Navigating the 2024 Tax Landscape: Key Changes in Non-Dom Rules, Capital Gains Tax, and Inheritance Tax

Rachel Reeves, the new Chancellor, delivered her first budget in the House of Commons, introducing significant changes to the UK's tax landscape. Her budget seeks to tackle the pressing economic challenges facing the nation while aiming to ensure that high earners and wealthy individuals contribute fairly. Among the key points highlighted are adjustments to Capital Gains Tax (CGT) and Inheritance Tax (IHT), as well as updates to the Non-Domicile rules that have long provided tax benefits to individuals with overseas ties.

Non-Domicile Tax Rules

The UK’s non-dom tax rules allow individuals who are considered non-domiciled in the UK to benefit from specific tax advantages. A non-dom is typically someone who resides in the UK but considers their permanent home to be abroad. Here are the key points regarding the non-dom regime:

• Tax on Worldwide Income: Domiciled individuals are taxed on their worldwide income, while non-doms can choose to use the “remittance basis,” meaning they are only taxed on their UK income and any foreign income they bring into the UK.
• Changes in the 2024 Budget: Recent reforms have tightened remittance rules, particularly targeting non-doms with long-standing UK connections, such as property ownership. The new rules reassess domicile claims to ensure alignment with domestic tax obligations, potentially reducing the tax advantages previously enjoyed by long-term residents.

Comparison with UK Seafarers Earnings Deduction (SED)

The key difference between a UK resident seafarer and a non-domiciled (non-dom) individual is in the tax treatment. A UK resident seafarer can claim the Seafarers' Earnings Deduction (SED) for income earned outside UK waters, reducing their UK tax if they meet specific conditions.

A non-dom, while living in the UK, has their permanent home abroad and can avoid UK tax on foreign income, only paying tax on money brought into the UK. Seafarers are taxed as UK residents with special deductions, while non-doms can (currently) limit UK tax on their foreign earnings. The Seafarers Earnings Deduction was left unchanged after October's budget.

Recent Changes in Capital Gains Tax (CGT)

The 2024 budget introduced substantial changes to Capital Gains Tax:

• Increase in Tax Rates: The tax rates for CGT have been increased to 18% for basic rate taxpayers and 24% for higher rate taxpayers. This adjustment targets investors, particularly those holding shares and properties, and aims to boost revenue significantly.
• Reduction of the Annual Exempt Amount: The annual exempt amount for CGT has been slashed from £12,300 to just £3,000. This reduction means that many more taxpayers will be liable for CGT when selling assets, impacting ordinary individuals who may have previously avoided this tax.

These changes are expected to raise up to £35 billion for the government, although there are concerns that they may discourage investment and lead to reduced economic activity.

Changes in Inheritance Tax (IHT)

The 2024 Budget also included key adjustments to Inheritance Tax:

Chancellor Rachel Reeves outlined changes to Inheritance Tax (IHT) regulations, emphasizing the government's commitment to addressing the financial pressures on families. Previously, the government had frozen inheritance tax thresholds until 2028; however, Reeves has decided to extend this freeze for an additional two years, pushing the deadline to 2030.

Under the current regulations, the first £325,000 of any estate can be inherited tax-free. If the estate includes a residence that is passed down to direct descendants, this threshold increases to £500,000. Furthermore, for couples, when the tax-free allowance is passed to a surviving spouse or civil partner, the total exemption can reach £1 million.

Conclusion

The recent changes to the non-dom rules, along with updates to CGT and IHT, indicate a strategic shift in the UK’s approach to taxation, targeting high earners and substantial assets while attempting to close loopholes in the system. As taxpayers adjust to these new regulations, understanding the implications will be crucial for effective financial planning.