A summary of the key announcements
The Chancellor of the Exchequer, Rachel Reeves, delivered her maiden Budget today for the new Labour government, being the first Labour budget in over a decade. The Chancellor has sought to increase taxes under a backdrop of additional investment.
With some significant proposed changes, we have highlighted some of the measures that may impact the Channel Islands. This Budget has introduced a number of new proposals and as such there is lots of finer detail to analyse, but our initial reactions are as follows:
Abolition of ‘non-dom’ tax regime is likely to have significant implications for offshore trusts who have UK resident settlors who are either non-domiciled or deemed domiciled.
Liability to Inheritance Tax (IHT) will now be determined by a residence based system. As part of these proposed changes, the liability to IHT of excluded property trusts will follow the position of their settlor post 5 April 2025.
Carried Interest consultation with proposed adjustments to the form of taxation of such income from 2026, inclusive of changes to territorial scope, and an interim increase in Capital Gains Tax (CGT) rate to 32% from April 2025.
Abolition of ‘non-dom’ tax regime - as predicted, the Chancellor announced the abolition of the “outdated” ‘non-dom’ regime effective 6 April 2025, to be replaced by a “modern, simpler and fairer residency-based system”.
The measures introduced align broadly with the technical paper the Conservatives released after the spring budget on the foreign income and gains (FIG) regime, with a few nuances.
The Temporary Repatriation Facility, which allows for pre 5 April 2025 foreign income and gains for eligible individuals to be remitted at a preferential rate, will now be available for three years rather than two. The rate will be increased from 12% to 15% in the final year.
Transitionally, eligible individuals will be allowed to make an election for qualifying assets to be rebased as at 5 April 2017, slightly earlier than the 5 April 2019 proposed under the Conservatives’ technical paper.
It appears other transitional relief measures under the previous technical paper have been removed.
As anticipated, the protection from UK tax on foreign income and gains arising within settlor-interested trust structures will no longer be available for non-domiciled and deemed domiciled individuals who do not qualify for the 4-year FIG regime.
Inheritance Tax (IHT) - Liability to IHT will be determined by a new residence-based system, with individuals being subject to IHT when they have been resident in the UK for at least 10 out of the last 20 tax years.
Subject to transitional arrangements that may be introduced, any non-UK assets a person put into a trust or settlement will be subject to UK IHT charges at times when the settlor is a long-term resident. As part of these proposed changes, the liability to IHT of excluded property trusts will follow the position of their settlor post 5 April 2025.
Changes to taxation of carried interest - outside of the wider CGT increases (discussed below), a higher rate of CGT will apply to the taxation of carried interest from April 2025 at a rate of 32%.
This is to be followed with a formal review of the taxation of carried interest with proposals to tax under the income tax regime effective from April 2026, with bespoke rules to “reflect the unique characteristics of such income”.
The proposed revised regime suggests that carried interest is subject to tax as profits of a deemed trade, with additional adjustments for certain qualifying carried interest, meaning that such income could be subject to both Income Tax and Class 4 National Insurance Contributions in respect of carried interest received as if carrying on a trade for that tax year of receipt. It should be noted that such changes are subject to consultation and may therefore alter.
The potential impacts are not limited to UK investors with the proposed territorial taxing scope being dependent upon the jurisdiction in which the investment management services were performed, although analysis of the detailed proposals will be critical.
Corporation Tax – The main rate of corporation tax will be capped at the current 25% for the duration of this parliament, with small profits and marginal relief rates also remaining at their current level.
For capital allowances, full expensing and the £1 million Annual Investment Allowance, writing down allowances, and the Structures and Buildings Allowance will remain. A further review will be undertaken to simplify legislation in this area.
From an offshore perspective further consultation is proposed in respect to the UK’s rules on transfer pricing, permanent establishments, and Diverted Profits Tax alongside “considering opportunities for simplification or rationalisation of the UK’s rules for taxing cross-border activities in light of Pillar 2”.
Some of the other measures announced are as follows:
- Raising £6.5 Billion per year by 2029/30 by further investing in closing the tax gap, recruiting an additional 5000 staff in tax compliance, inclusive of tackling offshore tax non-compliance as noted above.
- More widely CGT increases, effective immediately to 18% (basic rate) and 24% thereafter, with residential property remaining at these rates as previously proposed
- In addition proposed increases on the 10% tax rate applied to assets qualifying for Business Asset Disposal relief to 14% from April 2026 and proposed increases to 18% thereafter.
- VAT being applied on private school fees from Jan 2025, alongside the removal of business rate relief.
- Stamp duty land tax (SDLT) surcharge on second homes will increase to 5% from 31 October 2024.
If you have any questions, or would like to discuss any of the areas covered in our summary in more detail, please get in touch on the details below on how the Budget might impact you or your business.
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