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Jeremy Hunt made major changes to the tax system for so-called “non-residents” in his budget, scrapping the colonial-era concept of domicile in taxation and reducing the amount of time people can benefit from status benefits.
Non-residents are UK residents who are considered to have a permanent home outside Britain. The system, which dates back more than 200 years, allows people resident abroad to pay UK tax on their UK income and capital gains only.
Unlike UK residents, who pay tax to HMRC on their worldwide income and gains, non-residents do not pay UK tax on foreign income or gains unless they bring them back into the country.
The system – which Labor has vowed to abolish – has long drawn controversy. The latest high-profile row involved Akshata Murty, the wife of Prime Minister Rishi Sunak, who had previously claimed the status.
Downing Street said Sunak was “excluded from all policy development processes and was only introduced to policy after final decisions had been made”.
What did the British Chancellor announce?
Hunt said on Wednesday he would abolish non-resident status, replace the concept of domicile in taxation with a residency-based system and steal one of the main opposition party's key fiscal policies.
Under the new system, which will come into effect in April 2025, an individual will be able to claim their benefits for four years, up from 15 years now.
New arrivals will not be liable to UK tax on income or gains from outside the UK for the first four years, provided they can prove they have not been resident in the UK for 10 consecutive years before their arrival. But from the fifth year, they will pay the same tax as other UK residents.
Hunt told MPs he “has always believed that if we protect the UK's attractiveness to international investors, those with broad shoulders should pay their fair share.”
He said the new system would be “more fair and will still be able to compete with other countries.”
How do the changes affect people who are not current?
Government documents released alongside the budget showed that several transitional arrangements would be put in place for people who are not currently residents.
Those who do not qualify for the new system will, in the 2025-2026 fiscal year alone, pay tax on 50 percent of their foreign income. The reduction applies only to income, not foreign gains.
For current non-residents, capital assets will also be revalued to their levels on 5 April 2019 for sales made after 6 April 2025. This change means that when selling foreign assets, affected individuals can choose to be taxed on capital gains only from April 2019.
In addition, current non-residents will be able to bring foreign income and gains earned before April 2025 into the UK and pay tax at a reduced rate of 12 per cent under the Temporary Repatriation Facility.
This will be available in 2025-26 and 2026-27, and aims to encourage people to bring wealth inward.
Hunt said the two-year period would encourage people to “bring wealth earned abroad back to the UK where it can be spent and invested”, and that the measure would “attract an additional £15 billion in foreign income and generate more than £1 billion”. of additional taxes.
In a blow to existing non-residents, the government said it would abolish a common planning method for protecting foreign income and gains in trusts before non-residents are deemed to be resident in the UK after 15 years, from April 2025.
The ministers also promised to hold consultations on plans to transfer the inheritance tax from a residence-based system to a residence-based system.
What impact will Hunt's reforms have?
The Treasury said scrapping the current system would raise £2.7bn a year by 2028-29, on top of the £8.5bn that non-residents currently pay in UK tax each year.
In its budget forecasts, the Office for Budget Responsibility said 10,500 people would be eligible for non-resident status in April 2025, far fewer than the 68,800 registered with HMRC at present.
The FCA said the risk of non-residents leaving the UK en masse due to the change “may have been limited due to the generous protections” set out by the government. She estimated that between 10 and 20 percent of current non-residents who would not meet the criteria for the new system would go elsewhere.
What do experts do with the changes?
Tax experts said Hunt's announcement was more far-reaching than they expected. They said that while some aspects of the new system were internationally competitive, others were not.
“The new exemption is for four years. . . “It's 15 years less than the Italian equivalent,” said Will Johnston, tax director at chartered accountants MHA. But he added that the new system “still compares favorably…. . . By not collecting the equivalent of the annual Italian fee of 100,000 euros.”
“The ability to transfer money to the UK at a basic tax rate of 12 per cent will encourage non-residents to bring in huge sums,” said Tim Stovold, head of tax at accountancy firm Moore Kingston Smith.
But he warned that scrapping the current system left the inheritance tax status of people coming to live in the UK “up in the air”.
At present, a person is only liable for IHT after being a tax resident for more than 15 years. Reducing this would be a “huge disincentive for foreign nationals to settle in the UK for a longer period”, Stovold said.
