts of some clients who have left as early as 6 April 2023.

Following the Budget, RND individuals who have either delayed pulling the trigger on preprepared tax mitigation strategies or who set these strategies in motion some time ago would be well advised to reevaluate these with the benefit of fuller information, particularly on those aspects of the Budget about which there was no warning. More urgently, now is the time for those RND individuals who have held off on exploring their options until the Budget to take stock of their planning options in good time before 6 April 2025. At the same time, those clients who have been considering coming to or are recently arrived in the UK after 10+ years of non-UK tax residence should feel emboldened to seek advice on how they might take advantage of the opportunities the Budget presents for them.

For those clients considering relocation or well on their way to relocating, whether from or to the UK, we as a firm are well-placed to advise on the UK regime and on several ordinary and preferential tax regimes available in other jurisdictions. Of those leaving the UK, after considering the options, some may find that a move for la dolce vita is calling.

*****

With thanks to Daniel Burnham (Wealth Management Trainee, London) for his assistance.