A summary of the measures
Personal Tax
The UK personal tax regime will see substantial change following the budget, with far-reaching reforms to income tax, CGT and inheritance tax.
Reform of the UK Non-domicile regime
As originally announced in the Spring Budget by then Chancellor Jeremy Hunt, the non-dom regime, and associated remittance basis of taxation, will be abolished from April 2025, to be replaced with a new regime based on residence and length of stay in the UK.
Inheritance Tax will also move to a residence-based regime, effective April 2025, with associated changes for the taxation of UK resident settlors and beneficiaries of offshore trusts.
The main developments from the Spring Budget announcement are:
- To bring the treatment of offshore trusts in line with the tax position of the Settlor from April 2025.
- The original policy announcement noted that excluded property trusts settled before April 2025 would continue to be excluded. This will now not be the case – if the Settlor is within the scope of UK IHT, the trust will be subject to ten-yearly IHT charges and exit charges
- The removal of the 50% reduction for personal foreign income subject to tax in 2025/26. The original policy provided for a 50% reduction in the taxation of foreign income for individuals losing access to the remittance basis and not qualifying for the 4-year FIG exemption. This reduction will now not apply.
- Rebasing of assets will be to 5 April 2017. It was originally thought individuals losing non-dom status would be able to rebase foreign assets to their April 2019 value, however this has been pushed back to the April 2017 value. The policy is otherwise closely aligned to the Spring Budget announcement. These changes are discussed in more detail here.
The policy is otherwise closely aligned to the Spring Budget announcement. These changes are discussed in more detail here.
Reform of Inheritance tax
The reform of IHT originally proposed in the Spring Budget will also proceed, with IHT determined by reference to residence from April 2025, rather than domicile.
Individuals resident in the UK for 10 of the last 20 tax years will be considered “long-term residents” and will fall within the scope of UK IHT on their worldwide assets. Long-term residents will remain within the scope of UK IHT even after leaving the UK, subject to their length of stay in the UK.
Individuals resident for 10-13 years will remain in scope of UK IHT for 3 tax years after leaving the UK. This “tail” is increased for one year for every additional year of residence, up to a maximum of 10 years for persons resident in the UK for 20 years or more.
As noted above, offshore trusts will also be brought within the scope of UK IHT, albeit with an exemption from the Gift with Reservation rules for existing excluded property held in trusts established before 30 October 2024.
Other IHT changes include:
- Freezing of IHT thresholds to April 2030 – this is a further extension of two years and will mean no change to the IHT nil rate band for 21 years.
- Agricultural property relief will be restricted to give 100% relief on the first £1m of assets and 50% on assets over that amount. This will apply from April 2026.
- Business property relief will be similarly restricted to give 100% relief on the first £1m of assets and 50% relief on assets over that amount. In addition, relief on shares not listed on a recognised exchange, which includes AIM listed shares, will be reduced to 50%. The £1m allowance does not apply to these shares. These changes will also have effect from April 2026.
- The IHT exemption on pensions will be abolished from April 2027. The pension fund will form part of the deceased’s death estate, with IHT payable by the pension fund itself at up to 40%.
In addition to the above changes, the Treasury has put out a call for evidence on the effectiveness of the Settlements Legislation, the Transfer of Assets Abroad provisions and the CGT Capital Payments regime. These measures all relate to the taxation of UK residents with an interest in offshore structures and will be of significant interest to trustees and company administrators on the Islands.
The call for evidence runs to 19 February 2025, after which there will be a formal consultation. Any change is therefore unlikely by April 2025.
Capital gains tax
As widely expected, CGT rates have been increased, rising to 18% for standard rate taxpayers and 24% for higher and additional rate taxpayers (from 10% and 20% respectively). Trustees’ and personal representatives’ main rate of CGT is also increased to 24%.
These changes have effect from 30 October 2024. Other CGT changes include:
- Business asset disposal relief rate will increase to 14% from 6 April 2025 and 18% from 6 April 2026
- Investors’ relief rate will increase similarly. In addition, the lifetime allowance for Investors’ relief has been reduced to £1m from 30 October.
Carried interest
As expected, the Budget announcements contained a number of changes to the taxation of carried interest. In the short term, the tax rate on carried interest will increase to 32% from 6 April 2025. However, this is just the first step in a wider series of reforms.
More widespread reform will be implemented in April 2026. The Government plans to introduce a revised tax regime for carried interest which sits wholly within the income tax framework, with all carried interest treated as trading profits and subject to income tax and Class 4 NICs. The amount of ‘qualifying’ carried interest subject to income tax and Class 4 NIC will be adjusted by applying a 72.5% multiplier, giving an effective tax rate of 34.075%.
Non-qualifying carried interest will be taxed under the income based carried interest (IBCI) regime, and a consultation running until 31 January 2025 has been introduced by the Government to consider additional qualifying conditions (beyond the average holding period requirement).
The rules for people leaving the UK or arriving in the UK are more complex, and we suspect will be very bespoke to individuals’ circumstances. The application of the new foreign income and gains (FIG) rules will be important, as will the ability to utilise double tax treaties for those who fall within multiple tax regimes.
Corporate tax
The Treasury have published a business tax roadmap to provide certainty on key corporation tax rates and allowance. Commitments in the roadmap include:
- Capped headline rate of Corporation Tax to 25%, with the Small Profits Rate and marginal relief remaining at current rates
- Capital allowances full expensing to be maintained
- Annual Investment Allowance to remain at £1m and the WDA rates and Structures and Buildings Allowance to remain unchanged.
Other measures announced include:
- Extension of Pillar II to introduce the Undertaxed Profits Rule for accounting periods beginning on or after 31 December 2024
- Anti-avoidance measures to tighten rules preventing shareholders extracting untaxed funds from close companies, effective 30 October 2024
- Equalise the treatment of alternative finance with conventional finance to remove unintended tax consequences, effective 30 October 2024
Reliefs were also announced for independent film productions, theatres, orchestra, museum and galleries.
A consultation will follow on the tax treatment of predevelopment costs for capital allowances purposes. Further consultations are also expected in Spring 2025 in relation to Transfer Pricing, including:
- A potential exemption of UK-UK transactions
- Changes to the treatment of guarantees
- Removal of exemption for medium sized businesses
- Increased documentation requirements
Tax avoidance
Aside from the tax reforms noted above, the main focus on anti-avoidance is through investment in HMRC compliance and debt management staff.
Recruitment of 5,000 additional compliance staff is the cornerstone of this investment, with the aim to raise an additional £2.7bn per year by 2029/30. Additional funding has also been announced to improve HMRC’s management of tax debts, with a view to raising an additional £2bn per year by 2029/30.
Other announcements and consultations
In addition to the measures noted above, the Chancellor also announced the following measures which may be of interest to Islanders and Island based businesses:
- Confirmation of the introduction of VAT on private school fees from 1 January 2025. Higher Education will be excluded, as will most nurseries Independent Learning Providers, but all other education establishments are expected to fall in scope.
- Employers’ NIC will increase to 15% from April 2025, with the Class 1 NIC secondary threshold reduced to £5,000 from April 2025 (and frozen at this level to April 2028)
- Increase in the Higher Rate of Stamp Duty from 3% to 5%, effective for transactions with an effective date on or after 31 October 2024. This increases the maximum SDLT rate to 17% and will impact UK property transactions undertaken by Island residents.
