Julia Peake, Technical Manager at Nucleus Financial, considers two tax announcements which will apply from April 2025 for non-doms and furnished holiday lettings.
At the end of July the new Chancellor, Rachel Reeves, highlighted that the economic landscape Labour inherited when it won the general election a few weeks earlier, was in a worse shape than expected.
She stated there would need to be some tough decisions made, which is likely to result in cuts to services and increased taxes which will be announced in the upcoming Budget set for 30 October 2024.
Two announcements which were made by the previous government, which will be implemented from 6 April 2025 are:
- Changes to the non-domiciled, UK resident taxation for foreign income and gains as well as inheritance tax (IHT) for non-UK assets and some trusts.
- Abolition of the taxation benefits for furnished holiday lets
Foreign income and gains (FIG)
The current remittance basis, for UK resident, non-domiciled individuals states they only pay tax on foreign income and gains when they bring them to the UK. This is being abolished and replaced with a residence-based scheme which will provide 100% relief (for a maximum of four years) to those who have not been UK resident in the 10 years prior to 2025/26.
Qualifying individuals will need to make annual elections to remit FIG tax-free to the UK up to four years after they arrive or four years total if they are already UK resident. Those not eligible for the FIG regime, including settlor interested trusts and deemed domiciled individuals, will be subject to tax on their worldwide income and capital gain on an arising basis in the new tax year.
Transitional arrangements for affected non-UK domiciled individuals
Individuals will be able to rebase their foreign assets, CGT will only be charged on the increase in value from the rebasing to the date of disposal.
A Temporary Repatriation Facility (TRF) will be available for those currently on a remittance basis to remit FIG that arose prior to 6 April 2025 and pay a reduced tax rate for a limited time.
The rebasing date, rate, the length of time and the possibility to expand the scope to include stockpiled income and gains will be confirmed in the Budget.
The government will also review current offshore anti-avoidance legislation, though this review and resulting changes are not anticipated to take place until tax year 2026/27.
New residence-based regime for inheritance tax
The government will change the current domiciled based IHT system to a new residency-based scheme which will affect non-UK domiciled individuals and some trusts.
The new IHT test for non-UK assets will be whether a person has been resident in the UK for 10 years prior to the tax year in which the chargeable event (for example death) arises, as well as keeping a person in scope for 10 years after leaving the UK.
IHT charges occurring before 6 April 2025 will be unaffected by these changes and will be charged according to the existing rules.
The government will also abolish Excluded Property Trusts (EPTs), meaning their assets will be in scope for IHT going forward.
There will be some adjustments required and some transitional arrangements for affected settlors. Confirmation of these and any new rules will be published in the Budget, following external engagement with stakeholders which will be over the summer.
Furnished holiday lets (FHLs) taxation abolished from 06/04/2025
Currently, Landlords of FHLs benefit from preferential tax treatment, including:
- Exemption from finance cost restriction rules meaning Landlords can claim more than basic rate income tax
- Preferential capital allowances rules
- Reliefs available from taxes on chargeable gains for trading business assets
- Income is included as relevant UK earnings when calculating maximum pension relief
When the new tax year rolls around these tax benefits will be gone. The changes going forward will be:
- Finance cost restriction rules apply so that loan interest will be restricted to basic rate for income tax
- Removing capital allowances rules for new expenditure and allowing replacement of domestic items relief- Transitional rules apply
- Withdrawing access to reliefs from taxes on chargeable gains for trading business assets- Transitional rules apply
- Income is no longer counted as relevant UK earnings for pension purposes
This may mean that Landlords want to sell their current FHL going forward. When combined with the Bank of England reducing interest rates last month, this could invigorate the housing market, making buying houses (especially for first time buyers) more appealing again.
For more information on both of these please see:
Changes to the taxation of non-UK domiciled individuals – GOV.UK (www.gov.uk)
Abolition of the furnished holiday lettings tax regime – GOV.UK (www.gov.uk)
What can clients do?
Firstly, they need to speak to their regulated tax adviser now to begin to review their current investment arrangements if they are affected by these changes. While we await further details in the Budget, discussion and preparation can take place so action can be taken once the new rules are confirmed.
There could be some actions the clients could take both now and when the new rules come in depending on their circumstances. These will need to be discussed and agreed with the client’s regulated tax advisor, but consideration could be given to:
- Reviewing current tax status
- Delaying a move to the UK
- Deferring any sales until after the details from the budget are known
- Looking at how these investments are held and if they can be changed either by ownership or the assets themselves
- Looking at selling their FHL- subject to any changes to Capital gains tax that could be announced in the Budget, which there might be.
- Reviewing their pension contribution to ensure they have enough UK relevant earnings for the contributions they are making if they were relying on the income from their FHLs.
Alerting clients to these upcoming changes can add real value to clients and their overall holistic financial plan so they can be “ahead of the game” once all the information is known. It also gives us an opportunity to work with our professional connections, by bringing the different expertise from the financial services and regulated tax worlds together for the mutual benefit of the clients.
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