Introduction


The run up to a Budget is always a time when rumours and uncertainty abound. When it is the first Budget of a new party in Government this chatter can be multiplied tenfold. Chancellor Reeve’s first Budget looks unlikely to disappoint given the frenzied and rampant speculation evident in the various recent public pronouncements by members of the government such as:


  1. The talk of a black hole in the public finances of at least £22 billion (rising to £100 billion over the next five years);
  2. Headlines claiming that The Chancellor is looking to raise £40 billion in tax rises and spending cuts;
  3. Prime Minister Starmer warning that the Autumn Budget will be “painful”; and
  4. The Business Secretary refusing to rule out increases to the rate/scope of employer’s national insurance. In the last few days this has led to heated discussions as to whether such changes would break manifesto promises.


In addition to press coverage around areas where the Chancellor may look to raise further tax, there has also been talk of potential row backs from policies previously announced for fear they may backfire. Including in relation to:


  1. the planned changes to the taxation of non-doms (individuals are said to be leaving the UK resulting in a net loss of tax rather than increased tax take); and
  2. private equity.


Potential changes to the taxation of non-doms


We have posted a number of insight pieces about the announced seismic changes to the taxation UK resident foreign domiciled individuals (see A regime ripe for reform – but not like this and Changes to the UK’s Special Tax Regime for Foreign Income and Gains).


There has been a flurry of articles in the last month or so suggesting the government could be considering softening the proposals, adopting something of a compromise but still delivering on “the spirit of the manifesto without going as far as previously suggested.” There might be some movement in relation to:


  1. grandfathering for IHT excluded property trusts (see below); and
  2. the 50% relief on 2025/26 foreign income that the Conservative administration had promised.


Nothing specific has been said by the Chancellor or any government ministers with a Treasury spokesman referring to the reports as “speculation not government policy”. All we do know is that the government is now refusing to commit to a figure in terms of how much the changes will raise, stating we must now wait for the Budget.


It seems clear that the figures the government (and the previous Conservative administration) were working with were inaccurate. Specifically, more foreign domiciled individuals have left the UK or are planning to leave because of the proposed changes than was anticipated. In addition, the UK appears to have plummeted down the league table in terms of jurisdictions of choice for rich foreign domiciled individuals.


The question that has plagued advisers over the past few months has been whether UK resident foreign domiciled individuals should/can do anything prior to 30 October. It would be surely be inequitable for the Chancellor to announce any changes in the Budget that would disadvantage individuals that had been dissuaded from taking an action because of clear comments made by Labour previously (prior to any row back) and it is very much hoped that there will not be anything that has a 30 October cut-off date.


Grandfathering of excluded property trusts


The Conservatives said they would have a transitional provision grandfathering for IHT purposes, trusts created prior to 6 April 2025. This meant that qualifying trusts (settled by a foreign domiciliary at a time when they were not deemed UK domiciled) would remain sheltered from IHT with respect to excluded property (broadly foreign situs assets). 


The Conservative proposals were far from ideal (for the reasons summarised in  A regime ripe for reform – but not like this) and were in any event quickly superseded by Labour’s April comments coming so soon after. From an IHT perspective this meant there would be no grandfathering of excluded property trusts and fatally undermined the all important IHT protection that high and ultra-high net worth UK resident foreign domiciled individuals had hoped for.


If Labour does change its policy and announces on 30 October that there will after all be grandfathering this would of course be very welcome. As stated, given the circumstances a 30 October 2024 (Budget Day) cut off would be wrong. Labour was previously clear that there would be no grandfathering. Individuals who would otherwise have set up such settlements will have refrained from doing so because of the clear statements made given the penal tax provisions (both the relevant property regime and for settlor interested trusts the gift with reservation of benefit anti-avoidance provisions) that would apply. Any grandfathering should apply to all trusts set up prior to 6 April 2025.


If a UK resident foreign domiciled and not deemed domiciled individual wants to establish a trust even if there is no grandfathering, then going ahead and getting the trust in place with all the property settled prior to 30 October might be felt prudent just in case. It would be critical to not rush and make a mistake that will cause a significant non-UK tax issue. Where there is a US settlor and/or beneficiaries, for example, it will be vital that detailed US tax advice has been taken and that the American advisers have signed off on the trust as well as the UK advisers. Getting it wrong leaves an individual with a complex structure which cannot be easily collapsed.


IHT – the ten-year tail


The proposal that an individual who comes within the scope of worldwide UK IHT can only break free from UK IHT after ten complete tax years of non-UK residence is ridiculous. No other jurisdiction has a provision which so unfair, disproportionate, theoretically draconian and unenforceable.   


There was discussion with respect to extending the current IHT tail in the 2017 changes but enforcement was considered a huge hurdle, hence we have our current tail which is broken if the foreign domiciled individual is not UK resident in the fourth year and the three preceding years were years of non-UK residence. It is hoped that sense prevails in 2024 as it did in 2017, and the current tail is not extended.


The dropped transitional provision - 50% relief on foreign income received in 2025/26


There has been speculation that Labour might bring back the 50% transitional relief with respect to foreign income received in 2025/26 (the first year of the new regime). 


This might happen as part of a compromise package but realistically it is not a key issue for those affected. It only lasts for one year. UK resident foreign domiciliary concerns focus on:


  1. The changes to IHT which mean that it will no longer be possible to shelter their foreign assets. These changes being the most important for the majority of the high and particularly ultra-high net worth individuals impacted.
  2. How disadvantaged the new special regime for income and gains is compared to the old regime where the individual is looking to live in the UK for more than just the short term.


It is these issues that the government needs to address to stem the flow of those leaving and to increase the attractiveness of the UK for rich foreign domiciled individuals that are potential new arrivers. 


Any other changes?


Labour itself (in its April 2024 comments) announced that it might introduce some type of relief for investing in the UK. Nothing further has been said and it may be that this will feature on 30 October.


Transitional provisions needed to prevent the changes being retrospective/retroactive


As the saying goes the devil is in the detail and the detail is crucial with respect to these changes. It is understood that there is no intention that individuals who have left (or who are not UK resident in 2025/26) will be caught because of the changes. Careful examination of the legislation will be needed though particularly in relation to the IHT tail.


Scrutinising draft legislation


It may be that on 30 October we get the details of the new regime but must wait for any draft legislation which could be released in tranches. There could be very tight timetables that have to be worked to by the professional bodies and other interested parties for comment. Nothing has been said to indicate that there will be a much-needed delay before implementation.