In more detail

Recap on historic propositions by the Conservative and Labour Parties

Historic rules

Historically, 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 UK 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.

RND individuals were also able to benefit from the use of trusts as a means of protecting against UK inheritance tax (IHT) should they become "deemed domiciled" if resident in the UK for 15 out of preceding 20 UK tax years.

Conservative government proposed reforms

In the Spring Budget, the previous Conservative government announced plans to reform the rules affecting RNDs. These included replacing the remittance basis of taxation with a new four-year FIG regime.

This proposed regime would be available to individuals for the first four tax years of UK tax residence, after a period of ten years of non-UK tax residence.

The Conservative government had announced that eligible individuals would not pay tax on FIG arising in the first four years of UK tax residence, and would be able to remit these funds to the UK free from any additional tax charges.

For those individuals previously taxed on the remittance basis but not eligible for the new four-year FIG regime, such individuals would be subject to UK income and capital gains tax on their worldwide FIG. However, the Conservative government had announced a concession for those not eligible for the four-year FIG regime and moving from the remittance basis, such that only 50% of their non-UK income arising in the 2025/26 tax year will be subject to UK tax.

In addition, the Conservative government had announced plans to reform the IHT regime and to move from a domicile-based regime to a residence-based one. This was proposed to be subject to a consultation period, but in outline was expected to result in individuals that had been tax resident in the UK for 10 years falling within the scope of IHT on their worldwide assets, with such exposure lasting for a period of 10 years following that individual ceasing to be UK tax resident. Such reform was also expected to affect the IHT profile of trusts after 5 April 2025, in the event that the settlor was within the scope of IHT on their worldwide personally owned assets. However, it was expected that there would be a concession for "excluded property trusts" set up prior to 6 April 2025, as outlined below.

Under ordinary IHT rules, trusts are subject to a number of charges. These include an "entry charge" (of up to 20%) upon property being settled into a trust, an "anniversary charge" (of up to 6%) on each ten -year anniversary of the trust being settled, and an "exit charge" (of up to 6%) when property leaves the trust.

However, where non-UK assets are settled into a trust by someone who was not UK domiciled (or deemed domiciled) at the time the assets were settled, such assets fell outside the scope of the above IHT charges.

These trusts are currently referred to as excluded property trusts and provided an effective way for non -UK domiciled individuals to move assets outside of their taxable estate prior to becoming deemed domiciled after 15 years of UK tax residence.

Under the proposed rules announced by the Conservatives, the above position was not expected to change, and assets settled into a trust prior to 6 April 2025 were expected to remain outside the scope of the IHT charges. This presented a possible planning opportunity to set up excluded property trusts prior to 6 April 2025.

Reforms announced by Labour

Following the Spring Budget, and while in opposition, the Labour Party made various counter-comments regarding the above reforms. The Labour Party has now announced further details of its plans to reform these rules, which are expected to be announced formally as part of its Autumn Budget on 30 October 2024. We outline these in more detail below.

In broad terms, the Labour Party is proposing to adopt the 4-year FIG regime originally proposed by the former Conservative government, with the following exceptions:

• The concession of taxing only 50% of the foreign income of individuals transitioning from the remittance basis in 2025-26 will not be adopted.
• A rebasing of foreign capital assets will be available for those individuals that have previously been taxed on the remittance basis, however, the 5 April 2019 date originally proposed by the former Conservative government has not been confirmed. It appears likely that the relevant rebasing date will be changed.
• The Temporary Repatriation Facility (TRF) will be available to those that have unremitted foreign income and gains taxable on the remittance basis. Confirmation of the period for which the TRF will be available (originally proposed to be for the period 6 April 2025 through 5 April 2027) was not confirmed, nor was the rate applicable to remittances made during that period (originally proposed to be 12%), but it was noted by the Labour Party that it wants the TRF to be "as attractive as possible". Following the Spring Budget and ahead of the General Election it was suggested that the Labour Party would consider extending the 2 year TRF period, which may be supported by its most recent announcements. Additionally, another welcomed addition to the proposals is confirmation that the Labour Party is exploring ways to expand the scope of the TRF such that it captures income and gains that are currently held within non-UK structures.

It was also confirmed in the announcement that the rules relevant to remittances will remain relevant for FIGs that arose before 6 April 2025, and which are remitted after 5 April 2025, subject to the TRF period. Additionally, the Labour Party will be conducting a review of the existing offshore anti-avoidance legislation in order to "modernise the rules and ensure they are fit for purpose.", which is unsurprising considering the implications of the above proposed changes. However, it was confirmed that such offshore anti-avoidance changes will not be effective until at least 6 April 2026.

The announcements by the Labour Party therefore mean that effective 6 April 2025 RNDs should expect income and capital gains arising in non-UK settlor-interested trust structures to be attributed to and taxable on the settlor, subject to available motive defences, on the basis that the protections currently afforded to such structures will be removed.

In addition to the introduction of the new FIG regime, the Labour Party has also provided further comments on its intention to reform the current IHT regime, which it plans to also introduce effective 6 April 2025.

As originally proposed by the former Conservative government, the current domiciled-based regime will be replaced with a residence-based regime, the effect being that an individual will be within the scope of IHT on their worldwide assets after being tax resident in the UK for 10 years. For those non-domiciled individuals that have been UK tax resident for between 10 and 15 tax years, this will result in them becoming exposed to IHT on their non-UK assets for the first time on 6 April 2025. The Labour Party has also confirmed that its intend to introduce a 10 year "tail", which would result in individuals remaining within the scope of IHT on their worldwide estate for a period of 10 years following ceasing to be UK tax resident, if that follows a period of 10 or more years of UK tax residence.

The Labour Party has confirmed that it will not engage in a consultation period on the above IHT reforms, but will reflect on stakeholder feedback provided earlier in the year following the Spring Budget.

Perhaps the most impactful announcement by the Labour Party immediately following the Spring Budget was its stated intention to remove excluded property status for non-UK assets owned in excluded property trusts. The Labour Party repeated that intention in its most recent announcement, confirming that it will undertake external engagement over the summer period and will publish the detail to support such changes in the Autumn Budget.

In its most recent announcement, the Labour Party recognised "that trusts will already have been established and structured to reflect the current rules, so is considering how these changes can be introduced in a manner that allows for appropriate adjustment of existing trust arrangements". It is not clear yet what such an "appropriate adjustment" might look like, but it now appears clear that there will be some form of transitional measures introduced for existing excluded property trusts, which is welcomed.

Lastly, the Labour Party has opened a call for evidence in connection with its plans to make changes to the taxation of carried interest in the UK. Very little was included in the announcements that suggested what amendments might be introduced, however, the Labour Party repeated its view that fund managers do not generally participate in the downside risk of the fund in connection with their carried interest entitlements. It was confirmed that further announcements in this area will be included in the Autumn Budget.

Conclusion

Although the detail of the proposed measures will not be available until 30 October 2024, and the relevant draft legislation later than that date, the direction of travel has now been confirmed by the Labour Party with the effective date of change now confirmed as being 6 April 2025. As these changes are likely to be significant and wide-reaching for many current and former RNDs, their family offices, trustees of non-UK trust structures as well as those with plans to relocate to the UK, it is imperative that an analysis to understand the effects of these changes is undertaken as soon as possible, and any action plan as a response to such changes is drawn up comfortably in advance of 6 April 2025.

Please contact your usual Baker McKenzie contact, or any member of the Wealth Management Team (please see details below), should you want to discuss the above changes in more detail.