Spring Budget 2024: UK Tax Budget

£9.38bn

Estimated amount raised by non-dom reforms during forecast period

8%

New rate of employee NICs

£1.5bn

Estimated amount raised by later Energy Profit Levy sunset date

The biggest surprise in the Spring Budget was perhaps the raucous reaction given by the House to a fairly muted set of tax proposals.

While the non-dom reform and NICs cuts stand out as significant changes they had been so well trailed in the press they were of no surprise. Perhaps it was the whiff of an election in the air that was the cause of excitement, so much so that the Deputy Speaker had to frequently intervene instructing all sides of the chamber to "shout more quietly".

Whatever the cause, MPs were in good voice as the Chancellor announced his measures. In addition to the non-dom change and NICs cut the Chancellor also announced measures including an extension of the energy profits levy and a reduction in the capital gains tax rate on residential property disposals on which we've commented in more detail below. There were also the usual 'crowd pleasers' of saving 2p duty on a pint of beer and a freeze in fuel duty. Did this signal the firing of the election starting gun? By the sound of the MPs reaction to the Budget, it certainly sounds like we're off to the races.

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Non-dom regime reforms

One of the most high-profile announcements was the abolition of the UK's current tax regime that applies to non-domiciled individuals ("Non-Doms") which, if the Conservatives win the next general election, would come into effect from 6 April 2025.

That is not to say that similar changes would not happen if Labour wins the next general election. As many people will be aware, there has been speculation for some time that a Labour government would abolish or replace the Non-Dom rules.

The current rules

Very broadly, the Non-Dom regime is aimed at UK resident individuals whose 'permanent residence' (which is a complicated term) is overseas. Non-Doms are currently able to reside in the UK and pay tax on their income and gains only if it is either UK source or is "remitted" to the UK – they do not pay tax on their unremitted foreign income and gains. There are also inheritance tax benefits to Non-Doms, as they do not generally pay inheritance tax on worldwide assets.

This status can be claimed for up to 14 years in 20 (though charges can apply after 7 years). This is generally viewed, by international standards, as quite a generous regime.

The changes

The Chancellor announced plans to abolish the Non-Dom regime in full and replace it with a different, residence-based regime.

From 6 April 2025, any individuals who become UK resident after a period of ten years of non-UK residence would be taxed as follows:

First four years

For the first 4 years, individuals who qualify for the new regime will not pay any UK tax on foreign income and gains ("FIG") or non-resident trust distributions, even if they bring their foreign income and assets into the UK (the "FIG regime"); and
Subsequent years

After those 4 years, those individuals will pay UK tax on the same basis as any other UK resident individual.

There will inevitably be a huge number of details to work through, but this is what we know so far:

There will be transitional rules (see further detail below);
Individuals must claim this basis of taxation for each of the 4 years, if they wish the regime to apply in all 4 years;
If an individual claims to be taxed under the FIG regime, they will not be entitled to their personal allowance or CGT exempt amount;
The statutory residency test will be used to determine whether individuals can claim for the FIG regime; treaty residence, non-residence and split-years will be ignored;
Overseas Workday Relief is also being reformed but will broadly still be available for first 3 years of tax residency for those who claim under the new FIG regime; and
Individuals who, on 6 April 2025, have been UK resident for less than 4 years (though still were non-UK resident for 10 years previously), can claim to be taxed under the FIG regime for the remainder of the 4 years.

Transitional rules

What is the tax treatment of non-doms who cannot claim under the new regime?

For individuals who previously claimed the remittance basis but cannot claim to be taxed under the new FIG regime (e.g. because they may have been UK tax resident in the previous 10 years), for the tax year 2025/26, they will only pay tax on 50% of their foreign income (but this reduced rate will not apply to their foreign chargeable gains). After 6 April 2026, these individuals would be taxed in the same way as other UK resident individuals – i.e. UK tax is broadly due on their worldwide income.

Is there any rebasing for foreign assets?

Yes, but conditions apply. Individuals who have claimed the remittance basis and UK domiciled (or deemed domiciled) can elect to rebase any "personally held foreign assets" that they held on 5 April 2019. Further conditions will also be introduced prior to the rules coming into effect.

Temporary Repatriation Facility

Finally, individuals who have been taxed on the remittance basis can elect to pay tax at a new 12% rate if (i) those amounts arose to the individual personally when they were taxed on a remittance basis (i.e. pre-6 April 2025) and (ii) those amounts are brought into the UK in tax years 2025/26 and 2026/27.

Inheritance tax

The government has not made any detailed announcements about the changes to the inheritance tax legislation, other than that it will be a new residence-based system, and that this will be subject to a consultation. It is intended that these changes will also be implemented 6 April 2025.

These changes will inevitably have wide-ranging implications for many of our clients, in particular, but not limited to our international asset management clients. Please do feel free to get in contact with us if you have any questions on the above.

Employee and self-employed NICs

National Insurance Contributions – A Further Cut for Workers

In possibly the worst kept secret of the Budget, the Government has announced that the rates of employee and self-employed National Insurance contributions (NICs) will be reduced for the second time this year. From 6 April 2024, the main rate of Class 1 employee NICs, charged on annual earnings between £12,570 and £50,270, will be cut from 10% to 8%. When combined with the 2% cut that took place at the start of the year, this represents a one-third reduction in the 12% rate that previously applied. The measure is expected to cost the Exchequer over £10 billion per year from 2024-25. However, employers do not have an equivalent reason to celebrate since the rate of Class 1 employer NICs on earnings above £9,100 per year will remain unchanged at 13.8%.

The main rate of self-employed Class 4 NICs, charged on annual profits between £12,750 and £50,270, will also be cut by 2%. This was already set to fall to 8% from the next tax year but the Budget announcement means that, from 6 April 2024, the effective rate of Class 4 NIC will be 6%.

Measures announced in the Autumn Statement mean that the requirement to pay Class 2 NICs, which are currently charged at £3.45 per week, will effectively be abolished from 6 April 2024. This is because self-employed individuals with profits above the £12,570 threshold will no longer be required to pay these NICs but will continue to receive access to contributory benefits (including the State Pension). Those individuals who pay Class 2 NICs voluntarily, including people who moved abroad, will continue to be able to do so in order to preserve their entitlement to such benefits. However, the Government has announced that it will launch a consultation later in the year to fully abolish Class 2 NICs, which may affect individuals making these voluntary contributions in the future.

In the longer term, it is expected that the reductions in the rate of NICs will cost the Government £21.4 billion in 2028-29, with the changes announced in today's Budget and the Autumn Statement each costing an estimated £10.7 billion. However, it is notable that The Office for Budget Responsibility has stated that the continued freezing of personal tax allowances and thresholds (commonly known as 'fiscal drag') is expected to raise receipts of tax by an estimated £41.1 billion in 2028-29 - almost double the value of the cuts to the rate of NICs.

The new rates of NICs are summarised in the table below:

These measures will apply/have effect from 6 April 2024.

Real Estate Taxation

Abolition of Multiple Dwellings Relief for SDLT

Residential stamp duty land tax ("SDLT") has over recent years become overcrowded with many different rates and regimes – including first home buyers' relief, a 3% surcharge for purchasers of second homes, a 2% surcharge for non-residents, and a 15% flat rate for purchases of properties by companies and other legal bodies. One of these regimes is multiple dwellings relief, which can reduce the rate of SDLT for the simultaneous purchase of multiple residential units from 15% to 1%. The introduction of these other rules has made this relief less valuable over time, and so its abolition is likely not as much a disappointment for taxpayers as it might have been had it happened a decade ago. However, it will likely increase the SDLT bill for corporate purchasers of care homes and student accommodation as well as individuals buying a house with a granny annexe – the Government has estimated an increase in revenue of £385m in 2028–29. The abolition takes effect from disposals made on or after 1 June 2024.

£385 million

Government has estimated an increase in revenue of £385m in 2028–29

Abolition of Furnished Holiday Lettings regime

Those who let furnished holiday homes out on short-term lets in the UK are entitled to reliefs as though they were trading, including business asset rollover relief, the ability to claim capital allowances, and the ability to treat the profits as earnings for pensions purposes. The Chancellor has announced its abolition from April 2025, in a bid to both raise revenue — some £245m in 2028–29 — and help alleviate the housing crisis in UK holiday destinations, such as Devon and Cornwall, by removing this tax distortion between long-term and short-term lets.

£245 million

The Chancellor has announced its abolition from April 2025, in a bid to both raise revenue — some £245m in 2028–29

Capital gains tax rate for residential property reduced to 24%

When the higher rate of CGT was reduced to 20% in April 2016, the Government left the rate at 28% for carried interest and residential property gains, to provide "an incentive for individuals to invest in companies over property". The rates for basic rate taxpayers were also then split between 10% and 18%. The Chancellor has now announced a reduction in the higher rate for residential property from 28% to 24% to "encourage landlords and second home-owners to sell their properties" in a bid to boost Government revenues and the housing supply. The 18% rate that applies to basic rate taxpayer remains unchanged. This means there are now 5 different rates of CGT — 10%, 18%, 20%, 24%, and 28% — more different rates than income tax. This rate reduction takes effect from 6 April 2024.

5 different rates

there are now 5 different rates of CGT — 10%, 18%, 20%, 24%, and 28%

Business taxation

Full expensing sought to be extended to leased assets

Full expensing – relief against tax for 100% of capital expenditure on certain assets – was made permanent in the Autumn Statement 2023, but at the time this did not apply to assets held for leasing. In this Budget the Chancellor announced that the Government would consult on extending full expensing to assets which were held for the purposes of being let out to third parties, subject to fiscal conditions allowing. This will be welcomed by those in the industry. Draft legislation will be released shortly for consultation, with the legislation taking effect from a future date to be announced.

VAT registration threshold increased to £90,000

The Chancellor announced that the VAT registration threshold would be increased from £85,000 to £90,000 to help SMEs grow. This will be welcome news for those close to the threshold and will allow them to grow their revenues a small amount without having to start charging UK VAT at 20% and increasing their prices or reducing their profitability.

£90,000

The Chancellor announced that the VAT registration threshold would be increased from £85,000 to £90,000 to help SMEs grow.

However, it does nothing to address the extreme cliff-edge effect that having such a high VAT registration threshold causes. Analysis by Tax Policy Associates (the diagram below) has shown that businesses deliberately refrain from increasing their turnover to avoid hitting the current VAT registration threshold. This change will only move where this cliff edge occurs rather than solving the underlying issue, which would likely require a radical reduction in the threshold. The change takes effect from 1 April 2024.

Energy Profits Levy

The government has announced that sunset of the Energy Profits Levy (EPL), has been extended until 31 March 2029, despite the fact that they restated in the Autumn Statement 2023 that the EPL would end no later than 31 March 2028. This is the second time extension; when introduced the EPL had a sunset date of 31 December 2025. Originally introduced in May 2022 as a 25% 'windfall' tax on oil and gas firms, due to the high energy prices caused by the war in Ukraine, the government expects that the extension (of the now 35%) surcharge will raise an additional £1.5bn.

£1.5 billion

the government expects that the extension (of the now 35%) surcharge will raise an additional £1.5bn

The EPL may be ended early if the 6-month average price for oil and gas is at or below 'normal' levels, as determined by the Energy Investment Security Mechanism.

RIF

Introduction of new fund vehicle – the Reserved Investor Fund

The government has confirmed that, following a consultation last year, it will be going ahead with the introduction of a new type of unauthorised UK fund vehicle – the Reserved Investor Fund (Contractual Scheme) ("RIF"), which is expected to be primarily of interest to commercial real estate investors (due to its VAT treatment).

The design of the RIF largely follows the proposals set out in the consultation. The RIF will be transparent for tax on income and not subject to tax on gains, with transfers of units being free from stamp taxes. Investors will generally only be subject to tax on capital gains when they dispose of their units.

A key government concern had been that a RIF should not enable non-resident investors to indirectly dispose of UK real estate free from non-resident capital gains tax – something which would potentially be possible if the RIF was not itself UK property rich (broadly, if it derived less than 75% of its value from UK land). To address this concern, a RIF will have to either (i) be UK property rich, (ii) only be open to investors who are exempt from UK tax on gains (other than by reason of residence), or (iii) not invest in UK property or UK property rich companies.

The eligibility criteria for RIF status will include that it is both a “collective investment scheme” and an “authorised investment fund” (AIF) for regulatory purposes, and that it either (i) is not closely held, (ii) is only closely held due to the presence of certain institutional investors, or (iii) meets requirements to be widely marketed and made available to certain categories of investors.

The RIF is to be available to professional investors, as well as those who invest at least £1m (or have already invested in it).

The introduction of this new fund vehicle is a welcome development, which, for the right investor base, may be a viable onshore alternative to the Jersey Property Unit Trust (JPUT).

No date for the introduction of the RIF has been given, although the government has said it will start legislating for it in the Spring Finance Bill 2024 (with detailed rules to be set out in secondary legislation at a later date).

Transfer of Assets Abroad

New anti-avoidance provisions will be added to the already complex transfer of assets abroad (TOAA) regime. The TOAA regime is designed to prevent UK-resident individuals from avoiding UK tax by a transfer of assets to a person who is not UK resident.

Both the power to enjoy and the capital sums TOAA charges require that the UK resident individual is the "transferor" of the assets. Established case law allows for an individual closely associated with the transfer of assets to be regarded as a "quasi transferor", resulting in the individual falling within the scope of these charges (subject to meeting other conditions). In the long running Fisher TOAA litigation, HMRC had argued that family shareholders in a company that transferred assets to a Gibraltarian company should be viewed as quasi transferors, which would have resulted in income of the Gibraltarian company being charged to UK income tax. However, the Supreme Court recently unanimously held in Fisher that shareholders in a company that transferred assets could not be regarded as the transferors of those assets.

Doubtless (but not explicitly) in response to the Supreme Court decision in Fisher, the Chancellor has announced new rules which deem an individual participator in a close company to be a transferor of assets transferred by the close company. A close company is broadly a company which is under the control of five or fewer participators, or any number of director participators. The rules will also apply to a non-resident company that would be close if they were UK resident. Although HMRC have acted quickly to close a perceived loophole in the TOAA regime, the measure is only costed to raise £15m of revenue, suggesting that not that many taxpayers would have utilised a company to circumvent the TOAA charges.

The measures will apply to income arising from 6^th April 2024.

ESG Measures

A further £120m was committed to the Green Industries Growth Accelerator (GIGA). GIGA is a fund to support the expansion of strong and sustainable clean energy supply chains across the UK. Sector funding splits of the GIGA funding were also announced: up to £390m is allocated to supply chains for offshore wind & electricity networks and up to £390m to supply chains for Carbon Capture Utilisation and Storage and hydrogen. £300m of GIGA funding has already been allocated to nuclear fuels. Further clean energy developments were the announcement of the purchase of two nuclear sites in Wylfa and Oldbury-on-Severn, and progress in the tender process for small modular reactors (SMRs). SMRs are advanced nuclear reactors that have a power capacity of about one-third of the generating capacity of traditional nuclear power reactor. The advantage of SMRs is that they can be sited on locations not suitable for larger nuclear power plants, offer savings in cost and construction time, and they can be deployed incrementally to match increasing energy demand.

The government also announced that trades in carbon credits will be brought within the scope of the VAT Terminal Markets Order (TMO). The TMO provides for the zero rating of certain commodity transactions on named commodity exchanges or “terminal markets”.

Other environmental measures announced in the Budget were the increase of air passenger duty for non-economy flights and the extension of the sunset date for the energy profits levy from 31 March 2028 to 31 March 2029 (although the Chancellor did commit to an end to the levy if the price of oil and gas is at or below 'normal' levels for a sustained period before that date). These measures were tempered by a further 12 month freeze in fuel duty levels, extending the temporary 5p fuel duty cut and cancelling the planned inflation-linked increase for 2024-25.

Also of note is that providers of ESG ratings will be regulated by the Financial Conduct Authority; a move that will hopefully improve consistency and rigour of ESG ratings.

On the governance side, changes were made to the economic crime levy and the government continued with moves to improve standards of tax advisers, launching a consultation on options to strengthen the regulatory framework in the tax advice market, and on requiring tax advisers to register with HMRC. The rate of economic crime levy will be increased from £250,000 to £500,000 per annum for "very large entities" (businesses regulated for Anti Money Laundering purposes with UK annual revenue greater than £1 billion). This change was required to plug a shortfall in anticipated receipts from the levy.

Other measures of interest

UK ISA

The Chancellor announced the introduction of a new UK individual savings account (ISA), allowing individuals an extra £5,000 annual allowance to invest in UK equity. This is in addition to the existing £20,000 annual ISA allowance. A consultation on the design of the UK ISA was published alongside the Spring Budget, including which assets should be eligible for the UK ISA. For example, the UK ISA could potentially include investments in ordinary shares in UK incorporated companies that are either listed on a UK recognised stock exchange or admitted to trading on UK recognised stock exchange. Another potential asset mentioned in the consultation is UK gilts.

An ISA is tax advantaged savings account; income and gains arising from within the account are not subject to UK income tax or capital gains tax. The previously announced reduction of the dividend allowance from £1,000 to £500 with effect from 6th April 2024 may mean that investors who max out their current £20,00 ISA allowance would welcome an opportunity to receive UK dividends tax free.

A timeline for the implementation of the UK ISA has not been announced.

£5,000

An extra £5,000 annual allowance to invest in UK equity

High Income Child Benefit Charge (HICBC)

HICBC is known for being unfair – two parents can earn £49k each and have full child benefit, whilst another couple could have far lower combined earnings but have their child benefit reduced or withdrawn entirely (via the HICBC) just because one parent earns over £50k. The Chancellor acknowledged this and is consulting on fixing the unfairness through administering it on a 'household' rather than 'individual' earnings threshold. In the meantime, he has announced two changes to improve the position for parents: firstly, HICBC will not bite until an individual earns over £60k; secondly the charge will apply over a greater range up to £80k rather than £60k. Taken together, it means the individual income range over which HICBC is charged is now £60-80k, rather than £50-60k.

The scorecard for this measure shows it costing on average £624m a year from April 2024 to 2029 although that estimate does not include the impact (which could be positive or negative) of moving to a 'household income' assessment.

The changes are effective from 5 April 2024; the proposal to move to a 'household income' basis of assessment is targeting April 2026 and will be consulted on in due course.