KN Spring Budget Briefing 2024

The theme for the 2024 Spring Budget we were told, repeatedly, was 'lower taxes mean higher growth’.  Although there were a number of areas touched upon by Jeremy Hunt, the Chancellor of the Exchequer, the KN Spring Budget Briefing 2024 looks at some of the most important changes and how they might impact our clients.

1) Abolishment of the non-domicile rules … Non-dom, non grata?

In a somewhat surprising move, the Chancellor announced the abolition of non-UK domicile tax rules with a new residence-based regime to be introduced from 6 April 2025.  The treasury estimates that in 2025/26, this new regime will raise £185m.

The new 4-year Foreign Income and Gains (“FIG”) regime will apply to individuals who become UK resident, following a 10 year period of non-UK residence.

By opting into the regime, those individuals will not pay tax on FIG arising in the first 4 years after becoming UK tax resident and can bring these funds into the UK free from any additional charges.  During this period, individuals will also not pay tax on non-resident trust distributions but will pay tax on UK income and gains.

The following transitional arrangements for existing non-domiciled individuals claiming the remittance basis have been introduced:

1. An option to rebase the value of capital assets to 5 April 2019;
2. A temporary 50% exemption for the taxation of foreign income for 2025/26 (the first year of the new regime); and
3. A two year Temporary Repatriation Facility to bring previously accrued foreign income and gains into the UK at a rate of 12%.

Overseas Workday Relief (“OWR”) for the first 3 tax years of UK residence has also been changed so that from 6 April 2025, eligibility for OWR will be based on an employee’s residence and whether they opt to use the new 4-year FIG regime.

Critically, from 6 April 2025, income and gains arising from a non-resident trust structure will be taxed on the settlor or transferor (if they have been resident for more than 4 tax years) on the arising basis.

What this means in practice is that offshore trusts will be taxed on the same basis as UK domiciled settlors or transferors.

FIG that arose within the trust structure before 6 April 2025 will be taxed on settlors or beneficiaries if they are matched to worldwide trust distributions.

Inheritance tax (“IHT”) is currently a domicile-based system. The Government intends to move IHT to a residence-based system, subject to consultation, and applying this only from 6 April 2025. 

Current IHT treatment will continue for any non-UK property that is settled by a non-UK domiciled settlor and becomes comprised in a trust prior to 6 April 2025. New trusts and additions to existing trusts made by a non-UK domiciled settlor on or after 6 April 2025 will be subject to new residence-based rules.

It is therefore important to seek advice on how and when to settle a trust as the changes set out in today’s  Spring Budget could have a significant impact on the tax implications of setting up a trust structure.

2) The removal of the multiple dwellings relief – a sledgehammer to crack a walnut?

In what may become known as the Budget for abolishment, there was a further surprise when the Chancellor announced multiple dwellings relief (“MDR”) was being abolished.  Although MDR has been a staple in the world of residential Stamp Duty Land Tax (“SDLT”), it has certainly been abused. While this abolition is heavy handed, on balance, it does far more good than harm.

There are businesses whose sole activity is to make amends to SDLT returns to claim MDR. Perhaps inevitably, some of those claims have been spurious, and it is something that is very labour intensive for HMRC to oversee. Caselaw has also struggled to draw an accurate line between what is one dwelling and what is two. It is clearly an overly burdensome system for HMRC to police.

These changes will end the debate over what is a separate “granny flat” or annex (though may lead to a flurry of completions prior to the 1 June implementation). It’s also worth noting anything that has already exchanged is protected.

The ability for those buying the kind of luxury house that legitimately includes more than one “dwelling” to reduce their SDLT is not something many people will disagree with. By abolishing the rule, however, it will impact a relatively small number of legitimate transactions. The investor buying multiple flats, for example, will now be at a disadvantage unless they can buy at least six (and claim commercial SDLT rates).  The rules therefore will now disadvantage certain investors.

The change in rules also, in a roundabout way, closes down the “loophole” that allowed those purchasing commercial property alongside multiple dwellings in a single transaction to pay sometimes very low SDLT rates (sometimes close to 1%).

CGT

The Government has announced that from April 2024, the higher rate of Capital Gains Tax for residential property will be reduced from 28% to 24% for individuals. The Government hopes that this change will encourage landlords and second home owners to sell their properties, giving the residential market a much needed boost and providing more first time buyers with the opportunity to buy.

The Government has also confirmed that this will not affect access to Private Residence Relief. This change will primarily affect landlords with multiple properties and individuals with second properties who may have been waiting for more advantageous market conditions in which to sell.

The final pre-election budget

To many commentators, the Spring Budget did not appear to be a large enough “giveaway” for an early election to be called.

Alongside the above main talking points, there was a number of points which could be of wider interest, but there is not much information from the Government at this stage.

Unlike previous election years, the Spring Budget has been more measured this year. There has been a lot of discussion over the last few weeks surrounding the measures the Chancellor was going to take to bridge the tax gap of £35.8bn. The Chancellor announced a further £140 million to improve HMRCs ability to manage tax debts. While this is slightly lower than the £163 million offered in the Autumn Statement, further investment continues to be welcomed in an attempt to aid HMRC’s ability to recover taxes.

The full text of the Spring Budget can be found here: https://www.gov.uk/government/publications/spring-budget-2024

Please get in touch with your usual Kingsley Napley contact to discuss any of the upcoming changes or any related points.

Further information regarding our tax law and HMRC services is available on our website.

 

About the authors

Waqar Shah is a Partner in the Dispute Resolution department, focusing on the resolution of complex tax matters. He acts for high net worth individuals and corporate clients across all sectors in respect of HMRC disputes and investigations across the full range of taxes. This typically includes VAT disputes, employment tax matters (including 'IR35'/off-payroll working), customs/excise duty issues, tax fraud investigations, and more recently, National Minimum Wage enquiries.

Matt Spencer is a partner within the Corporate, Commercial and Finance department, specialising in tax law, advising on and efficiently structuring a wide range of corporate and real estate transactions including M&A, land transfers, developments and leases.

Krishna Mahajan is an Associate in the Dispute Resolution department, who specialises in litigation and resolution of complex tax matters.  
Krishna has extensive experience in tax and trust litigation including working on Codes of Practice 8 and 9, cross-jurisdictional schemes with UK tax implications, settling EBTs and film finance schemes with HMRC, and concluding long standing HMRC enquiries.

Melissa Joseph is a trainee solicitor in the Dispute Resolution department at the time of writing.

Irène Schell is a trainee solicitor in the Corporate, Commercial and Finance department at the time of writing.