The October 2024 budget proposes a number of very significant changes for those who were previously considered “non-domiciled” for tax purposes, with effect from 6th April 2025.

James Rivett KC and Emma Chamberlain are private client tax specialists who act for both clients and HMRC. They take a balanced look at some of the fundamental features of the proposals highlighting some of the main features, explaining what the new rules will do, what they don’t do, how they will/may work, who is affected and what one should be thinking of doing now if you are or are advising someone previously treated as a “non dom”:

• (2.07) Rewrite of the relevance of domicile.
• (2.36) The background to the proposed changes and what we can expect in the months to come, including HRMC’s technical note of 30th October 2024.
• (6.37) The new regime for “qualifying new residents” – part of the abolition of the remittance basis. They identify some of the potential difficulties such as the fact you cannot claim later and also the matching rules are affected.
• (11.45) Transitional reliefs.
• (26.09) Why the remittance basis is still relevant.
• (30.22) Changes to Inheritance Tax for both individuals (30.22) and trusts (36.18).
• (41.40) Transitional provisions including discussion of the relevant property regime and new exit chanrges (45.40), funding the new charges (49.55) and double tax treaties (51).
• (54) Should you consider leaving the UK?
• (57.57) Should you consider coming to the UK?

Addendum: If you are foreign domiciled and deemed domiciled but leave by April 2025 only a 3 year tail applies; if you are foreign domiciled and not deemed domiciled but have been here for more than 10 years no three year tail applies if you leave by April 2025. 

Useful links

HMRC’s technical note of 30th October 2024:Reforming_the_taxation_of_non-UK_individuals.pdf

“Trust Taxation & Estate Planning” – Chamberlain & Whitehouse (Sweet & Maxwell) 5th edition 2024

Legislation

Acts referred to

Inheritance Tax Act 1984

Taxation of Chargeable Gains Act 1992

Taxation (International & Other Provisions) Act 2010

Taxes Management Act 1970

Income Taxes Act 2007

Finance Bill – 7th November 2024 – schedule 9: Finance Bill publications - Parliamentary Bills - UK Parliament

Particular clauses referred to

Section 809L ITA 2007

Section 809P(12) ITA 2007

IHTA S49(1) taking precedence over s48(3)

FA 1986 Section 102(4)

Cases

Sehgal v HMRC [2024] UKUT 00074 

Addendum:

If you are foreign domiciled and deemed domiciled but leave by April 2025 only a 3 year tail applies; if you are foreign domiciled and not deemed domiciled but have been here for more than 10 years no three year tail applies if you leave by April 2025

Laura 0:10

Welcome to pump court tax check podcast series brought to you by the barristers of pump court tax chambers. We are the largest UK tax set and our podcasts aim to give you insight into recent developments in tax law and procedure. Across the series, we'll look at a range of topics covering issues that arise both in disputes and in advising clients more generally.

Laura 0:32

All of the cases and legislation mentioned in a podcast are set out on our website in the listing for that particular recording. If you have any questions, please do contact one of our staff team, you can find their details on our website, pumptax.com.

Emma 0:51

Right, off we go.

James 0:53

Hello and welcome to the pub court tax chat. I'm James Rivett and we're joined as well today by Emma Chamberlain. And we're going to talk to you a bit about the recent announcement regarding the future landscape of the changes to non-domiciliaries. So Emma and I practice in tax and in particular focus upon private client taxation.

James 1:17

Over the years, we've both represented both the taxpayer and HMRC. And our proposal over the course of the next 45 minutes is to present what we hope is a balanced account of things, reflecting the different experiences that we both have and the different clients that we represent on both sides of the divide between taxpayers and HMRC.

Emma 1:37

I agree, because some of the changes, although there's been a lot of fuss about them, some of the changes are undoubtedly an improvement on the current position.

James 1:43

And in some ways, a vast improvement for reasons I think we'll develop over the course of this podcast.

James 2:01

Good morning, Emma.

Emma 2:02

Good morning, James.

James 2:04

So in the budget, one of the big changes that was announced was the proposed rewrites of a fundamental pillar of the UK tax system that has been in place for a number of centuries, namely the relevance of domicile as a connecting factor for the basis of UK taxation. Emma, I thought it might be helpful just if you could start by setting out the landscape over which these changes have developed over recent months and also what we can expect over the months to come.

Emma 2:37

This began obviously as a Labour Party policy, which has been developed over some years. Then Jeremy Hunt rather stole their clothes by announcing in the budget on the 6th of March, I think, he was going to introduce these changes. Foreign domicile would be abolished as a relevant concept in taxation. And a fairly detailed technical paper was introduced with some gaps and a promise of legislation later in the year.

Emma 3:02

And none of this was due and indeed is not going to come into effect until the 6th of April, 25. The government obviously had an election, Labour got into power. In July, they had a fairly brief policy paper which announced various changes to what the Tories had proposed, in particular, an income tax relief that was going to be introduced in 25/26, taxing foreign doms at half rates was not going to come into effect.

Emma 3:31

And in that we can see some changes so that, for example, there are now particular transitional reliefs that affect excluded property trusts, so trusts set up by non-doms that were in place on the 30th of October. But those reliefs are quite heavily circumscribed. On the budget day, the government produced a draft legislation.

Emma 4:19

They are very much open to comments on the draft legislation as it affects non-doms. They accept that it's not perfect. It is quite complicated.

Emma 4:28

And at the moment, the revenue are having a series of listening sessions with the representative bodies, listening to sort of technical aspects of the legislation that don't quite work. It's important to note that I don't think there'll be any fundamental change on policy. I don't think we'll suddenly get a situation where you'll get a lump sum or a forfait, whatever lobbying goes on.

Emma 4:48

But I think you will get the revenue and listening mode on how can we make this regime work practically better. And that I think they're interested in. I imagine there'll be a further redraft of the legislation in January.

Emma 5:01

James 5:21

James 5:40

Emma, can we expect, in light of the announcement in October, a rewrite of the book?

Emma 5:45

The book does cover some of the changes announced by the Tories, but inevitably there's going to be further work. The work on this book never ceases. And I imagine, well, a new edition should be out next year.

James 5:55

James 6:35

So the first of the topics that we wanted to look at as part of the abolition of the remittance basis that applies to non-UK domiciliaries is the introduction of a new regime for what are called qualifying new residents. Just broadly, these are individuals who will be fully relieved from UK tax on their foreign income and gains for the first four years of UK residence, regardless of whether such income or gains are remitted to the UK.

James 7:04

There will also, as part of that, be a rather more limited exemption that exists for employment income of that category of individuals, insofar as the income in question is attributable to duties performed outside the UK. Every individual who becomes UK relevant after at least 10 years of non-UK residence will be eligible for this, regardless of their domicile. Emma, I wonder, having set out the rules as it were, if you might make a few observations about how, in practice, this will operate, perhaps by reference to some of the interesting features of this regime.

Emma 7:39

I think there are obviously obvious benefits about having a complete exemption, not having to worry about complicated remittance rules. But of course, it's quite expensive, I imagine, for the revenue, and they probably want to know how much it's going to cost. And this may be behind the fact that in section 845A, as amended, they've insisted now that you have to make a claim.

Emma 7:59

So you can't just say, I haven't been resident for 10 previous years. I'm now resident in the UK. I'm exempt from foreign income and gains.

Emma 8:08

I don't need to report it, which, in a sense, has been the current position for remittance basis users. They haven't had to report foreign income and gains. They've just had to avoid remitting them.

Emma 8:17

Now they will have to report every item of foreign income and gains and including income and gains on trusts. And that is quite a significant burden. In addition, the claim doesn't apply across the board.

Emma 8:30

You specify what you want it to apply to. So if you want it to apply to foreign income, but not for some reason, foreign gains, I can't immediately see why you'd want that. You have to specify that.

Emma 8:41

If you do make the claim, then you lose your personal allowances. You lose the ability to make foreign losses against foreign gains. So there are consequentials about making this claim, which could be adverse.

James 8:54

Just on that point, Emma, on the loss of the ability to claim foreign losses, is that a perpetual loss or does it come back in after you cease to be a qualifying new resident?

Emma 9:04

If Section 16 is amended, it's going to just be that four years it's lost. But obviously, you can't carry the losses forward to use against future gains that will then become chargeable after four years. It's also limited in what it applies to.

Emma 9:17

So broadly, it reflects the remittance basis, but not entirely. So for example, a trust under the current regime, a non-dom who is a settlor of a trust, that trust can realise gains and they're not chargeable on the settlor and they're not chargeable on the trustees. They just go into a pool of stockpile gains.

Emma 9:37

It doesn't matter where the gains are realised. Under this FIG exemption, the gains realised by the trust have to be foreign and they can't be on real estate. So there's a limitation there.

James 9:49

In addition, it doesn't apply to things like obviously UK incoming gains. It doesn't apply to life policy gains. So that's important if you've got a European coming to the UK who will often have an offshore investment bond, maybe even a personal portfolio bond, because those are very favourably taxed in Europe.

When they come here, those gains are not going to be protected by the new FIG exemption regime. And I think that may be a mistake by the revenue, because in a way you want to make this as a generous and internationally competitive as possible. And I think limiting it by limiting it to not being available for life policy gains and requiring people to itemise every aspect of that foreign incoming gains does make it less helpful for people.

Is there a reason why they don't apply it to life bond gains?

I think because the remittance basis doesn't apply to life policy gains and they basically followed the remittance basis. They haven't wanted to extend it, probably for reasons of cost. But I think it will limit the attractiveness of the regime.

And of course, it will pose traps because a European coming here might well think, oh, well, my offshore bond, that gain is going to be protected under the exemption. And it won't be. The other aspect of the regime, which I think is quite controversial, is that if you don't claim it, or maybe you claim it, but you don't itemise every aspect of your foreign incoming gains and you miss something off quite inadvertently, you're not going to be able to claim it later if you are careless.

Or deliberate.

Or deliberate. Sorry, yeah. I'm assuming that clients aren't deliberate, just possibly careless or their advisors are careless. And that's quite difficult because we do have quite a uniquely long inquiry period for offshore assets. It's 12 years and you don't have to be careless for the revenue to raise that.

So, if you leave off an item of foreign income, let's say some complex underlying corporate piece of income, that won't get the protection of the exemption. And if the revenue can show you're careless, then you can't claim it later. And that might be difficult.

You might have a trading company, which is overseas. You think it qualifies for the motive defence, but you're not quite sure. Are we now going to have to itemise all that income that arises in the foreign company in order to claim exemption from it? Or will you be content to rely on the motive defence?

Well, and would you want to consider putting in place a protective claim in relation to it, albeit at the expense of the disclosure of all the incoming gains and protects and no doubt a huge amount of professional work to do?

Indeed. And offshore income gains is another area of difficulty. So, I think there is that aspect about it that's difficult. I think another aspect is the way the matching rules work, which is quite difficult. So, if you've got a trust and a four-year exemption...

Just pausing there. Sorry, Emma. I know I'm very aware of the fact that we're talking to Emma Chamberlain here. And in a sense, it's almost a self-defining class, because if you've listened in, you will probably know who Emma is. But just for the uninformed members of the audience, can you just explain broadly what the matching rule is and what it does?

So, at the moment, it's quite hard to explain in a short way, but if you get a benefit from a trust, it's matched first to income, and I'm assuming that the settlor is foreign domiciled broadly, if it's foreign income, and then it's matched to offshore income gains.

And then if you get that benefit, if you've not got any of that and it can't be matched to that accumulated offshore income gains or offshore income, then it's matched to what we call Schedule 4C gains, which are a particular type of gain. And then finally, it's matched to sort of normal gains, gains on equities. And you go through all those pools to determine what your tax rule is.

But you match through all years. You have to go through all your income before you finally get to matching on gains, for example. Okay.

So that's the basic rules as matters stand. And how are they disrupted or changed by the terms of the new regime for qualifying new residents?

What I thought they would do is that if you were a qualifying overseas resident, you would just be treated like a non-resident. So you'd get a benefit from a trust, a capital distribution, and it would be ignored effectively for all purposes.

It wouldn't be matched to any gains. It wouldn't be taxed. It would just be exempt.

That doesn't seem to be how it operates. So the way I think it works is that it is matched to gains, but those gains are ignored and in a sense can be carried forward. So that's pretty similar to how it works for non-residents.

But if you've got relevant income in that trust, and remember, a lot of people will come here who may not be the settlor of the trust, the trust may be longstanding, set up for various members of the family and international trust, and it will have a pool of relevant income. That income can be matched to the benefit that you get in your four-year period. The way I read it is that, that benefit won't be carried forward.

But if it's not matched, if the benefit, say you get it and there's no income or gains that it can be matched to, it is carried forward and taxed later. So there is a trap there. But if you get benefits from trusts, and they're not fully matched in that four-year exemption period, they could, as matters currently stand, be carried forward and taxed later.

And again, I think that's a bit of a trap because people think, great, I can get capital, lots of capital from trusts without having to worry about tax. Well, they do have to worry about tax a bit. They've got to make sure that they fully match it, as I read the legislation as it stands.

But that presumably is something, maybe we'll come on to this towards the end of the podcast, that is something that there would be a reason for getting your house in order, as it were, before you came to the UK. Because you could, through careful application of the current matching rules, tidy this up before you actually enter the new regime.

But remember, a lot of people are not going to come here with advice. They're going to come here and be inadvertently resident. And they think, great, I've got this exemption, got a capital distribution from a trust set up by my father, long since deceased, don't have to worry about it. And they might have to worry about it.

And I think these exemptions, given it's only a temporary one, it's not like the remittance basis that can go on for years. It's only a four year exemption. I'd always encourage the government really to take a broad view, to keep it simple.

And so I think this is an area of technical aspects that people could say you might want to change, because you want to get people to come here. I mean, that's the purpose of the regime. It's got to be internationally competitive.

And we'll talk a bit at the end about why the sort of people who may find this attractive and some of the, frankly, favourable opportunities this presents to current non-residents in relation to gains in particular. One of the points I think you made that I found particularly interesting is the observation regarding the amendments to the ability to make consequential changes. That is something of a rewrite or a different approach to the way in which claims and consequential amendments have been made in other bits of the legislation under the terms of the international TIOPA 2010, but also under the terms of the Taxes Management Act.

Normally, in the event that HMRC issue an inquiry into something, there is a specific piece of machinery that allows you to make late claims as part of that inquiry or by way of consequential amendment. It is interesting, perhaps as part of a wider campaign to focus upon the quality of tax advice people are receiving, that you don't get to do that if the mistake or the error relates to carelessness or deliberate behaviour. Perhaps we should move on to the next topic.

The next thing I thought we'd talk about is another type of transitional relief, and this is the Temporary Repatriation Facility. This will allow former individuals to repatriate prior to the 6th of April 2025 foreign income and gains into the UK, or to treat them as remitted at a pretty generous flat rate of tax. Now, the precise amount of the rate of tax will vary depending upon which year you do this in.

But this is an important feature of the regime and is one of the quid pro quos, I suspect, for the abolition of the remittance basis. Emma, perhaps you might tell us a little bit more about this.

I think this is a very imaginative scheme. Who is it available to first? You don't have to be non-dom in 24/25. It's available to anyone who claimed the remittance basis in the past under Section 809b.

So just pausing there. So that would include categories of individual who became deemed domiciled after 2017 and the amendments that were made then. That category of individuals who have a pot of income and gains that predate that period, they can use this facility.

They can. And you can also use it even if you didn't claim after 2008/9, if you basically any income or gains were in fact subject to the remittance basis in 2007/8 or a prior year. And remember that although income tax required a claim in those years, CGT did not. So it will essentially be open to anyone who has got historic unmerited foreign income and gains.

And those who never needed to make a claim, perhaps their income was under 2000 or recent arrivals with no UK income and no remittances of foreign income or gains can also use this facility. And it will be useful for those who may be running out of clean capital or may just think, well, I might stay here now. I'm actually domiciled here.

You can still use this relief provided you've got some past historic foreign income and gains. And there are two types of TRF. There's what I call main TRF, which is what applies to your personal historic foreign income and gains arising at any time before April 25.

And then there's your trust TRF. You don't have to be the settler of the trust, but any historic foreign income and gains arising in the trust prior to April 25. But it will not be available, for example, to trust income and gains arising post April 25.

So again, another reason why there is work to do prior to the end of the tax year to make sure that you've identified that category of income or gains. In terms of the mechanics of it, this is done by way of election. Is that right?

Yeah.

And am I right in understanding the way in which the legislation works? You have to designate or identify what those income and gains are, understandably.

Yeah. And I think personal foreign income and gains is a bit easier. The main TRF is easier than the trust TRF. I think though on TRF you designate it. So the revenue want people to use this because obviously it's going to get them 12% tax.

They don't want to make it too difficult. It's available for three years. So for 25/26, 26/27 you pay a 12% rate on designated foreign income and gains.

And last year you pay a 15% rate. So they've extended the time that was originally announced by Jeremy Hunt. Originally it was only going to be a two year facility.

This is a three year facility. It's not clear when you designate your historic foreign income and gains, do you designate what arose originally or do you designate what it represents now? That's not entirely clear. And nor is it entirely clear how you calculate that because by definition, your foreign income and gains probably arose in a foreign currency.

Do you designate it and calculate the actual gain at the date the game was actually made, for example, or is it the exchange rate at the date of designation? So I think those aspects still remain unresolved. And again, I think those are the sort of technical areas which one would hope would be clarified in the legislation.

I mean, on that point, actually, I was interested, the election, I think this is something that has to be done through the terms of a tax return. Is that right?

Yes

So it's not something that can be made by consequential amendment or by way of pre-standing claim at the end of an inquiry.

You've got to make it in the individual's tax return for one of the three TRF years. So you do actually make it in the tax return.

I suppose you can amend your tax return. So if you have it for 25/26, submit it in 27 you could amend your tax return by 28 and then do it. And if you do designate qualifying overseas capital, it's treated as designated from the start of the tax year to which the return relates.

Why would I? Can I ask a silly question in relation to this?

I'm not going to be able to answer it.

I bet you will. Just on this one, are there circumstances in which an individual who is currently non-resident might want to use this?

You can't use it if you're non-resident. You have to be UK resident at the moment. Having said that, again, this is one area where I think the revenue could be generous because if they want to get people to use it.

I would have thought exactly, why not extend it?

Yeah, at the moment they haven't.

I suppose they want people to not leave and use this facility. They don't want people to leave and then still use this facility. So that may be one thing in their mind.

But I think it also ties into something we're going to come back to, I know, at the end, which is the category of individual who may actually be inspired to come back to the UK.

Yeah, maybe within six years of leaving. Yeah, absolutely.

You might be able to, if you come back within six years of leaving and you're resident in one of the TRF years, 25/26 to 27/28, I guess you could then use it. Though it's slightly unclear how it works. It's important to note that you don't have to bring in what you designate.

So for example, you've bought using foreign income and gains, a house in the USA, which is basically bought with foreign income and gains. And you might think, oh, I'm going to sell it in the future. And I might like to use that capital in the UK.

You can designate any amount of that purchase price as eligible for TRF. You don't have to bring it in, in the three years. And that gives you a lot of flexibility.

Once you designate it, it goes to the top of what's called the mixed fund rules, which are quite complicated rules, but basically dictate the order in which you bring in foreign income and gains. And it then goes to the top of that. And you can bring that in tax free. That's how it should work anyway.

And just to point out the obvious in relation to this, when it comes to payment of my 12% charge, or whatever it may be, depending upon the year in question, I don't think the legislation is drafted to enable me, for example, to bring my pot of 100 into the UK and then fund the 12% charge from other sums without remittance.

It's not like the 30,000, which you can pay out of them. No, you have to pay, you have to allow for the 12%. And I have a lot of clients who are thinking about using this facility, and they obviously don't have to use it on all of it. They could just use it on some of it.

It has also been introduced on Trusts. And I think part of the motivation there was to encourage people to wind up Trusts, because in a sense, the revenue would much rather everybody owned assets personally, much easier to track through. And so that is a sort of further relief that Labour have introduced that wasn't available under the Tories.

And that I think is quite complicated at the moment, because once again, we're back to these wretched matching rules of how you match a capital payment, which has to be received after April 25, to historic foreign income and gains that are received before. And it's quite a complicated thing. The only thing I'd say is if you want to get trust TRF, you can't make an income distribution. You have got to do a capital distribution.

Can I just say on behalf of all of our listeners, that I for one am very much looking forward to Emma's podcast on the matching rules alone, which I know will be number one of the Sunday Times podcast lists this Christmas. Perhaps time for another topic.

So the next topic is a short one, really, which is just to observe the continued relevance of the remittance basis. One obvious point is that, albeit that the remittance basis has been removed for future purposes, it will continue to remain the case that those provisions of the Income Taxes Act 2007, which articulate and identify what constitutes a remittance as matters stand, will for future purposes continue to remain relevant to make sure that you don't, in the new world, bring a category of foreign income and gains into the UK without knowing whether or not it's going to amount to a remittance. Notably, in addition to keeping that going, the provisions of the finance bill, which was first published on the 7th of November, 2024.

I see an interesting point there. There's a wonderful judgment of Lord Briggs, I know somewhere, where he says that one of the great tricks of the Kremlin during the 80s was simply to renumber all of the provisions. Everybody got confused as to where to find the legislation.

Of course, by the time you listen to this podcast, it's quite likely that all of these provisions are going to be completely renumbered. But what I'm talking about is the numbers in the bill as published on the 7th of November. Baked into Schedule 9, in addition to the continued relevance of it, and a number of consequential amendments to give affect to those transitional provisions, are also a number of small amendments to broaden the width of the current regime, and in particular, the provisions which deal with circumstances where a relevant person, where a particular course of action results in a relevant person enjoying a benefit.

And the enjoyment in question is not more than negligible, as it were. That is, we think, to address the consequences of a particular case that was before the FTT, in which the revenue lost. I actually query quite the extent to which this actually changes the law anyway, if you look at the precise terms of it.

But in any event, it's worth noting that not only does the remittance basis continue, those rules continue to apply, but they've also been expanded. Emma, anything else to observe of interest?

One aspect is the amendment to Section 809P.

I'm sure that's on top of everybody's Christmas list.

Well, it's quite important because it's...

What does the existing provision?

The existing provision, if you're a non-resident, you've got historic pre-departure foreign income and gains, you remit them while you're non-resident. You're non-resident for six years. That cleanses them under the current rules.

And that doesn't work anymore?

Well, depending on the interpretation taken of 809P 12, because it says not only do you have to remit the amount, it has to be taxed.

And of course, if you're remitting it when you're non-resident, it doesn't have to be taxed. Now, that could have implications for people who've already remitted foreign income and gains that arose pre-departure when they were non-resident have now come back to the UK. All those historic remittances, as it were, now going to be taxed, which would be a slightly bizarre consequence.

Well, would it be bizarre? I mean, it's clearly, it's not an inadvertent change. It's advertent. They've intended to do this.

I think they may have been intending to do something else. But anyway, we'll have to see what happens.

But your point is there isn't a transitional relief to deal with the circumstance where you did this 10 years ago.

Exactly. You might have remitted it to the UK to buy a house.

And now you're going to find that painting that's hanging on your wall is giving rise to an inadvertent tax charge on the 6th of April of 2025.

I would be surprised if that was the intention of the revenue, because you'd think something so fundamental would have been announced on a technical note.

Well, at the risk of being pompous about it, the finance bill is obviously a matter of the intention of Parliament, not the revenue. So there may be a difference between those two things. But yeah, I quite understand the point.

For those of you who've accidentally drifted across podcast channels from ‘How to Fail’ to ‘The Rest is Politics' and found yourself accidentally here...

Or ‘Political Currency’.

Or Political Currency. I'm James Rivett and I'm joined by the ever brilliant Emma Chamberlain. And what we're trying to do is to unpick some of the key principles and themes of the budget in October insofar as it relates to non-domiciliaries.

So the next and possibly the most fundamental amendment that's been made to the terms the UK tax base in the abolition of the relevance of non-UK domiciliary status is the amendments that's made to the UK inheritance tax net. Now clearly, as at the time at which these rules were first introduced several hundred years ago in the context of... One of the big questions was how do you deal with individuals who spend their entire working life and much of their life living outside the UK but still have their, through domicile, their fundamental connecting factor to the UK.

One of the real amendments that's made to the regime is the abolition of that and the replacement of it with a fixed period of residence as the connecting factor for the incidence of inheritance tax. And Emma, I wonder if you might just describe both the implications of this for individuals but also for the scheme of the taxation of Trusts. And we'll pick into that in a bit of detail.

Yeah, this is a pretty fundamental change to inheritance tax. Probably the biggest change since the changes to Trusts in 2006, because domicile and deemed domicile is largely removed as a determinant of UK IHT liabilities. So what we now have is a test based on long-term residence.

And personally, I think that is a good thing because at least with residence, we can pretty much determine someone's residence under the statutory residence test. And the government have basically adopted the approach that you're not immediately subject to IHT on your worldwide estate when you first arrive in the UK. You have to be in the UK for a certain period of time.

And what is that period, Emma?

The period of time after which you become subject to IHT is 10 years. So if you're 10 out of 20 years resident in the UK, you are what is called a long-term UK resident. Now, it could be 10 consecutive years or it could just be 10 years out of 20. So you've got a much longer period over which you have to count.

And it's 10 out of the last 20 years immediately preceding the tax year in which the chargeable event, including death, arises. Now, what that means subtly is that if you want to avoid becoming a long-term UK resident and you've been here nine years, you need to leave on your 10th year in order to avoid being a long-term UK resident.

That's important, isn't it? You leave in your 10th year, not in your 9th year.

You've got to be non-resident for the whole of the 10th year. So in a sense, you've got to leave just before the beginning of the 10th year.

So you do need to leave in the 9th year?

Yes, in a sense, yeah. Because if you're resident in the 10th year, although you're not subject to IHT then, that's fine if you die in your 10th year. If you leave in your 11th year, you have become a long-term UK resident at the beginning of that 11th year.

And that means, as I understand it, you then have your 10-year tail.

You then have a three-year tail if you've only been resident in the UK for 10 years. And if you've been resident here for, say, 14 years, so anything up to 13 years, it's a three-year tail. Being resident in the UK for 14 out of 20 years, it's a four-year tail. 15 out of 20 years, it's a five-year tail. And then finally, you get to 20 years. If you've been resident here for 20 years, and this includes all existing people, you have a 10-year tail.

It's not split year. So if you are resident for any part of the tax year in the UK, it's counted as a full year for the purposes of this test.

And if you're a young person under 20, you've got special rules. So it's basically, if more than half your time has been in the UK, then you're treated as a long-term UK resident. And treaty non-residents doesn't count for this purpose.

So just because you're a treaty non-resident and you default to the US doesn't mean that you can't be a long-term UK resident. Although you may be saved by the treaty, as we'll see, for other reasons.

Sorry, one last thing. For those who have been non-resident for, let's say, 10 out of 20 years, the way the calculation works is they'll need to actually be non-resident for 11 out of 20 years in order to avoid being a long-term UK resident when they come back. The only exception to that is if they've done 10 consecutive years of non-UK residence, they can come back in their 11th year and not be a long-term resident.

So Emma, that is obviously dealing with the position of individuals and their amendments and the amendments that have been made by legislation to how the UK will, for future purposes, tax long-term residents in the UK by reference to their worldwide estate.

Let's move on now to talk to Trusts. And as I understand the existing regime, in very broad terms, as matters stand, the nature or treatment of Trusts from a UK inheritance tax perspective depends upon the domicile status of the individual who is the settlor or the settlors at the time at which the settlement is created, coupled with the situs of the property at that time. Now, there are obviously two or three different aspects of that regime, which historically have been extremely favourable.

And the third feature is, of course, the incidence of charges under the relevant property regime, which apply broadly in circumstances where there is a 10-year charge or there's an exit charge between the 10-year periods. So Emma, over to you. How has that all changed?

That's a very clear exposition of the current regime. The first thing to say is that if your settler dies or has died before 6th of April 25, your trust is completely unaffected by this.

Right, so we need to watch out for contracts being taken out.

Yeah, it doesn't matter where the settlor’s domiciled at the date of death, as long as they die before the 6th of April 25, that trust will be excluded property, provided the assets are foreign situs, and the settler wasn't domiciled or deemed domiciled when he set up the trust.

So instead of it all being determined by the domicile of the settlor at the date the property became comprised in the settlement, it's now going to be looked at year by year. And if the settlor is not a long-term UK resident, which basically means they haven't been resident in the UK for 10 years going forward, it will be excluded property. And if they become a long-term UK resident, any settlement where they're the settlor will actually be within the scope for IHT.

Just pausing there Emma, a couple of silly points. By year you mean tax year. And the second point is, obviously as matters stand, the scheme of the inheritance tax regime is such that you are the settlor to the extent to which you've contributed property to the settlement. Does that remain the case or is it a cliff edge? You put some in, the whole thing's tainted.

No, it's just on the amount that you…

Are deemed to have contributed. Let's take those different stages of a new regime. So the first thing is, what have they done to the terms of the financial bill to the current scheme of taxation of qualifying interest in possession settlements? That's settlements in which there exists an interest in possession which arose prior to the 22nd of March 2006.

Or they arose on death. There was an interest in possession that was set up by will. So in relation to those ignoring for the moment any transitional provisions, it won't matter what the long-term resident status of the settler is. If the life tenant is a long-term UK resident, that trust property will now be within scope for IHT on their death.

So now for future purposes, for the eagle eyes of our listeners, the provisions of section 49, subsection one will take precedence over the old rule in section 48, subsection three. Is that right, Emma?

Correct. If subject to only one, the transitional provision, which in most cases will apply to prevent existing Trusts becoming immediately within the IHT net. But it will have quite a big impact for let's say your foreign domiciled or long-term non-UK resident, a guy who might not have ever been resident in the UK. And he sets up a trust for his niece or nephew or son or daughter, which is an interest in possession one on his death, that will not be excluded property if the life tenant is a long-term UK resident. And that is quite a big change.

Let's talk then about some of the transitional aspects of this and how they relate…

And those are important because I think those are the things will probably determine whether many people stay or leave. So if you have a trust set up by a foreign domiciled settlor, and that settlor will become a long-term UK resident on the 6th of April 2025, and is a beneficiary of the trust, they are not going to be subject to the gifts with reservation rules, or rather their property won't be taxed on their death, subject to various conditions. And they have to be satisfied at all times after the 30th of October.

The first thing is that the property must have been excluded property immediately before the 30th October under Section 48. So the settlor must have been domiciled abroad and not deemed domiciled at the time the trust was established. And they must not be a returner within what's commonly called condition A. In other words, they mustn't have a domicile of origin and be born here.

And also, presumably, it follows from that, you can't, at this point in time, transfer cash from the UK outside the UK, and then take advantage of the new rules. You'll be caught.

It's only property comprised in a settlement as at 30th October, which is foreign and remains foreign at that date, and isn't Schedule A1 property, so it's not residential property.

And it never must become UK property in the future. So it's no good saying, well, it was foreign on the 30th of October, but then I sold that, the trustee sold that foreign asset and temporarily invested it in the UK and then took it out again. It was foreign at the date of my death.

You lose the transitional. So this transitional provision to protect you from gifts with reservation is a bit like a Ming vase. You really want to carry it very carefully.

Very important. I mean, thinking about portfolio investments made by trustees, this is going to put a massive pressure on them to make sure that they're clear as to what they're investing in, particularly in transparent type funds.

Yes, exactly. I mean, in many cases, trustees will tend to have a corporate entity investing in the assets, but not always because for US reasons, they don't want some form of PFIC problems. So they might not.

And also things like you think of quoted securities, you change your listings, you've got a problem.

Absolutely. And of course, if you're a trustee, which has maybe lent to a beneficiary to buy some UK residential property, that is a relevant loan and that can never get the benefit in future of protection from gifts with reservation unless the settler becomes, leaves the UK for 10 years, so they lose their IHT tail.

It's a limited transitional. It's been very carefully circumscribed. And it will mean that, for example, I've got some trusts where quite clearly we're not going to get the benefit of the transitional on property, which was lent to the beneficiary to buy a house. Even if the loan is eventually repaid on the sale of the house, it's never going to get the benefit of that transitional.

And those funds will have to be kept separate from the rest of the trust fund, which will get the benefit of the transitional.

And what happens if either now or after the 6th of April, 2025, we release the reservation by excluding the settlor?

Well, if it's on foreign situated property, we don't have, I think, a deemed pet because section 102, subsection 4.

In Fakingham, we talk a little else.

Will not apply. So you won't have a seven-year runoff. And you might exclude the settler and spouse for other reasons to do with income tax, for example. So you can do that.

I think the transitional is making people pause for thought before they leave, because they were very worried about a 40% tax charge on death. Now they can...

That's addressed to some extent.

That has to some extent and to a large extent addressed it.

That's helpful. Let's move to the next feature of the regime, which is, in a sense, one of the most controversial amongst those who are concerned about the regime's concerns, which is the relevant property regime and the amendments to that.

So on the relevant property regime, there is no transitional to protect you from the relevant property regime, except that if you're a long-term resident settlor, the trust won't come within the relevant property regime until the 6th of April, 2025.

And pausing there to make the obvious point, the relevant property charges, the dates of those charges relate to the date on which the settlement was made, not the dates on which an individual who was a settlor became a long-term UK resident.

Yeah, but the trustees will now have to keep an eye on the long-term residence of the settlor, because they may come in and out. And the reason why that's relevant is, let's say you're a long-term UK resident settlor, and 2030, just going back to my previous example, there's an anniversary, and it pays 3% on our current rules, because it will have been relevant property for five years.

And then at 41, when the settlor's finally lost his IHT tail, I can put it that way, there will be another charge of 0.6%. There'll be an exit charge. And this is the controversial aspect about it, which is new.

So when you say new, you mean it wasn't a feature of the regime under the Conservative proposals that's been brought in under the Labour Party?

Yeah, none of this was in. And it's also not a feature of our current regime. We don't say when property becomes excluded property, that there's going to be an exit charge. Now we are.

That's true. But at the end of three years, for three years, their trust will be in the relevant property regime. At the end of three years, there'll be a 1.8% exit charge.

I think one of the difficulties with fairness or otherwise in anything to do with taxes, exactly, it's a very subjective assessment as to who gets there. But it is a consequence to the future of this regime, that there will, for future purposes, be an exit charge imposed on trust.

If you've got an exit charge in the first place, you will have been here for 10 years, one way or another. So it doesn't seem totally unreasonable. Personally, I can see the sort of idea why this transitional would have been introduced. But it is definitely encouraging people to leave earlier than they otherwise would do.

So Emma, two features that I just thought we should focus upon in ending this section on the new IHT regime as it applies to Trusts. One is, of course, that under the terms of the relevant property regime, we're going to have to pay this 6% charge and the exit charge. And that obviously is going to need to be funded. So how is that going to work? And what's the consequences of the funding of that charge?

Easy if you've got everything at trust level, because you've just got the capital there to fund it. Much harder if you've got it all at the corporate level. So the trust has a company and it holds most of its investments through that company, which is not an uncommon structure. And if you've got a shareholder loan down from the trust to the company, the loan can be repaid.

But if you haven't got that, you're going to have to get the money out of that company up to the Trust.

By distribution?

Yeah, distribution, capital share buyback, and all of that will have consequences. So it's either going to result in capital gains tax if the settlor is still in the UK, or potentially income tax if they can benefit.

And that's the cost. So if there's a dividend, say, coming out of the company up to the trust, that's a 39.35% tax cost, which has got to be factored in. The settlor gets taxed on that dividend income, gets a right of reimbursement, and then what's left can be used to pay IHT.

So your IHT charge might not cost you 6% every 10 years, it might cost you nearer 9% to fund it.

And the final thing I thought we should just touch on, really, in relation to the personal aspects of the amendments to the inheritance tax regime, is, of course, the continued impact of the relevance of those estate treaties that we have with other countries for double tax relief.

So the revenue or the government has chosen not to change the concept of domicile in relation to double tax treaties.

So for example, if you're an Indian who's domiciled an Indian in India, you've got a foreign disposition, foreign will, that passes the property, and it's foreign property on your death, you will still be able to claim the benefit of the Indian treaty. Same with Pakistan, Italy has got a similar treaty, and Switzerland, but they only apply on death.

So they won't protect you from relevant property charges, and they won't protect you on lifetime gifts.

But what they will do, for example, there are all sorts of different permutations. But obviously, one of the regimes, the popular regimes at the moment, is Italy, with which we have an inheritance tax treaty.

And depending upon its implications under the Italian regime or otherwise, if, say, an individual left the UK and acquired, through intention permanent leisure reside, a domicile of choice in Italy, or her arrival in Italy, the consequence of that would be to disable the tail under the UK regime.

On death.

Yeah, on death. I mean, there are all sorts of technical problems that follow from that. But the point to draw out is really, A, the continued relevance of domicile as a concept for those treaty jurisdictions, but B, the continued ability of those treaties to override the domestic position in appropriate circumstances.

Yeah. And Italy is interesting, because if you went to Italy with a Trust, you might think, well, I'm not going to be subject to tax on the Trust assets anyway, because I've got the benefit of this transitional. But I am going to have an exit charge after three years at 1.8. I'd rather not pay that much. I'd rather pay a much smaller exit charge, let's say in 25, first quarter, 0.15%, and wind the Trust up.

But then it's going to come within my estate for IHT purposes. But then if you think you can get domicile under Italian law under the treaty, you might think that's a risk worth taking.

But as you say, that's not in itself quite as straightforward as it sounds, given in particular the restrictions on the amount of time that you can spend in Italy under the new regime there.

I think Italy has been relatively generous in allowing people, new residents, to spend more time there and giving them visas. But it takes some time. If people are wanting to go to Italy, they need to get their skates on, because my understanding is it can take four or five months before you can get the appropriate rulings, etc.

Having been through each of those different steps in it, really two big questions, which may have different answers depending on different profiles. The first question, Emma, is, should you leave?

I think if you're in your 60s, and you were intending to leave, maybe in four years time or five years time, maybe go back home, I think leaving now has quite a lot to recommend it. You've got a much shorter tail. You can get out of these charges, particularly the 10-year tie, much quicker.

And then we'll probably leave in five or six years time. And they don't care nearly as much about IHT.

And I think it might also depend upon some of their wider concerns about any settlements or otherwise that they have interest in. For example, there will be a category of individuals who have a good, strong motive defence from the application of charges under the transfer of assets abroad code and from capital gains tax purposes. And if they apply to property in which they have an interest, in a sense, the new regime is very favourable for them in many respects. The difficulty is going to be making sure that you have the confidence to be sure that you can not only make that claim, but also that it's evidence to a point that it's going to meet what is an increased level of forensic scrutiny, I think, from the courts on these points.

Yeah. And I think they're talking about having a consultation on the anti-avoidance provisions, Transfer of Assets Code settlements provisions, and you'd hope that they'd aim to make them simpler because it's certainly pretty complicated and uncertain at the moment.

Are they?

I think TOA most people would find quite challenging. And what I've noticed is that those who had revenue inquiries, and they've been going on for some years, are more inclined to leave. They've sort of had enough of it. But we'll have to see.

I think it's still too early to say what the overall effect of this is. I mean, obviously, more people will leave than perhaps would have done, and they'll leave earlier. But there will be people coming as well, which we shouldn't forget.

Exactly. And in a sense, just before we go on to the people coming to it bit, but in terms of people who will leave, one of the obvious points to make in relation to the new regime is that in circumstances where, as matters stand, you have an English or Welsh or Scottish or Irish domicile of origin and a domicile of choice here, there were real limits as to what you could do from an inheritance tax perspective anyway, in terms of planning. Now, it is perfectly possible for a category of individuals simply to leave the UK, and after a period of 10 years, their estate will largely fall out of the UK inheritance tax net.

And I think that's right. I think we were quite unusual as a country, apart from the US, in having such a long, sticky domicile test for IHT. Most countries tend to base it around residence.

But that in a sense goes back to the origins of domicile as a connecting factor. That's a consequence of the way in which the British Empire was operated.

I mean, you might have someone who left, never intended to return to the UK, but perhaps didn't settle anywhere. They may have gone to America, moved from state to state. And that could be quite unjust to them. They might not have actually acquired a domicile of choice until perhaps they retired to Florida or something.

So working in different states. So I think for those people, the regime is better. And I think rightly so.

I think those people should not have been brought back into IHT. Often they'd have had the treaty, but they wouldn't necessarily wanted all the hassle of arguing about it.

And then, of course, the $64,000 question, if we want to promote people investing in the UK and coming to the UK, should we come? There are a number of features of the regime, which may attract people to come to the UK.

Is that fair?

Yeah. I've outlined, I think we've discussed on the four-year exemption, that there are problems with it. It's got its complexity.

You've got to itemise it. But the four-year exemption might be quite attractive.

If I was a non-resident sitting on an asset that was full of gain, I might be quite tempted to come to London for a couple of years.

Sort of Bahamas in London.

Exactly. Realise the gain and then merrily shoot off to Italy or wherever else I wanted to spend my days, having accessed our favourable four-year rule and our network of double tax treaties, which would allocate the right to tax it to the UK.

Yeah. And I'm not sure that that would have necessarily been the intention of the government. Obviously, what they hope is that people come and stay.

That's the aim of all this. But I think those people might be encouraged to come. And also people who maybe have family in the UK, have been out of the UK for quite a long time and maybe want to just spend a bit more time in the UK, perhaps see the grandchildren.

They've been 10 years out, consecutive 10 years, and they can come back and not be within the, they might be less bothered about foreign income and gains, but they won't be within the IHT net for effectively 10 years. So for those people, I can imagine some of those spending more time in the UK. For example, people in Jersey might say, okay, I've been out in Jersey for 11 years. I'd quite like to see my grandchildren a bit more. I'll come over for a few years. And that would be quite an attractive regime for them.

So in summary, it's an attractive regime for short-term immigration. It may not be quite as attractive for medium and long-term immigration.

And do remember that once you become UK resident, you become a leaver. So becoming non-UK resident again will require more effort than staying non-UK resident in the first place. And this is the sort of dilemma I'm seeing with clients who are thinking about coming. At the moment, they might be on 120 midnight tests. They've got spouses abroad. They've got accommodation here, but they haven't, they've just got the 90 day tie, no other ties. And they've been non-resident for years.

If they come back into the UK and they're resident here for a few years, they will be a leaver when they finally leave. And that means that their day count will automatically reduce.

Well, Emma, can I just end by saying that how lucky we are that not only to have had you speaking this morning, but also we can look forward next year to Chamberlain and Whitehouse's trust taxation and private client planning updated to reflect all of these amendments.

And thank you, James, because you've explained the current and future regime of admirable clarity in a way that I have not been able to do.

Well, I think that's all we've got time for in the course of this short podcast. There will be more in this series that cover some of the legislation as it develops over the course of the next few months.

But so far as today's concerned, thank you very much for listening. And it's goodbye from me.

And goodbye from Emma.

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