The tax treatment of "non-doms" (UK resident but domiciled abroad) has long been a bone of contention. Following fevered speculation before the election it is unsurprising that this Budget targeted them, but the scale of reform was unexpected. All of these changes apply from April 2017.

Non-doms will lose the remittance basis for income tax/CGT and favourable IHT treatment after more than 15 out of 20 years of residence, regardless of when they first arrived in the UK.  (At present they only become deemed domiciled for IHT purposes after 17 years and can claim the remittance basis indefinitely, provided they pay the appropriate charge.)  Under the new rules they will pay tax on worldwide income and gains including any benefits, capital or income received from trusts. Those with a UK domicile of origin will not be able to lose it easily: if they leave the UK and later return they will be taxed as UK domiciled whatever their intention and general law domicile status.

More fundamentally, UK residential property held indirectly (for example through a company or trust) will fall within the scope of IHT whether occupied or let.  This means IHT on the death of a deemed domiciliary owning shares in an offshore company, on a gift or PET of those shares and on 10 year anniversaries of trusts holding them. This may sound the death knell for traditional planning whereby a UK home is held through an offshore company/trust structure, but we await a Consultation Document which will be published after the summer recess

These changes must prompt non-doms to re-assess their options post-haste: they have just under 2 years to re-plan.  Will those already in the UK stay here? Their tax bills have increased steadily since the introduction of ATED and the associated CGT charge on gains from property disposals (without any PPR exemption) so the loss of IHT protection for UK property held indirectly will call existing structures into question and make non-doms wonder whether, without the tax perks, it is really worth it.  The benefits of owning foreign property directly or through an excluded property trust will remain, but that does not help those who wish to live here….

Ultra High Net Worth Individuals

HNWIs were not targeted specifically in the Budget but the Government is concerned about possible levels of tax evasion and non-compliance among wealthy individuals, so plans to extend the remit of the High Net Worth Unit. This Unit "looks after" individuals worth £20m+, which figure will now drop to £10m+.  Another Consultation is promised, on enhancing the information reported by wealthy individuals and trusts.

"Middle England"

High earners and professionals may benefit from the new IHT main residence nil rate band but will suffer from restrictions on tax relief for pensions contributions.

The new IHT allowance was widely trailed but Budget papers reveal that this will be phased in over 4 years and won't start until 6 April 2017. It will also be restricted for net estates of £2m+.

The initial allowance is £100k in 2017/18, rising annually by £25k until reaching £175k in 2020/21, on top of the existing NRB (itself frozen at £325k until April 2021).  It is transferable to a spouse or civil partner but will only reduce IHT on death, not other chargeable transfers. It applies specifically to a gift to direct descendants of a property which has been the deceased's residence although a Concession, effective from Budget Day, will encompass taxpayers who downsize or sell property that would otherwise have qualified.    

To finance the above tax relief for pension contributions by additional rate taxpayers will taper down from £40,000 to £10,000, starting in April 2016. This is a major change for high earners in future, who will need to try and maximise relief in the current year.

Existing Trusts

Trusts have not yet been rehabilitated, unfortunately, despite their use for non-tax reasons (eg. asset protection, privacy and management continuity.)  From April 2016 the dividend tax credit will be replaced by a £5,000 tax free "allowance". Above that dividends will bear tax at 7.5% or 32.5% (for basic and higher rate taxpayers) but 38.1% (for trusts taxed at the additional rate). Trustees will be worse off if they receive dividends over £25,250 p.a but trying to reduce the tax burden by appointing revocable interests in possession may prove fruitless as higher rate taxpayers will be worse off if dividend income exceeds £21,700 p.a.

The previous proposals to outlaw pilot trust planning (setting up separate settlements to try to obtain multiple nil rate bands) will reappear in the July Finance Bill and if property is added on the same day to relevant property trusts those will be aggregated in order to calculate the rate of IHT.

Pity the small Landlord?

Sharing your house is fine (rent a room relief will be increased by over 75% from next April to £7,500). But, from April 2017, individual buy-to-let landlords will only be able to deduct finance costs (principally interest) for basic and not higher, rate income tax. This change will be phased in over 4 years with the percentage of the finance costs available to be deducted against higher rate income gradually reducing from 75% in 2017 to 0% in 2020.

Sue Laing was invited to contribute this article to Tax Journal's Budget Update in July 2015.