Taxation of non-UK domiciled individuals (“non-doms”)

The Spring Budget 2024 announced that the remittance basis of taxation for non-doms would be abolished from 6 April 2025 and replaced with a residence-based regime. The new regime will provide 100% relief on foreign income and gains (FIG) for new arrivals to the UK in their first four years of tax residence, provided they have not been UK tax resident in any of the 10 consecutive years prior to their arrival. 

Years when split-year treatment is claimed will count as a full year for the purposes of the four-year FIG. Taxpayers who do not meet these conditions will be taxed on the arising basis on their worldwide income and gains from 6 April 2025. 

This had also formed part of the new government’s manifesto. The Budget on 30 October 2024 announced a few changes to the plans originally announced by the previous government. These include:

• scrapping the planned 50% reduction in foreign income subject to tax in the first year of the new regime;
• extending overseas workday relief from three years to four years, aligning with the new four-year foreign income and gains regime, but introducing a financial limit of £300,000 or 30% of overall employment income;
• extending the temporary repatriation facility from two years to three years, with remittances taxed at 12% in 2025/26 and 2026/27, and at 15% in 2027/28; 
• rebasing for capital gains tax applying to assets held on 5 April 2017 to the value at the date of disposal instead of rebasing to 5 April 2019 values;
• removing income tax relief on chargeable overseas earnings for income earned on or after 6 April 2025 (where overseas workday relief does not apply), but confirming that this income will be eligible for the temporary repatriation facility and taxable on the remittance basis;
• simplifying administrative requirements for employers and agents. The need  to obtain HMRC approval for applications for a direction to operate PAYE on the proportion of an employee’s employment income for work expected to be carried out in the UK will be removed; and
• reducing the travel cost exemption for costs incurred by non-domiciled employees paid for by employers when they come to work in the UK from five to four years, to align with the four-year foreign income and gains regime.

A remittance basis user’s unremitted foreign income and gains arising prior to 6 April 2025 will continue to be taxable in the tax year when they are remitted to the UK.

It was also confirmed that a residence-based regime will apply to inheritance tax (IHT). An individual is a long-term resident (and in scope for IHT on their non-UK assets) when they have been resident in the UK for at least 10 out of the last 20 tax years. They will remain in scope for between three and 10 years after leaving the UK.

There are also implications for trusts. Tax protections on foreign income and gains arising within settlor-interested trust structures will no longer be available to individuals who do not qualify for the four-year foreign income and gains regime. However, the temporary repatriation facility will extend to unattributed foreign income and gains held within trust structures. For IHT, any non-UK assets a person put into a settlement will be subject to IHT charges at times when the settlor is long-term resident (subject to transitional rules).

Private schools and VAT

The government will proceed with its manifesto commitment to remove the VAT exemption from private school fees.  Although no timings for this change were included in the manifesto, the Chancellor confirmed that the change would take effect in relation to fees in respect of education (and boarding) provided on or after 1 January 2025. 

The revised draft legislation, published alongside the Budget, includes the following changes:

• Exceptions to standard rate:
• Explicitly excludes the provision of teaching English as a foreign language.
• Explicitly excludes the provision of higher education courses.
• Definition of a private school:
• Explicitly excludes nursery schools (previously excluded elsewhere in the draft legislation).
• Explicitly excludes independent training providers and independent learning providers.
• Aims to capture only private sixth forms and not further education (FE) colleges. For an FE college to be considered a private school, a majority of 16–19-year-old pupils must now be charged fees.
• No longer excludes non-maintained special schools.
• Connected persons test:
• Updated to remove what was Note (2)(a).
• Definition of a nursery class:
• Amended to “a class composed wholly (or almost wholly) of children under compulsory school age...”
• Anti-forestalling provisions:
• The power to amend the anti-forestalling provisions outlined at 2(3) in the draft legislation will be removed.

Ed Saltmarsh, ICAEW Technical Manager, VAT and Customs, said: “It’s helpful that the government has updated the draft legislation to clarify the position in several areas, as we have called for. Nevertheless, we remain disappointed that the government has confirmed that it will introduce VAT on private school fees from 1 January 2025, as we think it doesn’t allow sufficient time for these schools to prepare for all the possible consequences and places an unnecessary burden on HMRC”. 

Taxation of carried interest

Carried interest is received by fund managers, mainly within the private equity (PE) industry. It depends on the performance of the underlying businesses that the funds have invested in. Traditionally, most carried interest is taxed at CGT rates. 

In July 2024, the government said that the tax treatment of carried interest did not appropriately reflect its economic characteristics, and announced its intention to change the rules. ICAEW responded to the government’s call for evidence, urging the government to proceed with caution, as any changes to the tax rules could jeopardise the contribution the PE industry makes to the UK.

At the Budget, the government announced that carried interest gains, which are currently charged to CGT at 18% at the lower rate and 28% at the higher rate, will be taxed at a flat rate of 32% for 2025/26. For 2026/27 onwards, carried interest will be brought within the income tax framework, with a 72.5% multiplier applied..

The government is also consulting on proposed amendments to the income-based carried interest (IBCI) and Disguised Investment Management Fee (DIMF) rules which will take effect from 6 April 2026. If you would like to contribute to ICAEW’s consultation response, please contact Katherine Ford, Technical Manager, by 15 January 2025.

Income tax thresholds

The Labour Party had promised that it would “not increase taxes on working people”, and specifically that it would not increase national insurance, the basic, higher, or additional rates of income tax, or VAT.

The Chancellor referred to that pledge when announcing that the government would end the freeze on income tax thresholds on 5 April 2028, in line with the previous government’s plans. For 2028/29, the income tax thresholds will increase in line with the consumer prices index. Different thresholds apply in Scotland for non-savings and non-dividend income.

ICAEW Budget webinar

To learn more about the measures discussed above, and other changes announced at the Budget, join members of the Tax Faculty at the Budget webinar on Friday, 1 November 2024. Attending the webinar could contribute up to 1.5 hours of verifiable Continuing Professional Development (CPD), providing you can demonstrate that the content is relevant to your role.

Further information

Read more in ICAEW’s articles covering the Labour Party’s manifesto commitments and the announcements made by the government on 30 July 2024.