The Government has announced that from 6 April 2024, the threshold after which child benefit is gradually withdrawn will be increased to £60,000, with the benefit fully withdrawn when one partner earns over £80,000. From April 2026, the intention is to shift to assessing entitlement on a household rather than individual basis.

Summary

The high income child benefit charge was introduced in January 2013, with the aim of limiting the availability of child benefit for those perceived to be ‘high earners’.

The threshold for the charge was set at £50,000 and applies if either of a child’s parents has income exceeding this figure, with the charge gradually tapering-up so that when earnings exceed £60,000 the charge equals the full amount of child benefit.

From 6 April 2024, the charge will instead apply where one parent’s income exceeds £60,000 and the taper has been widened, so that the benefit is not fully repaid until that individual’s income exceeds £80,000.

Currently, entitlement to child benefit is just determined by the income of the highest earner in the household. This creates an anomaly where a household with two incomes below the threshold may be entitled to child benefit, whereas a household with one higher earner but a lower total household income is not. The Government intends to resolve this by switching to assessing entitlement on a household income basis from April 2026. A consultation on how to do so will be published in due course.

Our comment

The threshold increase will be welcomed by those effected by the charge and widening the taper range will decrease what has been an anomalous marginal tax rate ‘spike’, but the regime remains a significant complication and brings a large number of individuals into self assessment.

The proposed change to assessment on a household basis will be complex, as currently HMRC does not collect the necessary data on household income. The Chancellor acknowledged that the switch will require a “significant reform to the tax system”. Further detail will doubtless emerge when the consultation is published.

The Chancellor has announced that the current remittance basis regime for non-UK domiciled individuals will be replaced with a residence-based regime from 6 April 2025.

Summary

Under current law, a non-UK domiciled individual (broadly someone originating from outside the UK, who does not intend to remain in the UK permanently), is able to elect to be taxed in the UK on the ‘remittance basis’, until they have been resident in the UK for 15 of the past 20 tax years. Under the remittance basis, an individual is subject to UK tax only on UK-source income and gains, and on any non-UK income and gains that are used in the UK. The Government plan to remove this regime and replace it with one based on tax residence.

The new regime will mean that individuals will not pay tax on foreign income and gains for the first four years after becoming UK tax resident. The regime is aimed at those coming to the UK either for the first time or after an absence of over 10 years, rather than being based on domicile status. Taxpayers who choose to use the regime will not be entitled to an income tax personal allowance or capital gains tax annual exemption for the relevant tax year.

Transitional arrangements will be made available to existing non-UK domiciled individuals after 6 April 2025. These will include:

- an option to rebase the value of capital assets to their value on 5 April 2019. This will be available for individuals who are currently non-UK domiciled and not deemed-UK domiciled under existing rules, who have claimed the remittance basis;
- a temporary 50% exemption on the taxation of foreign income in 2025/26, for individuals who will ‘lose’ access to the remittance basis on 6 April 2025; and
- a two-year ‘temporary repatriation facility’, which will allow individuals to remit existing pre-6 April 2025 foreign income and gains into the UK and pay a reduced 12% tax rate.

From 6 April 2025, the protection from tax on income and gains arising within settlor interested trusts will no longer be available and the foreign income and gains will be taxable on the settlor. The Government will also review provisions to prevent income tax avoidance by transferring income producing assets to a non-UK resident company. The existing rules will be revised to ensure that they remain effective and complement the new residence regime.

Overseas workday relief rules will also be revised. Under existing rules, inbound non-UK domiciled employees can benefit from an income tax exemption on income from non-UK duties for the first three years of UK residence, subject to that income not being remitted to the UK. The new rules will remove the requirement to keep the income offshore, meaning that the overseas element of the employment income can be brought to the UK without a tax charge.

A residence-based regime will also be introduced for inheritance tax. The Government plan to consult on this and has outlined plans for a 10-year exemption from inheritance tax on non-UK assets for new arrivals and a ‘tail-provision’ to keep a taxpayer within the scope of worldwide inheritance tax for ten years after leaving the UK. No changes to inheritance tax will take effect before 6 April 2025. The Government has advised that the current inheritance tax exemptions for non-UK property held in trusts will continue for trusts already in existence, and for trusts settled by a non-UK domiciled settlor before 6 April 2025.

Our comment

The Labour party had already announced plans to repeal the non-UK domicile tax regime if they form a Government after the next general election but, notwithstanding rumours in the press in the days leading up to the Budget, it was quite unexpected that the existing Government would take action now.

The new rules have been framed to attract foreign investment by those newly arriving in the UK. Such individuals will not be taxed on funds that they bring to the UK, whereas existing rules charge tax on remittances of foreign income and gains that arise after an individual becomes UK resident. Longer term UK residents stand to lose out, however, particularly if they anticipated using the remittance basis beyond 5 April 2025 or if they benefit from the existing beneficial regime for offshore trusts.

Individuals becoming taxed on a worldwide basis may need to give greater consideration to international tax treaties.

There is now a window of just over one year, during which time affected taxpayers should take the opportunity to review their tax affairs and plan for how the new tax regime will affect them in the future.

Two changes are being made, which aim to increase tax revenues and increase the supply of housing by discouraging short-term lettings and incentivising the sale of second homes. The first measure removes the ‘furnished holiday lettings’ tax regime. The second reduces the higher rate of capital gains tax from 28% to 24% on gains realised on disposals of residential property.

Furnished holiday lets

Many second homeowners and landlords letting their properties on short-term tenancies, use the furnished holiday letting (FHL) regime. This enables them to deduct the full cost of their mortgage interest payments from their rental income and claim for a broader range of repairs and maintenance costs. FHLs can also benefit from being treated as ‘trading’ assets for capital gains tax (CGT) purposes, meaning a variety of reliefs are available. Gains on the disposal of FHLs have been eligible for holdover relief to defer gains on gifts, business asset disposal relief is available to reduce the rate of CGT to 10% in appropriate cases and rollover relief is available to defer CGT on the disposal of FHLs if acquiring other qualifying assets such as more FHLs.

From April 2025, the FHL regime will be withdrawn, meaning that there will be parity of treatment between short and long-term lettings moving forward. Anti-avoidance rules will accompany the change in legislation to prevent property owners from engineering disposals of their properties to take advantage of the current reduced rates of CGT that apply to FHLs. ‘AirBnB’ owners will be affected by the change, as will farmers and landowners who have converted surplus farmworkers’ cottages into holiday homes. Bed and breakfasts, guest houses and hotels are unlikely to be affected by the proposed changes.

Reduced rate of capital gains tax on sales of residential homes

In an accompanying announcement, which came as somewhat of a surprise, the Chancellor announced a reduction in the rate of capital gains tax applying to residential property.

Currently, the higher rate of CGT on gains on disposals of residential property by individuals is 28%. For disposals from 6 April 2024, however, the rate of tax will be reduced to 24%. Main residence relief will continue to apply for disposals of an individual’s main residence and the lower 18% rate, which applies to the extent that gains fall within an individual’s basic rate band, will also continue to apply.

Our comment

A mixed bag for landlords today. On the one hand, a reduction in the CGT rate will be welcomed, particularly as recent Budgets have seen a more singular direction of travel towards increasing the tax burden on landlords.

Those currently benefiting from the FHL rules will, however, suffer the impact of the changes from April 2025. Specifically, the loss of relief for interest on borrowings, could have a significant bearing on the overall tax liability and this may affect the commercial viability of some property business models.

The FHL changes were perhaps not unexpected given concerns around the need to redress the balance in areas suffering a perceived housing bottleneck for local residents and workers. The reduction in CGT, however, was not trailed in advance of the budget.

It does remain to be seen how much of an impact either of these changes will have in driving behaviour. In particular, how far it creates additional capacity in the property market, given that FHLs represent a small percentage of second homes. Property remains an attractive asset class both in terms of yield and capital returns, with the concern that higher tax costs could lead to higher rents as landlords look to preserve those post-tax profits.