Spring Budget 2024: The end of the remittance basis for UK non-domiciliaries

In the Spring Budget on 6 March 2024, the chancellor announced large-scale reform to the tax regime for "non-doms". The measures announced include the abolishment of the remittance basis of taxation, replacing it with a four year Spanish-style exemption for foreign income and gains which the Treasury has named the "FIG Regime", and proposed changes to inheritance tax.

Proposals for the FIG Regime

It is proposed that the new regime will work in the following way:

The remittance basis will be abolished for income and capital gains arising after 5 April 2025 – but the system will remain in place for income and gains accumulated before this date.

Foreign income and gains realised during an individual's first four tax years of residence (ignoring treaty residence and split years) will be exempted. A ten-year absence will be needed to reset the clock.

After the four-year period, non-domiciliaries will pay the same income and capital gains taxes on the same basis as other UK taxpayers.

All special treatment for offshore trusts based on non-domiciliary status (such as protected settlements) will be lost once the relevant settlor or beneficiary (as the case may be) comes to the end of the four-year period.

Electing into the four-year regime will be free of charge, save for the loss of the income tax personal allowance and capital gains tax exemption.

The proposals include fairly generous transitionary terms:

Individuals arriving in the UK between 6 April 2022 and 5 April 2025 will be able to use the remaining one to three years of the four-year FIG regime.

Individuals forced from the remittance basis onto the arising basis in 2025/26 will only be subject to income tax on 50% of their foreign income for that year.

A two-year facility available until 5 April 2027 (the "Temporary Repatriation Facility") will allow individuals with personal foreign income and gains accumulated abroad to remit those monies to the UK at a reduced rate of 12%.

Individuals who had claimed the remittance basis and remained non-domiciled at 5 April 2025 will be able to rebase foreign assets acquired before 5 April 2019 to their market value on that date.

The changes to the remittance basis will not be  included in the Spring Finance Bill and so can only be enacted by the next government. A Labour government may well adopt the main measures in its first Budget but could rewrite any part and could well consider the transitionary provisions overly generous.

Planning for the changes

In the midst of this uncertainty, and with an election looming later this year, what tax planning and structures might be attractive to any high net worth (HNW) individuals or families who intend to leave the UK at some point in the future?

FIG Regime

New or recent arrivals should seek to take advantage of the extremely generous four-year exemption – allowing them to avoid tax entirely on their foreign income and gains. Planning might involve:

• Focusing investment portfolios on foreign stocks, funds and bank accounts.
• Rebasing foreign capital assets towards the end of the period – by sales or transfers to a family company, trust or family members.
• Structuring UK assets to re-route income overseas where this would not be caught by the Transfer of Assets Abroad regime.
• Distributing income and gains from trust and company structures to ensure they are received within the four year window.

Outside the FIG Regime

Outside of the generous four-year exemption of the FIG regime, steps can be taken to prevent income and gains from arising until the individual has left the UK. Typical strategies include offshore life bonds, non-reporting status funds, private funds and protected cell companies.

Life bonds

Offshore Life bonds benefit from an appealing tax regime that offers advantageous features to holders. One such feature is the ability to make annual tax-free withdrawals of 5% of the initial investment amount over a period of twenty years.

Growth within the linked portfolio rolls up tax free and the 5% withdrawals can be used overseas or brought to the UK without taxation (assuming the bond is funded with "clean" capital). This presents a significant advantage for investors.

Furthermore, if in any given year the 5% withdrawal allowance is not fully utilised or not used at all, the unused portion of the allowance carries over the following year. This rollover provision increases the effective amount of the allowance for the subsequent year, allowing for potentially larger tax-free withdrawals such as a 50% lump sum after ten years.

Any withdrawals in excess of the 5% (including all profits if the bond is cashed in) are subject to income tax. However, the regime could be highly attractive to any individual or family intending to leave the UK within twenty years. Once non-resident, they can cash in the bond free of any UK tax. HNW families can select a new home and time their move to minimise or avoid local taxation in their new country of residence.

Non-reporting status funds

An investor in non-reporting status funds is not subject to tax on income or gains accumulated within the funds, only distributions. As with life bonds, the downside has always been the imposition of income tax on disposals of the investment, which is highly unattractive where it converts capital gains (otherwise subject to 20% tax) to income (up to 45%).

However, if an individual becomes non-resident for tax purposes before disposing of their investment, the cash extraction would escape UK taxation entirely.

An investor may want to be confident that they are indeed planning to leave the UK before making this investment, as a disposal before an exit would leave them in a significantly worse position than they would have suffered with a UK or reporting status fund.

Private funds

Private funds, such as a private Open Ended Investment Company (OEIC), can also be used to defer capital gains tax on listed investments while monies are held within the fund. OEICs do not pay tax on their capital gains, so these can be rolled up tax free until the investor wishes to dispose of all or part of their investment.

Plenty of retail OEICs are available; the benefit of a private OEIC is that the family can appoint and replace the regulated investment manager, and structure their own funds within the umbrella of the OEIC, allowing some investors to benefit from income and others from gains.

The disadvantage of a private OEIC has always been the cost of compliance as the fund must be administered and managed by FCA-regulated specialists. As a result, they should not be considered for sums of less than £10m and a careful cost/benefit analysis should be carried out for sums less than £15m.

Once non-resident, taxpayers can sell all or part of their investment free of UK tax, or may wish to maintain the private fund as a sound investment platform provided it is tax efficient in their new jurisdiction.

Protected cell companies

Protected cell companies (PCCs) are another form of company which allows deferral of tax on capital gains. They have been popular in the private wealth space as they are offshore entities (they do not exist in UK law) and so often carry inheritance tax benefits for non-domiciled individuals.

A PCC differs from an OEIC on its legal basis. It does not benefit from any special tax regime for funds but instead avoids the anti-avoidance provisions applicable to family companies by allowing different investors to have separate "cells", each partitioned from the insolvency of the other, but reducing each family's total interest in the company to below 25%. This prevents the company's capital gains being attributed to the investors.

PCCs also suffer from higher compliance costs than a regular family investment company. While these are not as great as those of an OEIC, they are unlikely to be cost-efficient for values below £5m.

Inheritance Tax

Many of these wrappers are located outside the UK and so will also be outside of the inheritance tax net for non-domiciliaries under the current regime or for those in their first ten years of residence under the new plans announced at the Budget.

Those likely to this benefit are offshore life bonds, non-reporting status funds and PCCs.

Osborne Clarke comment

This Budget announcement is the final nail in the coffin for the remittance basis, which has been a steady feature of UK tax for over 200 years. It seems a virtual certainty that the next government, whoever they may be, will replace the system with a four or five year facility.

The only real question mark is whether a successful Labour government would retain the fairly generous transitional arrangements or consider them overly generous. It would be unusual to include that level of detail in an election manifesto, so the true picture may not emerge until the next Budget. Fortunately, the options we have identified above should all be available even after the new rules are brought in.

We would be happy to speak to any prospective clients who have any questions about the new regime or potential planning.