UK Budget Date Confirmed and an Economic Trilemma

The UK Budget

The date for the Budget has been confirmed as 30^th October 2024, slightly later than many had originally anticipated. The announcement follows a Treasury internal audit commissioned by Labour when they took office, and the Chancellor’s response has hinted at tax increases as well as further cuts to welfare and public spending. This is based on a calculation of a £22bn “black hole” in the public finances inherited from the Conservatives.¹

Prior to taking office, the Chancellor confirmed that she intended to only hold one fiscal event a year, always accompanied by a full review by the Office of Budget Responsibility. It should be noted that the Chancellor has three options available to her; cut public spending, increase taxes, or increase borrowing. The Government cannot borrow too much more without breaching its own fiscal rules and this leaves the shortfall to be made up of a combination of cuts to public spending, such as a move to means test the Winter Fuel allowance², as well as increasing taxes.

Some of the tax increases - namely, the cancellation of the UK non-dom regime and a move to apply VAT to private school fees - have already been well sign-posted by Labour in the General Election campaign.  However with Rachel Reeves having also committed to no future increases to Income Tax, VAT, Corporation Tax and National Insurance, she is left to look to other taxes such as Inheritance Tax (IHT) and Capital Gains Tax (CGT).  These taxes are typically lower revenue generating taxes, with IHT forecast to generate £7.2bn in 2024/25, which is equivalent to 0.3% of national income.³

The Non-Dom Regime⁴

Further details on the cancellation and replacement of the non-dom regime were released. The cancellation of non-dom regime was previously announced by the outgoing Conservative government on 6th March 2024 but due to the early calling of the election they were unable to release draft legislation.  The new technical note provides some further clarity, but we will still need to wait until the Budget in October for full details.

A summary of the proposals announced under the Conservatives can be found in our note on the Spring Budget: https://privatebank.jpmorgan.com/eur/en/insights/wealth-planning/spring-budget-2024-the-end-of-the-non-dom-regime.

Broadly, the proposal was to abolish the use of the concept of domicile in the UK’s tax code and replace the long-standing UK non-dom system with a new “modern, simpler and fairer” regime.⁴ This was widely noted at the time as a ‘stealing of the march’ of Labour’s policy, so it is to be expected that a lot of the details from the Conservative’s March proposals have been retained by Labour.

New Arrivals to the UK

• Confirmed that the introduction of a residence-based test will be from 6^th April 2025.
• The new regime will allow new arrivals to the UK, provided they have not been UK tax resident in any of the 10 consecutive years prior to their arrival, to earn Foreign source Income and Gains (FIG) free from UK tax for the first 4 years of UK residency.
• From the start of their fifth year of UK tax residence, individuals will pay UK tax on their worldwide income and gains at the prevailing rates of Income Tax and CGT.

Existing non-domiciled UK resident individuals – transitional provisions

• There will be transitional arrangements for existing non-doms; under the Conservative government it was proposed that these individuals will have a two-year window (2025-26 and 2026-27) where they can bring to the UK their FIG that arose before 6 April 2025 at a flat rate of 12%. Labour have not confirmed the specifics of the new “Temporary Repatriation Facility (TRF)” but have confirmed that “the rate and the length of time that the TRF will be available will be set to make use as attractive as possible.” ⁵ There is also a possibility that the TRF will be extended to certain overseas structures such as trusts.
  
• Any FIG which arose prior to 6^th April 2025, which is not remitted using the TRF, will continue to be taxed when remitted to the UK. This includes individuals who can benefit from some of the new 4-year FIG regime.
• Existing individuals who have been UK resident for fewer than four tax years and who are eligible for the new residence-based exemption will also benefit from the relief from tax on their foreign income and gains until the end of their 4^th year of UK tax residence.
• Labour have decided not to introduce the proposed temporary 50% reduction in foreign income subject to tax in 2025–26. This would have been available for non-doms who will lose access to the remittance basis on 6^th April 2025 and are not eligible for the new 4-year exemption.
• Existing non-doms who have claimed the remittance basis will be given the opportunity to ‘re-base’ their assets for UK CGT purposes to an as yet unspecified date (the Conservatives had proposed 6^th April 2019) for disposals that take place after 6^th April 2025.

Non-UK Trusts

• The trust protections introduced as part of the 2017 non-dom reforms will be reformed / removed meaning that new FIG arising within a non-resident trust after 6^th April 2025 will be taxable on the trusts non-dom settlor(s).
  
• Foreign income and gains that arose within trusts before 6^th April 2025 will not be taxed unless distributions or benefits are paid to UK resident who have been here for more than 4 years.
• As noted above, the Government announced that they would explore ways to expand the TRF to apply to non-resident trusts.

Inheritance Tax (IHT)

• Before the election the Conservative party had proposed that IHT should also move to a residence based regime and they had committed to a consultation exercise prior to this being finalised. The new government have now confirmed that they will adopt this proposal and intend to replace the old regime with a new residence based regime from 6^th April 2025. This will impact the scope of property brought into the charge of IHT both for individuals and trusts.
  
• While the exact nature of the rules has not been confirmed, it is anticipated that the basic test for non-UK assets being brought into scope for IHT will be whether a person has been resident in the UK for 10 years prior to the year in which the taxable event (including death) arises. This includes the potential for a 10 year tail after leaving the UK.
• Further details on these provisions will be announced at the Budget, after consultation with stakeholders.

Personally Held Assets

• It is envisaged that worldwide assets held in an individual’s personal name, post 6^th April 2025, will be subject to UK IHT, once a person has been resident in the UK for 10 years (“the residence criteria”). This comes with a provision that the person will be in scope for UK IHT for 10 years after leaving the UK (“the tail provision”).
  
• The taxation of UK situs assets, at present, will remain unchanged.

Trusts

• While it was anticipated originally that the current IHT treatment will continue for any non-UK property that is settled by a non-domiciled settlor into trust prior to 6^th April 2025, it has since been confirmed that the government will end the use of Excluded Property Trusts.
  
• However, they recognise that “trusts will already have been established and structured to reflect the current rules”. Therefore, the government will be considering how to transition to the new system while allowing for adjustment to existing trust arrangements. Confirmation of these potential transitional arrangements will be announced at the Budget, following external engagement.
• New trusts and additions to existing trusts will be subject to the new residence-based rules after this date.

Call for Evidence – Carry ⁶

The government also announced a commitment to take action in respect to the taxation of the carried interest “loop-hole”. Our previous note on the Future of Carry in the UK can be found here: https://privatebank.jpmorgan.com/eur/en/insights/wealth-planning/the-future-of-tax-in-the-uk-carried-interest.

Labour are committed to engaging with all relevant stakeholders and are asking for written representations as well as meeting with various external stakeholders. The key questions in respect of which they are seeking feedback on are:

• How can the tax treatment of carried interest most appropriately reflect its economic characteristics?
  The government notes that there are a range of circumstances in which carried interest is received, and that the characteristics of the reward will not be the same in all cases.
• What are the different structures and market practices with respect to carried interest? 
  The government is particularly interested to understand how these differences should be taken into account as part of its reforms.
• Are there lessons that can be learned from approaches taken in other countries? 
  While many other countries have specific regimes for the taxation of carried interest, their detail and conditions for access vary.

They have confirmed they intend to announce any findings / changes at the Budget on 30^th October 2024.

Applying VAT to Private School Fees and Removing the Business Rates Charitable Rates Relief for Private Schools⁷

It was well sign-posted leading into the election that the incoming Labour government intended to apply VAT to private school fees so it comes as little surprise that this is one of the first policies announced. While details will be fully confirmed at the Budget a technical note published earlier this week sheds some light on the policy.

Broadly:

• As of 1^st January 2025, all education services and vocational training supplied by a private school, or a “connected person”, for a charge will be subject to VAT at the standard UK rate of 20%. Boarding services closely related to such a supply will also be subject to VAT at 20%.
• The note included detailed of anti-forestalling measures, such that, any fees paid from 29^th July 2024 pertaining to the term starting in January 2025 onwards will be subject to VAT.
• The government will legislate to remove eligibility of private schools in England to business rates charitable rates relief.

The technical note states that the government does not anticipate that this measure means that school fees will increase by 20%, rather they expect “private schools to take steps to minimise fee increases”.

Next Steps

The summer will be a busy one for the government as they are consulting both formally in relation to the taxation of carry as well as carrying out further external engagement on IHT and the non-dom changes.

While we have been granted a little more certainty there remains a significant amount of detail to be confirmed in the Budget in October. If any of the above changes impact you or if you have any questions please discuss this with your J.P. Morgan team as well as your independent tax advisors.

¹ https://www.theguardian.com/politics/article/2024/jul/29/reeves-moves-fast-to-tackle-22bn-budget-shortfall-covered-up-by-tories

² https://www.bbc.com/news/live/c3g9yy73l77t

³ https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/inheritance-tax/

⁴ https://www.gov.uk/government/publications/2024-non-uk-domiciled-individuals-policy-summary/changes-to-the-taxation-of-non-uk-domiciled-individuals?secureweb=Teams&secureweb=OUTLOOK

⁵https://www.gov.uk/government/speeches/spring-budget-2024-speech

⁶ https://www.gov.uk/government/calls-for-evidence/the-tax-treatment-of-carried-interest-call-for-evidence/b8a7b5ae-0fcd-49bc-bfd1-d5cf5f4a8599

⁷ https://assets.publishing.service.gov.uk/media/66a7a1bdce1fd0da7b592eb6/Technical_Note_-_DIGITAL.pdf