On 6 March 2024 Chancellor Jeremy Hunt delivered the last Budget of the Sunak government before the UK’s upcoming election. Positioned as a “Budget for Long Term Growth”, the most eye-catching change will be the abolition of the ‘Non-Dom’ regime from April 2025, which at first glance looks like a major blow for the UK as a jurisdiction able to encourage asset managers. The writing has been on the wall for the Non-Dom regime for a number of years as it is viewed by many as simply not sustainable.

However, the detail suggests that whilst the old regime is on the way out, it will be replaced with a potentially more preferential regime that allows for a 4-year window in which new foreign income and gains (‘FIGs’) can be brought into the UK tax free. Remitting such FIGs was taxable under the existing regime, meaning that Non-Doms coming to the UK would often ensure existing clean capital was available for remittance while having to ’park’ their new income and all gains  ‘offshore’ to protect it from taxation.

The impact on Non-Doms already resident in the UK, many of which are now deemed domicile and potentially taxable on FIGs (remitted or not), will need to be assessed, particularly if they have undertaken pre-emptive planning. In short, it could be a shrewd move on behalf of the Conservative Party, undermining one of Labour’s key tax policies and fuelling an injection of wealth into the UK that in turn may fuel growth.

The Non-Dom regime has been part of the UK tax landscape for 225 years, a measure dating back to colonial times to protect overseas wealth from wartime taxes. The change  comes at a time when there is an increasing global shift in people and wealth – with many jurisdictions using their tax system to compete. From a policy perspective the removal of the Non-Dom regime will be fundamental change in how the UK is perceived externally. In the years to come it will be important to see what impact this has on the UK’s ability to attract overseas talent and investment. How the change is communicated will be crucial to long-term competitiveness, particularly to individuals with wealth wrapped up in unrealised assets.

Another headline catching measure will be the reduction in national insurance contributions (‘NICs’) by further 2% for both employees and the self-employed. This builds on the NIC cuts announced in the Autumn Statement at the end 2023, however this only impacts lower earnings and will largely be wiped out by the fiscal drag of retaining rate limits for higher and additional rate taxpayers. As such this is unlikely to be of much interest for the asset management industry.

Non-Domicile Changes

Non-Doms are individuals whose permanent home, or domicile, is considered to be outside the UK. The current Non-Dom regime is a favourable tax regime which allows Non-Doms who are UK residents to opt for the remittance basis of taxation. This option exists currently for a period of 15 years subject to a flat rate charge after 7 years. This means that whilst they pay tax on their UK income and gains in the same way as UK domiciles, they pay tax on their FIGs only when these are remitted, or brought to the UK.

The new reform removes preferential tax treatment based on domicile status for all new FIGs which arise from April 2025. This reform will abolish the remittance basis of taxation for Non-Doms.

For new arrivals, who were not resident for a consecutive period of 10 years , there will be a full tax relief for a 4-year period of subsequent UK tax residence on FIGs arising during that period. These FIGs can be brought to the UK without an additional tax charge.

Existing tax residents, who have been tax resident for fewer than 4 tax years and are eligible for the scheme, will also benefit from the relief until the end of their 4th year of tax residence. Depending on when residency starts this may be less than 4 calendar years.

The government suggests this is simpler and more attractive than the current approach, as being able to bring FIGs into the UK, initially, without attracting any tax charge, encourages Non-Doms to spend and invest these funds in the UK.

Currently, Non-Doms who are taxed on the remittance basis are also eligible for Overseas Workday Relief (‘OWR’) during their first 3 years of UK tax residence. OWR will be retained and simplified under the new system.

Under the new regime, regardless of where an individual is domiciled, and after transitional arrangements (see below), anyone who has been tax resident in the UK for more than 4 years will pay UK tax on any newly arising FIGs, as is the case for all other UK residents.  The government states that this new regime is more generous than countries which have no equivalent scheme, and will be competitive against countries who operate similar systems for new residents. Given that these reforms represent a significant change for those affected, the government has proposed targeted transitional arrangements for existing Non-Doms. There will be:

  • A temporary 50% reduction in the personal foreign income (gains will be taxed in full) subject to tax in 2025-26 for Non-Doms who will lose access to the remittance basis on 6 April 2025 and are not eligible for the new 4-year FIG exemption regime. This may be as they did not have the required 10 year non-residency period that the regime requires.
  • Re-basing of capital assets to 5 April 2019 levels for disposals that take place after 6 April 2025 for current Non-Doms who have claimed the remittance basis. This means that when foreign assets are disposed of, affected individuals can elect to be taxed only on capital gains since that date. It is unclear why that date has been chosen over a current date. Those affected may be advised to consider if assets can actually be disposed of prior to 6 April 2025. If not, such as for illiquid assets, evidence of the value on that date will need to be obtained.
  • Non-Doms will be able to remit foreign income and gains that arose before 6 April 2025 to the UK at a rate of 12% under a new Temporary Repatriation Facility in the tax years 2025-26 and 2026-27. This may not be attractive for US taxpayers who might have a lower additional charge if the income has suffered tax in the US already.

Protections are removed on non-resident trusts for all new FIG that arises within them after 6 April 2025. FIGs that arose in protected non-resident trusts before 6 April 2025 will not be taxed unless distributions or benefits are paid to UK residents who have been here for more than 4 years. It is not clear if trust assets can also be rebased to 6 April 2019 or if they too might benefit from making actual disposals.

Liability to inheritance tax (‘IHT’) also depends on domicile status and the location of assets. Under the current regime, no IHT is due on non-UK assets of Non-Doms until they have been UK resident for 15 out of the past 20 tax years. The government will consult on the best way to move IHT to a residence-based regime. To provide certainty to affected taxpayers, the treatment of non-UK assets settled into a trust by a non-UK domiciled settlor prior to April 2025 will not change, so these will not be within the scope of the UK IHT regime. Decisions have not yet been taken on the detailed operation of the new system, and government intends to consult on this in due course.

This is a significant change and we need to see the detailed rules. One obvious area that will have to be considered is where the Non-Doms are subject to tax in another jurisdiction. That may be as the individual is taxed by nationality, such as the US, or where profits or assets are taxed locally. Care will be needed on the availability of credit for taxes paid and that the basis of calculating the FIG is at least broadly similar. For US nationals investing in funds that may require a change in the funds invested in, or the fund also providing UK tax basis information.

Income Tax

The basic rate of income tax remains at 20%, the higher rate at 40% and the additional rate at 45% for 2024-25. The government previously reduced the point at which individuals pay the additional rate of 45% from £150,000 to £125,140 for the current tax year and this will continue for 2024-25.

The income tax personal allowance and basic rate limit are fixed at their current levels until April 2028. They are £12,570 and £37,700 respectively. For those entitled to a full personal allowance, the point at which they will pay income tax at the higher rate will continue at £50,270.

Corporation Tax

Corporation tax will remain unchanged for 2024-25 at 25% for companies with profits over £250,000. The 19% small profits rate will be payable by companies with profits of £50,000 or less. Companies with profits between £50,001 and £250,000 will pay tax at the main rate reduced by a marginal relief, providing a gradual increase in the effective corporation tax rate.

As corporation tax due on directors’ overdrawn loan accounts is paid at the dividend upper rate, this will also remain at 33.75%.

Dividends

The taxation of dividends for 2024-25 will remain as follows:

  • Ordinary rate: 8.75%
  • Upper rate: 33.75%
  • Additional rate: 39.35%

In addition, the government will reduce the Dividend Allowance from £1,000 to £500 from April 2024. The Corporation Tax due on directors’ overdrawn loan accounts is paid at 33.75% and remains unchanged.

LLP vs Ltd

UK asset managers will continue to look at the comparison in effective tax rates between LLP and Ltd structures. Rates for 2024-25 remain static, a welcome outcome after changes in recent years. The LLP remains the most beneficial for pure profit extraction, but the optionality and planning opportunities afforded by Ltd company structures continue to be appealing for mature managers.

There was no announcements in relation to the salaried and mixed member rules and we fear that the associated scrutiny placed on managers is set to continue despite the recent BlueCrest case. The widening gap between the LLP and Ltd continues to feel ripe for filling with something equivalent to the employer’s NIC, albeit this needs to be balanced with the lack of optionality to roll-up profits under the mixed membership rules.

As we reach the 10-year anniversary of the mixed membership and salaried member rules it is beyond disappointing that HMRC’s interpretation of the legislation continues to evolve, despite the high profile loss in the BlueCrest case in both the first and upper tier tribunals. HMRC continue to drag out enquiries and have amended their guidance on certain aspects as recently as February 2024.

HMRC also continue to take a highly uncommercial interpretation of the mixed membership rules and deny access to double tax relief. The relevance of the mixed membership rules continues to be highly questionable given the increased effective tax rates since their implementation and numerous technical arguments as to why they are no longer needed on the statute book.

Transfer Pricing / IME

There were no specific announcements on transfer pricing following a consultation last year in relation to the reform of UK legislation relating to transfer pricing, permanent establishments and Diverted Profits Tax. That consultation ended in August 2023 and HMRC/HMT have continued to engage with AIMA as to how best these should be developed. Of particular interest for asset managers would be a possible change to the investment management exemption (‘IME’). We are likely to see further developments in this area, with suggestion that the conditions may be relaxed to a degree as not to disadvantage certain managers that rely on being an agent of independent status.

We understand that HMRC have a number of open tax enquiries questioning whether a transfer pricing adjustment should be made to impute a higher level of taxable income on the asset manager in relation to fee-free management share classes. We are led to believe this may be part of a wider strategic review by HMRC.

Fee-free share classes are widely used across the industry as co-investment is encouraged. In reporting funds such share classes often have higher levels of Excess Reportable Income (‘ERI’) on which HMRC already collects tax. Logically, if fees were charged then the management fee (not the performance fees) would reduce ERI levels. It would be particularly harsh if performance fee were imputed as these are not deductible under the reporting fund status regime.

From a transfer pricing perspective, key to the analysis is whether the relationship with an external investor and a manager is truly comparable to a manager and individuals in a management class. The question of relative bargaining power is often overlooked, noting that conceptually the same service can be priced very differently based on bargaining power between the parties.

It should also be noted that from April 2023, large multinational businesses operating in the UK have been required to keep and retain transfer pricing documentation in a prescribed and standardised format, set out in the OECD’s Transfer Pricing Guidelines (Master File and Local File). In practice this should only hit a minority of the asset management industry as the requirement aligns with the Country-by-Country Reporting (‘CbCR’) regime that applies to groups with a consolidated group revenue of more than €750 million. However, managers are increasingly restructuring their transfer pricing documentation in the new format to align with requirements in other jurisdictions. Regardless of size, best practice is that all asset managers should maintain and document an OECD compliant transfer pricing policy given the potential interaction with the IME and disguised investment management fee legislation.

OECD Pillar 2

As announced previously, the government have implemented the globally agreed G20-OECD Inclusive Framework Pillar 2 in the UK. For accounting periods beginning on or after 31 December 2023 the government:

  • Introduced an Income Inclusion Rule (‘IIR’) which will require large UK headquartered multinational groups to pay a top-up tax where their foreign operations have an effective tax rate of less than 15%
  • Introduced a supplementary Qualified Domestic Minimum Top-up Tax (‘QDMTT’) rule which will require large groups, including those operating exclusively in the UK, to pay a top-up tax where their UK operations have an effective tax rate of less than 15%.

Both the IIR and QDMTT will incorporate the substance based income exclusion that formed part of the G20-OECD agreement.

These changes represent a fundamental shift in global taxation aimed at international structures exploiting low tax jurisdictions with the UK expecting to raise an additional £2 billion per annum. The measure aligns with the CbCR regime, meaning most asset managers in the UK should not be impacted, however potential application to fund structures will need to be considered and any associated carve outs.

In the Autumn Statement the government announced that a future Finance Bill will amend the multinational top-up tax to introduce the Undertaxed Profits Rule (‘UTPR’). This is the backstop rule in Pillar 2.

Economic Crime Levy

The government will increase the charge paid by businesses with UK revenue >£1 billion from £250,000 to £500,000 with effect from April 2024. As is currently the case, payments for 2024 to 2025 will be due in the following financial year.

There will be no change to the charge for small entities (which remain exempt), medium entities (which will continue to pay £10,000), or large entities (which will continue to pay £36,000). The size bands will also remain unchanged.

Reserved Investor Fund

The government is publishing the summary of responses to a 2023 consultation on the scope and design of a tax regime for a new UK investment fund vehicle: the Reserved Investor Fund (Contractual Scheme) (‘RIF’). The government will begin legislating for the RIF in the Spring Finance Bill 2024.

Making Tax Digital

Whilst the government remains committed to introducing Making Tax Digital (‘MTD’) for Income Tax Self Assessment (‘ITSA’), it is yet to confirm the date by which the new regime will apply to LLPs. Nonetheless in the coming years it remains apparent that the tax compliance process will need to be embedded within quarterly accounting cycles.

Capital allowances

The full expensing rules for companies allow a 100% write-off on qualifying expenditure on most plant and machinery (excluding cars) as long as it is unused and not second-hand. The rules were originally designed to be effective for expenditure incurred on or after 1 April 2023 but before 1 April 2026. Similar rules apply to integral features and long life assets at a rate of 50%. The government announced in the Autumn Statement 2023 that both allowances will be made permanent.

The government is to publish draft legislation for consultation to help consider any potential extension to include plant and machinery for leasing.

The Annual Investment Allowance (AIA) is available to both incorporated and unincorporated businesses. It gives a 100% write-off on certain types of plant and machinery up to certain financial limits per 12-month period. The limit remains at £1 million.

Research & Development

As announced in the Autumn Statement 2023, the existing Research and Development Expenditure Credit (RDEC) and SME schemes will be merged, with expenditure incurred in accounting periods beginning on or after 1 April 2024 being claimed in the merged scheme. The rate under the merged scheme will be set at the current RDEC rate of 20%.

The changes also provide additional relief for loss-making Research and Development (R&D) intensive SMEs through a higher rate of payable tax credit from April 2023, as a feature of the existing SME scheme. Those entitled to this higher rate would, from April 2024, continue to claim under rules similar to the current SME scheme rather than under the new RDEC scheme.

A number of other changes will apply to the new regime from April 2024, including that R&D claimants will no longer be able to nominate a third-party payee for R&D tax credit payments, subject to limited exceptions.

HMRC will establish an expert advisory panel to support the administration of the R&D tax reliefs. The panel will provide insights into the cutting-edge R&D occurring across key sectors such as tech and life sciences, and work with HMRC to review relevant guidance, ensuring it remains up to date and provides clarity to claimants.

Crypto

The government announced a consultation on the UK implementation of the OECD Crypto Asset Reporting Framework (‘CARF’) and amendments to the Common Reporting Standard (‘CRS’), seeking views on extension to domestic reporting. The consultation will run for 12 weeks to 29 May 2024. With Bitcoin hitting a new all-time high in recent days crypto currencies and tax are likely to be back on the agenda for many in the asset management industry.

Transfer of Assets Abroad (‘TOAA’)

The government announced that from April 2024 the TOAA provisions will be amended to introduce a provision that deems individuals who are participators in a close company, or a non-resident company that would be close if they were UK resident, as transferors to address situations where transfers are made by such companies. This change will ensure that a transfer made via a company, in which the individual is an owner or has a financial interest, will be considered a ‘relevant transfer’ by that individual for the purposes of the TOAA legislation.

Capital Gains Tax (‘CGT’)

The main rate of CGT is maintained at 20%, extended to 28% in relation to carried interest. However, from April 2024 the higher rate of CGT on residential property gains will reduce from 28% to 24%. The lower rate will remain at 18%. The rationale is that cutting the higher rate of CGT is expected to incentivise earlier disposals of second homes, buy-to-let property and other residential property where accrued gains do not fully benefit from PRR. This will generate more transactions in the property market, benefitting those looking to move home or get onto the property ladder. Or put another way, it is simply a tax reduction for those with second homes.

There is still potential to qualify for a 10% rate on gains up to £1 million under Business Asset Disposal Relief (‘BADR’) and £10 million under Investors’ Relief. There has been concern for a number of years that this relief could be withdrawn, but this would clearly be counter to a growth strategy.

The CGT annual exempt amount will be reduced from £6,000 to £3,000 from 6 April 2024. This is a steady rolling back of relief that was previously much higher.

Pension tax limits

A number of changes were made to the tax regime for pensions for 2023/24:

  • The Annual Allowance (AA) is £60,000.
  • Individuals who have ‘threshold income’ for a tax year of greater than £200,000 have their AA for that tax year restricted. It is reduced by £1 for every £2 of ‘adjusted income’ over £260,000, to a minimum AA of £10,000.
  • No Lifetime Allowance (LA) charge.

The AA and threshold and adjusted income levels will remain the same for 2024/25. As previously announced the LA of £1,073,100 will be abolished from 2024/25. Changes have been made to clarify the taxation of lump sums and lump sum death benefits, and the application of protections, as well as the tax treatment for overseas pensions, transitional arrangements, and reporting requirements. From a practical perspective individuals should consider using their allowance before the 5th April deadline.

Individual Savings Accounts

The government is freezing the limits on Individual Savings Accounts (‘ISA’) (£20,000), Junior Individual Savings Accounts (£9,000), Lifetime Individual Savings Accounts (£4,000 excluding government bonus) and Child Trust Funds (£9,000) for 2024/25.

The government announced that it is looking to introduce the UK ISA.  This will have a new ISA allowance of £5,000 in addition to the existing ISA allowance, and will provide a new tax-free savings opportunity for people to invest in the UK.

Inheritance Tax nil rate bands

Despite much speculation before the Autumn Statement 2023, Inheritance Tax (IHT) has not been abolished. The nil rate band has been frozen at £325,000 since 2009 and this will now continue up to 5 April 2028. An additional nil rate band, called the ‘residence nil rate band’ is also frozen at the current £175,000 level until 5 April 2028.

Furnished Holiday Lettings

The Furnished Holiday Lettings (‘FHL’) tax regime will be abolished from April 2025. Draft legislation is to be published and will include anti-forestalling measures that will apply from 6 March 2024. The effect of abolishing the rules will be that short-term furnished holiday lets and longer-term residential lets are treated the same for tax purposes and individuals will no longer need to report the two income streams separately.

HMRC Digital Services

The government wants the tax system to be simple, fair and support growth. To make progress on its tax simplification objectives the government is delivering changes both to how taxpayers interact with the tax system and to the underlying tax rules.

The government is removing confusion for ITSA taxpayers by simplifying access to digital services for customers who want to pay in instalments in advance via a ‘budget payment plan’, or in arrears via a ‘time to pay arrangement’ from September 2025.

Taxable benefits for company cars

The rates of tax for company cars remain frozen for 2024/25. Future car benefit rates have been announced for 2025/26 to 2027/28:

  • For 2025/26, the rates for emissions under 75gm/km increase by 1%.
  • For 2026/27, the rates for emissions under 75gm/km increase by a further 1%.
  • For 2027/28, the rates for emissions under 75gm/km increase by a further 1%.

The charge for electric cars will rise from 2% to 5% over that period. For cars with emissions of 75gm/km and above, there will be a 1% rise in 2025/26 only, subject to a maximum of 37%.

From 6 April 2024 the figure used as the basis for calculating the benefit for employees who receive free private fuel from their employers for company cars remains £27,800.

Tax Administration and Maintenance Day

The government will bring forward a further set of tax administration and maintenance announcements on 18 April 2024.