Wei Zhang, Partner
Great. Thank you everyone for attending this session on Crystal Ball Gazing into the potential UK and US tax changes in 2025 and beyond. First of all, a quick reminder. For security reasons, you have joined the session automatically on mute and without video. If you have a question, please feel free to use the Q&A function located at the bottom of your screen. If you have any technical issues during the event, please feel free to let us know via the chat function here and one of us will be able to help you.
We are excited to be here today. We’re dividing today’s session into three parts. First, the UK update, then the US update and finally, to wrap up with a Q&A session at the end. On the UK side, we have Charlie Sosna and Stephanie Pierce who will discuss the potential changes in UK tax rules and how these changes may affect you and your clients. Charlie is a UK qualified Partner in our London office and Stephanie is a UK solicitor based in our Singapore office. On the US side, Tim Burns, Theodore Tan and myself are US qualified lawyers, Tim and I are based in our Hong Kong office and Theodore is based in our Singapore office. Tim and Theodore will talk about what may happen to the US tax rules with the Trump era tax cuts sun setting at the end of 2025.
Now, turning to the UK updates, perhaps one of the hottest topics in the private client industry in this year is the UK tax reform that’s going to affect non-UK domiciled persons. So, Charlie, there has been a lot of speculation and talk about what’s happening in the UK tax rules at the moment. Can you clarify for us what the new rules will be?
Charlie Sosna, Partner
Head of Tax and Wealth Planning
Thanks very much for that Wei and thank you everyone for joining us today. Yeah, it is, it is a hot topic and there is lots of speculation and it seems to be constantly evolving, there was even more news on it at the end of last week. Perhaps the best starting point would be to sort of go through an overview of where we are and take a slight step back to remind you what the current situation is in the UK and why these changes are so significant. For over 200 years, the UK has taxed on a concept of domicile and the most relevant for what we’re talking about today is this concept that if you are non-UK domiciled but living in the UK, you would only pay tax on your UK source income and gains and you do not pay tax on your non-UK income and gains unless you bring them in. As I say, over 200 years, the whole private client market knows it very well and it’s been one of the backbones for why the UK has been so attractive. There have been tweaks to those rules over the years and notably you can only benefit from them now for fifteen years but there’s lots of planning around trusts and other things that could be done to make the UK a long term, very interested jurisdiction to move to, to take advantage of that kind of tax system. What is coming in now and what is proposed is a complete abolition of the non-dom rules. Domicile will no longer be relevant as a concept of how you are taxed in the UK at all. What they are moving towards is purely residence based taxation so, the UK has a statutory residence test and if you are UK tax resident then you are going to fall within these new rules. What they are saying is if you have been non-UK tax resident for ten years and then you come here, you will get the benefit of this four year foreign income and gain regime, called the FIG regime. Effectively, what that says is for four years the UK is not going to tax you on your non-UK income and gains even if you bring them in, so it’s more beneficial than the current regime. After four years, global taxation, the whole lot, no planning is going to help you, well, no trust sort of planning, they will through it. So it is a, it is a short-term window which is questionable as to how attractive that seems. From a domicile… sorry, from an inheritance tax perspective, there’s also lots of changes there. So, again, under the current rules, if you are non-UK domiciled, you are only subject to UK inheritance tax on your UK assets and we wouldn’t subject you to tax on your non-UK assets. Again, you could be in the UK for up to fifteen years and benefit from that regime still and when you go past fifteen years, again there was lots of planning that could be done to help shelter non-UK assets from a UK inheritance tax exposure. All that’s going or under the proposal it’s all going and I think towards the end of the conversation we might talk about the glimmer of light from the Press last week but the current proposal as the Government have outlaid it is that once you’ve been UK tax resident for ten years, you’re going to be subject to global inheritance tax including assets held within trusts that you’re a beneficiary of and if you then leave the UK, you will have a ten year tail where you remain within the scope of inheritance tax, which raises various questions. When do we expect all this? Well, subject to what, what is being kind of going to come out of the Budget is expected to happen on the 6 April 2025 so, not a lot of time to plan for that. And when are we expecting more details? Well, subject to what’s been coming out of the Press recently, we expect the draft legislation and a lot more details in the UK Budget which will be on the 30 October, so just at the end of this month. And Steph, could we perhaps move to the next slide.
As I’ve sort of alluded to, there’s been some recent developments on this and again this might be helpful to take a slight step back and understand how we’ve got here because we’ve obviously had a new Government come into the UK earlier in the year, a Labour Government. So, if we take a step back when it was a Conservative Government, the Labour Party in opposition were heavily critical of Conservatives saying they’re all just favouring their rich friends, this non-dom regime is ridiculous, it costs the UK money and there was a technical paper done that implied that if the UK was to abolish the non-dom regime in its entirety, it would bring in about 3.2 billion sterling into the UK economy. There were many people who questioned the facts and statistics that went into that but it was a nice little headline to run with. To take the wind out of the opposition sales, the Conservatives whilst in Government said okay that’s fine, we’re going to abolish it and it was kind of a political move more than anything. So, a lot of the policies that are being announced now and talked about were actually put forward under the Conservative Government before the election. The way that the Labour Party dealt with that in the run up to the election was to say the Conservatives haven’t gone far enough in the proposed changes and abolition of non-doms, we’re going to go farther, further and make it harder and Steph will talk a bit about that.
What’s been happening in the background which could be quite helpful to understand is, there’s been a lot of discussion with the Treasury and Government about the reality of the situation and what we are seeing on the ground as advisors. Some of those conversations have been led by people like me and other leading private client advisors in the market who are advising non-dom clients and sort of the people that we all deal with. Some of those have been discussions that have been set up by a group of single family offices who have been engaging with the Treasury. The Treasury have been saying that they’re very interested and are looking at the detail and in particular are interested to understand is this going to balance the books? Are they, if they push ahead with these changes, as proposed, are they going to make money? More detailed and technical analysis and financial statistical analysis has been done which implies that if they push ahead with these changes as planned, they’re going to lose money. So they’re going from an, what was a proposal of making 3.2 billion into the economy, it then fell to about a billion, now they think they might be net or maybe losing money. Rachel Reeves, the Chancellor, is I think someone from all accounts who needs to balance the books, she’s talked a lot about that so, all of a sudden now there has been quite a significant row back towards the end of last week where they’re saying they’re looking at the details of the proposals, they’re going to be pragmatic not ideological and we won’t press on regardless, but we’re not going to abandon this completely. I mean, the whole title of this ‘Crystal Ball Gazing’, I can’t give anyone definitive answers but it does seem that there is some more light at the end of the tunnel here perhaps and that maybe these proposals are not going to come in as harshly as we first expect. Perhaps Steph, you could talk through some of the details of these proposals and then towards the end, we can talk a little bit about what we’re hoping might come out as a result of these announcements last week.
Stephanie Lim Pierce, Managing Associate
Yeah, thanks Charlie. So, just to take you through the detail and again, this is with the caveat that this is based on what’s been released by the Government so far but nothing is set in stone and of course, this could look different in the October Budget, especially based on what we’ve seen the Press recently. But as you can see, for the first four years of UK residence, provided that that person has been a non-UK resident for at least ten years prior to that, foreign income and gains are not subject to UK tax. After that four year period, then worldwide income and gains are subject to UK tax and settle or interested trusts are also subject to UK income and tax, income tax and capital gains tax and I’ll go into the tax treatment of trusts very shortly. So, for existing UK resident remittance basis users who have exceeded four years, as of 6 April 2025, they will also be subject to income tax and capital gains tax on their foreign income and gains, they can no longer access their remittance basis, they can no longer shelter such income and gains from the, from UK tax and they will also be subject to UK tax on pre-6 April 2025 income and gains to the extent that they remit that to the UK. Now, the previous Conservative Government had proposed an interim relief for the first year for such remittance basis users where they would only be taxed on 50% of their foreign income for the first year of the regime. Labour have not committed to this but they may well and that’s something we’ll get to at the end. But then this brings me onto the central release which I will get into more detail later into this presentation but again, these reliefs are only for previous remittance basis users, they’re not for new arrivals or those who have never accessed the remittance basis. On inheritance tax, as Charlie covered, again for the first ten years of residence, non-UK assets will remain outside of the UK RHT net and UK assets will be subject to inheritance tax but that is the same as it has always been. After ten years is when that individual’s worldwide estate will be subject to inheritance tax and most importantly, there is proposed to be a ten year inheritance tax tail so if that individual has been UK resident for ten years, then they leave after that ten years, their worldwide inheritance tax liability is proposed to follow them around for ten years.
So, moving on now to trusts. The tax treatment will follow the residents of the settler and again we can broadly split this into the first four years for income tax and capital gains tax and the first ten years for inheritance tax. The residence of the beneficiary isn’t particularly relevant unless we’re talking about trust distributions, in which case no material changes have been announced on that score, and also it’s worth noting that UK assets and trust will be and have always been subject to UK tax. So, when we’re talking about tax, we’re talking about offshore trusts with non-UK assets. So, again, we can see from this diagram that the first four years are effectively tax free, then after four years the taxation of trust income and gains kicks in for certain trusts and so very broadly, income tax will be chargeable on income arising within the trust if the settler or their spouse are beneficiaries. Capital gains tax is chargeable on gains arising within the trust if the settler, their spouse, their children or grandchildren are beneficiaries. So already we can see that the capital gains tax rules are much wider and it’s unlikely that many trust would escape those. For inheritance, again, we see that same ten year timeline as we do for individuals, so for the first ten years of the settler’s residence the non-UK assets remain sheltered from inheritance tax but after ten years they’re brought within the UK tax net. So broadly, this means that where the settler was a beneficiary of the trust, the trust assets would be subject to inheritance tax at a rate of 40% on the setter’s death. The trust will also be subject periodic charges on every ten year anniversary and on distributions of capital from the trust and those are charged at a maximum rate of 6%.
So, the tax treatments I’ve just summarised, that’s actually the default tax treatment for trusts settled by UK resident domiciled individuals. So, technically, there’s no change to those rules, it’s just that those rules will now apply to non-doms after four years for income tax and capital gains tax and after ten years for inheritance tax. Now, the Conservatives had previously said that there would be grandfathering for trusts settled before 6 April 2025 but Labour have not committed to this. Of course, given recent developments, they may row back on this but this is, this part is just purely based on what they’ve officially put forward so far. Labour have also subsequently said that there will be some transitional arrangements for pre-existing trusts but haven’t announced what they will be. So they may well introduce some form of grandfathering and I think that statement was to give them room to do so but we do anticipate that certainly clients who are already UK resident and may be coming up to this four year and ten year deadline will be looking to restructure and certainly may very well exclude themselves as settler and a spouse, not least to escape the worst of the income tax and certainly the inheritance tax.
So, lastly, the tax treatment I summarised here for trusts, is for trusts settled by UK resident set law. Where the settler is a non-UK resident and remains so, there’s no material change. The only real changes UK resident beneficiaries can no longer shelter offshore trust distributions with the remittance basis but if that beneficiary is within that first four year tax free period then they can receive trust distributions in the UK tax free, apparently. So, again that’s actually a bit more generous than the current regime, albeit only for a short duration.
So, this is an example timeline for the post-6 April 2025 tax treatment of someone who would previously be classified as a non-dom and this is for a new arriver. So, where this diagram makes reference to tax or not tax, do bear in mind this is with regard to non-UK assets. UK assets will almost always be subject to tax wherever you are resident. So we can see that individual arrives in Year 1 and for the first four years they have the benefit of that FIG regime so there’s no, there’s no tax, there’s no income tax, no capital gains tax, no inheritance tax. Then in Year 4 they no longer qualify for the FIG regime so then their worldwide assets become subject to income tax and capital gains tax. They remain in the UK until we get to Year 10 and Year 10 is when the inheritance tax kicks in and for that period now, after Year 10, they are subject to income tax, capital gains tax and inheritance tax on their worldwide assets. So let’s say this person departs the UK in Year 15. From the year that they depart, after that they are no longer subject to income tax and capital gains tax on their non-UK assets because they’re no longer UK resident. However, as proposed by the Government, there will be a ten year inheritance tax tail so when they leave in Year 15, even though they no longer reside in the UK, if they die within that ten year period, their worldwide estate would still be subject to UK inheritance tax until they become clear of that ten year tail, in this example at Year 25 and from that point on, their non-UK assets are no longer subject to UK tax.
So there will be some transitional reliefs although the detail has not been announced but this is what we know so far. So the first is the temporary repatriation facility or the TRF and that’s available for UK resident individuals who have previously their remittance basis and it’s to encourage them to remit pre-2025 non-UK income and gains to the UK. So the TRF which had previously been put forward by the Conservative Government was going to be for two years and it was essentially going to tax remittances of that pre-6 April 2025 income at a reduced rate of 12%, or income and gains sorry, at a reduced rate of 12% as opposed to a top rate of 45% for income and 20% for capital gains. So we don’t know what Labour propose yet, we don’t know how long they propose this facility to last, we don’t know the rate. Originally, this was also only to apply to personally held income and gains but apparently the Government is exploring the possibility of expanding this to income and gains within non-UK structures such as trusts. So it may we be a more generous facility than the previous Government proposed and Labour have made it clear that they want to encourage inward investment to the UK but either way we’ll find out more on the 30 October at the Budget.
As for rebasing, again as with the TRF, this is for previous remittance basis users. The idea is that certain, their offshore gains would be rebased so the previous, the Conservative Government proposed a rebasing date of 5 April 2019 so, if you remitted gains to the UK, it would be a rebasing, that would be the kind of rebasing date for such gains. Again, we don’t know the rebasing date that Labour are proposing but as far as we understand they will be offering this rebasing relief. And as I covered earlier, the previous Government also proposed that additional relief with that, only 50% of foreign income being taxed for previous remittance basis users for the first year. So, Labour have not said they’d take this forward but given the potential other row backs they’ve indicated, they may well do.
So of course the non-dom rules aren’t the only suite of changes to be announced in the upcoming Budget and I’ll quickly run through a few other changes that may affect high net worth individuals. So the first is proposed changes to the taxation of carried interest and the Government have said that they intend to “close the carried interest loophole” so, I’m sort of sure many of you know, carried interest is a performance incentive payable to fund managers once external investors receive their specified return or the hurdle. So senior fund managers take a profit share of the excess, which is usually about 20% and that carried interest is taxed in the UK as capital gain at a special rate of 28% if it meets certain requirements for the carried interest regime instead of being taxed at 45% which is the income rate. So Labour have said they disagree with this regime and that carried interest should be taxed at the higher income rates. They have not given details yet on how they would change the carried interest regime but they would likely revert to the 45 income tax rate. However, there have also been some rumblings that the capital gains tax rate may remain for carry in certain situations, so we await more detail on this. As for capital gains tax, the Government hasn’t ruled out increasing capital gains tax rates, it would seem to be an easy win to raise more tax revenue without affecting the majority of the electorate and so we’re all but expecting a rise in the capital gains tax rate at this point and as a reminder, currently that’s 20% or 24% for gains from residential property.
So, there’s also going to be the end of year VAT exemption for private schools. Again, that’s an effective increase for private schools of 20%, although a lot of schools are absorbing some or all of that increase. We don’t expect this to have a major impact on our clients but it’s worth noting nonetheless and this will take effect from the 1 January 2025.
On stamp duty land tax or SDLT, that will be increased for non-UK residents so, a potential increase of 1% which increased the overall non-resident SDLT rate to 3%. We haven’t seen a major impact for non-resident clients but again it’s something worth noting.
On the offshore anti-avoidance legislation, this is notoriously complex and most practitioners would welcome a well-considered review. These revisions include the taxation of non-UK trusts, companies and similar structures that might otherwise fall outside of the scope of UK tax. So the stated aim is to remove ambiguity and uncertainty and make the rules simpler to apply, which would be great but no changes from this review are anticipated to take effect before 6 April 2026, which I think gives you an idea of the size of the task.
And then lastly, an exit tax. I think the idea of an exit tax has been mooted in the press and on various opinion pieces, but in our view it’s unlikely to be implemented and there’s no indication from the Government that they would do so. So, the Government has reiterated its desire to introduce a regime which is, and I quote, “internationally competitive and focussed on attracting the best talent and investment to the UK”, however, they also seem to have realised that some of their more extreme proposals, particularly on the inheritance tax, may end up losing them tax revenue if the targeted individuals leave the UK as a result.
So, I’m going to hand back to Charlie now, who’s going to take you through some of the surprising potential winners of these changes, our thoughts on how this may affect trust planning and our own predictions for what might be enacted on the 30 October.
Charlie Sosna, Partner
Head of Tax and Wealth Planning
Thanks, Steph. Yeah, so with any changes there tends to be some sort of sideline winners and there’s, there’s few of them with these proposals but there are certainly some out there and the main category of those will be people who are non-UK residents, so they’re not living here, but are from the UK originally and are UK doms. Those category of people tend to find themselves in quite an awkward situation because of the way that the, the concept of domicile works in the UK, which is for someone with a UK domicile of origin it is very difficult to lose that and HMRC are unwilling to accept that someone has lost their UK domicile of origin for quite a long time. These new rules will give them a lot more clarity. They will know that once they’ve been outside the UK and non-UK tax resident for ten years, they’re not going to be subject to UK inheritance tax on their non-UK assets and that is a massive win for them. They are no longer worried about this concept of domicile and what they might mean. That will then open up an opportunity for them to consider settling trusts of their non-UK assets once they’ve been non-resident for ten years and are not concerned about UK inheritance tax exposure on those. So that, again, is a big win. The UK also will all of a sudden become slightly more attractive for them to come back to because under the current regime, if you were a UK domiciled individual that had lived abroad for many, many years, there’s, you’re not really attracted to come back here, 1) it strengthens your UK domicile position again which you might not want, and 2) the day you land, you’re basically subject to tax on everything, including on any structures that you’ve set up. However, now those individuals once they’ve been non-resident for ten years, could come back in, benefit from the four year FIG regime and feel a lot more comfortable in their situation. And we have seen a lot of clients, particularly those that have moved from the UK, lived in Asia for a long time or elsewhere, who are thinking “oh actually, maybe I will go back for a couple of years whilst I can see my grandchildren”, you know, deal with elderly parents, those kind of things and I’m less concerned about what that might mean.
Could we move onto the next slide, Steph. Thanks very much. I think there’s been a lot of concern as to crikey, does this mean this is the end of trusts for the UK or anyone with UK connections and no, is the answer to that, absolutely not. Are trusts a difficult position to be in if you are in the UK, you’re a UK set law and you’re going to be here long term and benefitting from that trust? Yes, from a tax perspective those trusts are not looking great. However, we will see trusts I think being of even far greater use, where you have a non-UK resident set law so for example, you’ve got parents based in Hong Kong and the next generation are here in the UK. It will seem mush more attractive for those set laws to be setting up trusts to provide for their UK resident future generations, then passing assets outright because those trusts we would still expect to offer long term protection from UK inheritance tax and also, effectively a wrapper for UK income and capital gains tax to provide only on tax on distributions. Again, there are many other non-tax reasons that clients set up trusts, particularly for asset protection and succession planning and those remain as valid as ever and it tends to be I would say when we’re talking with clients, yes tax is an important factor in the reason that they are looking at succession planning or the way that they structure their assets using trusts but tax is certainly not the only factor so, those are all still relevant too. So, I think in short, are trusts still relevant? Absolutely. And indeed I think where your settler is non-UK resident but you have UK resident beneficiaries, that they could be even more so, so I don’t think anyone’s going to be seeing the end of trusts for the time being from a UK perspective.
So, what are our thoughts? Where does, where does this leave us and what are the key takeaway points from this really? Well, I think the pros of this four year FIG regime is it’s simpler, it’s cleaner, the reality is the non-dom regime wasn’t necessarily fit for purpose, it, it deterred people from bringing their offshore income and gains into the UK which was not was needed, and it was complex, I think clients would come to the UK thinking “okay, I understand this” but after they’ve been here for a few years and they’re used to doing their tax returns and looking at how everything is structured and they’re seeing capital accounts and their separated offshore income and gains, they found it all quite a bit of a headache. This will be a move away from that. The other advantage is, there’s much more clarity without this concept of domicile and what someone’s exposure to inheritance tax is. So, there is, there is an element of good in all of this in that there is clarity. The cons are, I think there is a feeling that the Government has just gone too far. As Steph mentioned, they wanted to create a competitive regime that would attract people to the UK. Is this doing that? No, it is not. I think they thought they were going to call people’s bluff and that maybe that the wealthy, non-dom market in the UK and the rhetoric coming from those that are advising them wasn’t gonna come true in reality, they thought, “no, we’ll push ahead with these changes, you won’t leave, you’ll stay here and you’re going to pay us more money”. What has become very apparent during the course of the current tax year in the UK is, those people have started to up and leave, like that exodus has started and actually I think they, the Government have noted that, seen that reaction and are realising they need to change the take, have a change of approach. As I say, the cons, that means it’s not generous for a long term resident, this idea of there being a ten year tail when you leave is incredibly onerous and I’ll come on to think a bit more about that enforceability and I can see we’ve had a question about that which I’ll come onto. And I think this idea that there will now be not, no grandfathering for trusts that have been set up already, I mean something that clients find very difficult to accept, they’ve come to the UK based on a regime that was offered to them, they’ve set up trusts based off changes in the tax laws that really sort of pushed them towards that way because that would be the most efficient way to structure your affairs and now they feel that they’re in a worse position so that is a problematic. What are the predictions of this and what is maybe wishful thinking? Well, it feels potentially very likely that there is going to be some softening from where the Labour Party or Labour Government first put up their stall and said no, the Conservatives hadn’t gone far enough, there shouldn’t be any grandfathering, there shouldn’t be this 50% discounted rate for the first year. The question we now have is how far are they going to move away from that? I think one thing that is very clear is the abolition of the non-dom regime is going to happen, they’ve doubled down on that, they’ve made that very clear and actually, I don’t think that is a bad thing but for all the reasons we’ve talked about before and as I just mentioned, the non-dom regime really isn’t fit for purpose, it isn’t serving what the UK wants from it and I think there is, there is a place for change there. The question is are, on October 30th, and it does feel a little bit like waiting for exam results for October 30th to see what they’re going to come out with, are they going to make minor tweaks and say we’re going to push ahead with this four year FIG regime but we are going to allow some grandfathering, we are going to allow some reliefs and we are going to allow some more transitional period to allow people to adapt in or are they going to go further? So, one way that they could go further is there has been a lot of talk and engagement with Government about the fact that okay, we’re on this four year FIG regime, you’ve pushed pretty hard on it, you’re going to look pretty foolish if you row back from that but if there something that you could be running alongside it? And the proposal that has been put to them and when I was in a meeting with Treasury, they said the ministers are actively engaged and listening to it and interested. Is the idea that alongside this four year FIG regime, they run what they’re calling a tiered tax regime, a TTR, because we love an acronym as a tax lawyer, sorry for that. Effectively, what that would say is, it would work a little bit for those that like it, like the Swiss forfait regime or more common actually, to the Italian fixed flat regime and what the proposal would be is, depending on what your wealth bracket is, and I’ll talk about that in a bit more, you would pay a one-off flat fee and that would cover you for your worldwide tax, excluding your UK source income and gains again, and that there would be a longer protection for UK inheritance tax. And the idea would be that that regime would be open up for much longer than four years, hopefully ten or fifteen. The brackets that they have talked about if someone’s wealth being sort of zero to a 100 million, 100 million to 500 hundred million and 500 million plus and the idea being that you would self-assess where you saw your wealth. So it’s, and it be, it would be something that’s not having to be done on an annual basis so that there is not so much work. The feedback from clients has consistently been that is something that they find hugely attractive and if the UK was to go down that way, those that have not left would stay, those that have left would reconsider coming back even if they’ve done planning for going to Italy or where else, Switzerland, wherever they’ve gone and I think it would put the UK in a much better position for attracting what we want from it. Just to give you some, some flavour, there are many, many clients who’ve said, “We’ll be willing to pay a flat fee of a million a year to get to stay in the UK on that kind of system” if their wealth level is high enough and those are figures where I think the Government could put themselves in a good place where they’re saying, “Look, we’ve achieved what we wanted to do, we’ve abolished the non-dom regime, it’s gone, it was, it was to complicated, it didn’t attract people and we think people would not contribute in a way that we thought meaningful to the economy.” They could say, “We are bringing in, you know, x-amount of millions every year from these flat fees that people are paying and they are properly contributing” and I think they could find a way through there. The question is whether they are actively engaged and listening to that or not and that’s going to really come to light on October 30th, there’s a huge amount of work to be done, we’re expecting the draft legislation on the 30th October so, so whether they will go that far or say that there’s more to come in due course is yet to be seen.
Before moving on, if it’s alright, I might just deal with the one question that I can see that’s come up, to the extent I’ve not addressed it, which is the views on enforcement of that IHT ten year tail when someone’s gone outside the UK. There’s a big issue there and the Government I think know that’s an issue so, to explain what I’m talking about there, someone’s been in the UK for ten years, they’ve fallen within the scope of global inheritance tax, they’ve left and they die five years later when they have no assets in the UK. How is the Government in the UK going to go to that person’s estate and say, “We want 40% of your global assets as tax”? That is a huge problem. I think there will be many clients who will try and structure their affairs in a way so that they don’t have UK assets, they don’t have a UK will, they don’t have UK executors and look, the position actually is not un, you know dissimilar to a situation we have at the moment where you could have a UK domiciled individual dying abroad with no assets in the UK and the reality is, their executors probably don’t even realise that they need to be filing a tax return in the UK or paying tax here and I think that’s going to be a problem. The second part of that question is, “How would spouse exemption work where both spouses have been UK tax resident for ten years?” I would expect there to be a full spouse exemption in that case, much like we’d have it for UK deemed domiciled spouses currently, so I’d expect spouse exemption still to work, they just want to make sure that they’ve got their global estate planning done right in their wills to benefit from that. Very good.
I don’t know whether we want to move on or I can see there’s another couple of questions, I’m happy to deal with them or pick them up at the end, if easier.
Wei Zhang, Partner
Perhaps we move onto the US part and then address the other questions at the end.
Charlie Sosna, Partner
Head of Tax and Wealth Planning
That sounds great.
Wei Zhang, Partner
Thank you very much Charlie and Stephanie, these certainly sound like really big, important changes that could affect many clients with UK ties. Now, let’s turn to the US updates, where the potential changes may not be as fundamental as the UK changes that are being put on the table but could still be quite impactful high net worth individuals. Theordore, we’ve heard a lot about the Trump tax cuts sunsetting soon, what exactly does that mean? How does it affect our clients out here in Asia?
Theodore Tan, Associate
Right, thanks Wei. So, when they passed the Trump tax cuts at the end of 2017, because of the budgetary process they adopted in reconciliation, not all parts of the bill could actually have been made permanent so, some parts of the law are going to start expiring on 1st January 2026 unless Congress acts and it’s not all, it’s not all bad. So it’s going to be a mix of benefits and drawbacks depending on how exactly you are situated. Many of these are actually focussed primarily on domestic taxpayers so they may not really be relevant to clients based out here in Asia. So, I’m going to share some slides. Right. So, the slide is put up here, it’s not, it’s not comprehensive but it’s going to give you a sense of the changes that we are looking at that will impact our clients. Starting from the top left, we have the top marginal rate that’s going to go up to 39% for incomes above 400,000 depending on your exact filing status. In the 40.11 top, we have the 40.13 deduction which you know is currently capped at 10,000, this actually matters a lot to our clients that are based in high tax states such as New York or California, so this $10,000 limit was put in place to ensure that the Trump tax cuts didn’t actually rip a hole in the, in the federal deficit at the expense of taxpayers that live in high tax, mostly Democratic run states. So, the unlimited deduction coming back, you know that’s something that’s actually going to be great for our clients that are living in those states or thinking about moving to those states. So the top right and bottom right, those three panels, they’re mostly business provisions that affect the whole span of businesses from small 40.54 to multi-national corporations. We’re generally looking at tax increases across the board with 41.00 and the loss of certain business deductions, so these are going to be significant, mostly for multinational corporations based in the US, less so for our clients unless you know they’re running a business that has a big US footprint. The final one, which is probably the most important planning point for our clients, which is at the bottom left. That’s the increased unified credit for gifted estate taxes, so as I’m sure many of you are aware, US citizens and domiciliaries can give away a certain amount of gifts in their lifetime without be subject to gift or estate tax. The number is currently 13.61 million, it’s likely to go up to 13.91 million next year, before the sunset kicks in in 2026, where it’s going to drop by approximately half to about 7 million in change. So, this is a use it or lose kind of thing, so you actually have to utilise the full amount of unified credit in order to benefit. You can for example give away $7 million on gifts in 2025, you know and think you’ll still have $7 million dollars in 2026. So this is probably the most important planning point that we are looking at for our clients.
Wei Zhang, Partner
So you just mentioned that the unified credit or what we call the gifted estate tax exemption also was probably the most important planning point for our clients. So what kind of client profile do you think this is most relevant for and what do you think are the best ways to use this amount?
Theodore Tan, Associate
Right, well obviously you know this is going to be relevant to clients with US estate tax exposure so, you know I’m thinking US citizens, US Green Card holders to a certain extent based out here in Asia, the $7 million unified credit, you know at the 40% in top estate tax rate, that’s about 2.8 million in change in estate tax exposure that you know clients can get out of if they fully utilise the credit before it sunsets. So the easiest way to make use of unified credit of course is to make direct gifts, you know but of course for some of our clients this you know doesn’t always make sense, you know, if you’ve got young children, you don’t want to be giving them £7 million at this point, you know, so the other way is really to fund trust which are treated as completed gifts from a US estate tax perspective, you know, there is some time you know between now and January 2026 when the sunset kicks in, you know, and we know the Republicans are pretty keen on making this benefit permanent, you know, the Democrats on the other hand obviously are opposed you know because they see it as a giveaway to the rich but our view really is that you know for some of our clients, they can take a wait and see approach, you know wait till the shape of the next Congress becomes clear after the election on 5th November, you know since that’s probably the point at which we know whether there’s likely to be any movement on this front. So, you know, if trust planning is something clients are thinking about, you know one way to sort of hedge, you know which we think makes sense is to set up a standby trust now, you know and basically have it you know there ready, you don’t have to fund it until it looks like the sunset is going to take effect. What we are trying to avoid here is the situation where you know in the last quarter of 2025, Congressional talks break down, you know and all of a sudden there’s a rush, you know, intermediaries, professionals, they’re all going to be swamped and you know if you’ve not had a trust set up at the time, there’s some risk that you know you’re not going to be able to take advantage of that. So in terms of like you know client profile, obviously you know if your client’s close to the unified credit amount, you know you don’t necessarily want to be putting a you know significant percentage of your net wealth into, of your net worth into any trusts, you know so we think for us you know around the $40-50 million mark, that’s where you know it kind of makes sense to just sort of think about taking advantage of it because you know there is going to be a genuine tax saving if you, you know do realise unified credit.
Wei Zhang, Partner
Right. Thank you. Looking ahead, Tim, you guys are obviously paying very close attention to the upcoming US election and the Vice President debate just happened earlier this morning Hong Kong time. What do you see in each candidate’s proposals that will be of particular concern to our clients?
Timothy Burns, Partner
Right, so thank you, Wei. We’re not seeing a big sea change like you have on the UK side, it’s mostly what you’d expect on every four years on the US, so we’re having proposals form the Republicans and the Democrats. We’re not, we don’t anticipate any bipartisan support so essentially, you would need both chambers of Congress and the Presidency aligned to get anything through, which was what happened in 2017 with the Tax Cuts and Jobs Act, you had Republicans controlling the House, the Senate and the Presidency. So, barring an alignment, it’s unlikely we would see tax changes but we need to be aware of what both sides are proposing. Unsurprisingly, Trump’s proposals are by and large taxpayer friendly and pretty scant on details, while Harris’s proposals are less taxpayer friendly and have more details and Harris really has piggybacked off of the Biden proposals, subject to some modifications. So, going through them, with Trump, first and importantly he wants to extend out the sunsetting of the, the provisions Theordore just discussed that are going to sunset in 2026, namely the reduction in the unified credit, he wants to extend that out, the slight increase in ordinary income tax, he wants to extend that out. As far as I know he’s been quiet on the capital gains rate but Project 2025 does discuss reducing capital gains from 20% to 15%. He, Trump has floated the idea of abolishing income taxes altogether for a tariff based tax system but there have been no details on that and I don’t think anyone’s taking that very seriously. In relation to the corporate tax, Trump is proposing a decrease from 21% to 20% and a possible down to 15% for companies that manufacture in the US. So that’s the Trump side of the equation, there’s not many details and what we do know is relatively taxpayer friendly. Harris, Harris would like to increase capital gains from 20 to 28% for individuals making over a million dollars. Now note, this is less than what Biden wanted to increase it to, Biden wanted capital gains rates to go as high as ordinary income tax rates, that’s 39.6% for individuals making more than $1 million a year. Also, Harris wants to impose a mark to market tax, a capital gains tax on estates worth more than £5 million and she would also – now this one’s I think philosophically important because it does represent a shift in tax policy – impose an alternative minimum tax of 25% that for households over $100 million would include unrealised gains, and that’s important because the US tax system is based generally on realisation events so when you kind of take that away, their justification would be like” hey, this is the ultra, ultra net worth, the high net worth families”, it’s a $100 million but the reality is, a $100 million’s not as much as it used to be and if the policy comes in, you could easily foresee some simple modifications where $100 million becomes $10 million, becomes $1 million and I think frankly, the income tax and the estate tax when first enacted were only supposed to affect ultra-high net worth individuals. Harris would like to increase the, the corporate tax rate from 21 to 28%, which is still lower than it was pre-Tax Cuts and Jobs Act when it was at 35% so, Harris’s policy is actually when it comes to capital gains over a million and the corporate tax, this is not all that, that dramatic of a change, I really think it’s this concept of the 25% alternative minimum tax on unrealised gains that’s a bit of an outlier. So, those are the highlights in relation to the proposals. I haven’t focussed on, so, those are the highlights in relation to what we think will impact our client base. There are numerous proposals that we haven’t focussed on, things such as the childcare tax credit and you know, tax-free tips for, for waiters and waitresses. So, yeah, that’s what we’re expecting and that’s what we’re keeping an eye on.
Wei Zhang, Partner
Very good. Since though we’re still a month away from the election, for those who want to be very proactive, what advice would you be giving on how to prepare for the upcoming changing administration?
Timothy Burns, Partner
So, unified credit planning, we foresee the unified credit being reduced unless there’s a red wave so, if there’s any divide, unless everything’s aligned red, we suspect the unified credit is in fact going to come down, it’ll likely come down by half in line with the sunsetting of the Tax Cuts and Jobs Act, so for individuals who have significant wealth, it seems like it makes sense to start thinking about using that now. If you’re considering engaging in trust planning, well there’s only fourteen months until the, until this number decreases so really now is when people should be thinking about it. I would also note, for individuals who are considering relinquishing citizenship or Green Card status, a lot of pre-expatriation planning involves using the unified credit and there are a couple of reasons why. One, is trying to gift to reduce net worth below the $2 million threshold but also trying to remove assets from the exit tax. So, if someone is considering relinquishing US status in the near future, they may want to consider undertaking their planning in 2025 before the end of the calendar year. So I think that’s the obvious, you know what we should be talking to our clients about or what people should be considering. The other thing I would say is to watch out for a blue wave, right, if it’s a red wave, we’re going to say okay well, by and large it’s not going to have a negative impact, we’re not going to be, wake up with you know some surprises or handcuffed in some of our standard planning but if there’s a blue wave, there are a number of things that could come into play, for example in 2021 with Build Back Better, they almost enacted legislation that would significantly impair the ability of US citizens to engage in domestic estate tax planning, right. So, if you wake up and there is a blue wave, I would think that then there might be an impetus to try and engage in more immediate planning because you could see more draconian measures come in. Some clients back there were also considering taking gains off of the table to subject themselves to the lower tax rates anticipating a higher tax rate that would come in. So, from our perspective, that’s what we’ve been advising our clients.
Wei Zhang, Partner
Right, and I think this certainly also goes back to what Theodore has mentioned in terms of the possibility of setting up maybe a standby trust just so that you have things ready that if you need to pull the trigger on any sort of planning, you’re not going to spend months and months trying to set up some structure in order to take advantage of it. Thank you both for the US updates. I think at this point we can go back, there are some very good questions on the UK side. Charlie and Stephanie, would you like to, to address them now.
Stephanie Lim Pierce, Managing Associate
Yeah, sure, so, we have one question asking, “If I become a UK resident in 2024,” so this current tax year, “will I still be able to use the FIG regime for four years or will it be reduced to three years?” And the answer is, it will be reduced to three years. So, pre-6 April 2025 years will count both for that four year tax-free period but also for the ten years of non-residence. So, remember to qualify for that four year FIG tax-free period, you have to have the non-resident for ten years but if for example you were resident in the UK before you left, let’s say last year, and you come back to the UK in a couple of years, if you haven’t cleared that ten year hurdle, then you won’t qualify for that, for that four year FIG regime and they are counting pre-April 2025 years. And then they also ask, “Would it be better to apply under the remittance basis this year” I mean, better or worse, it’s, it’s, it’s where you are at that relevant year, right. So, we have clients who are currently resident and they are claiming remittance basis because they can and that is the, that is the law as it stands now, and the law as it stands, as it will stand from next year will be that as far as we know, that four year FIG regime. So, I think as Charlie went through in our presentation, there are pros and cons to both. If I’m honest, I think from what a few clients have said, they’re excited is a big word for the FIG regime, but they’re kind of looking forward to something being a bit more simpler to understand than the remittance basis but that is for the new arrivals, but yeah, as to whether the remittance basis or FIG regime is better or worse, my thinking is that it is what it is, if you are in the UK this year, this is the current rules and from the UK next year, those will be the rules, there’s no, there’s no real choice. And Charlie, I don’t know if you want to do the next question?
Charlie Sosna, Partner
Head of Tax and Wealth Planning
Yeah, that’s good. And just to tail end to what you were saying there, if, if your question is, if your first year of UK tax residence is the ‘24/25 tax year, so this one, would we recommend that someone claim their remittance basis for that year before falling into three years under the FIG regime, our expectation would be yes, I assume they have offshore income and gains that year that they want to avoid being taxed on but also, you will want to claim the remittance basis this year, it seems to be able to benefit from some of the transitional rules that will be allowed under the FIG regime, so my gut tells me yes, you would probably claim the remittance basis this year but obviously it’s case by case.
On the next question, there’s sort of two questions that are slightly connected. The first one is, “What are we seeing clients starting to do in terms of wealth planning?” It’s difficult because it’s an incredibly broad answer depending on what someone’s circumstances are and where they are. If you are someone who is in the UK, that you’ve been UK res, non-dom claiming the remittance basis and you’re thinking crikey, what’s going to happen to me coming forward, I think it’s a general review of things. If you’re, if you’re, before being here for ten years but ten years is coming up, I think we would be looking at whether we can exclude you from certain trusts to avoid you be taxed on your offshore income and gains in those trusts, exclude you from trusts to that you don’t have an IHT exposure in relation to them, I think we would be looking at gifting non-UK assets down a generation whilst you, before that ten year mark in April so that we can get them outside of your estate tax-free now. Those are all the kind of things, there’s, there’s a lot of reviewing and analysis to be done. The next question which I think is something that sort of pairs onto that wealth planning is, with a new non, new non, sorry, with the new UK non-dom regime which I suppose it’s not a non-dom regime but the FIG regime, for those who are emigrating to the UK for good, what preparation should they done before they come to the UK for their non-UK assets to minimise their tax exposure in view of the new regime? Slightly difficult because we don’t know exactly what the regime will look like but we’re advising many clients at the moment who are coming in, and that is something just to flag here as well, is you would think with all of this we’re not seeing people come here, we still are, surprising in part, but you know there are still many reasons people come to the UK and there are many push factors for people to be living somewhere else. I’m trying to think, what are we telling those people when they come? Well, we’re advising them of what the FIG year regime is going to look like. There is far less planning than we’d have done before around their pre-arrival planning of setting up offshore income accounts, capital gains accounts, clean capital accounts. All of that is far less relevant, whereas if someone is already here and claiming their remittance basis, their accounts are going to get way more complicated because they’re going to have all of those historic accounts, so for the bankers on the line I’m sorry, but you’re going to have all of those you know offshore income accounts, capital gain accounts and capital account and then you’re going to have a whole new set of accounts for the clean capital FIG regime and making sure you get your accounts in the right way. Whereas for new people coming in, that’s much more straightforward, I think we will see people looking to rebase assets, generate income and gains perhaps before arriving, however, many of them will actually delay generating income and gains because if they’re currently tax resident in another jurisdiction that would tax them, it makes sense for them to wait until they become UK tax resident, benefit from this FIG regime, trigger income and gains that we will not tax even if you bring them in and that might exist because they’re no longer resident in somewhere else. So actually, under the FIG regime, it has slightly turned on its head to what we used to say, which is, “Trigger income and gains before you get here and get your 58.47 account set up in the right way.” There is potential as if you take a more global approach to their tax planning that we’re saying delay triggering income and gains till you get here, we’re not going to tax that even if you bring it in and it might mean you don’t have to pay tax on it somewhere else. So, it’s a bit of a case by case but there’s still a lot of analysis and work to be done.
Stephanie Lim Pierce, Managing Associate
We have a couple of questions about insurance. The first one, “Insurance wrappers. We heard a lot of people peddling such products in the market as a silver bullet to UK tax changes. Do they really work especially with the Asian families looking to retain control over the investment decisions of the assets wrapped within the policy?” So, first of all, I will say that in insurance wrapper products I know are extremely popular in Asia and in Singapore, they are less popular in the UK, I think because the way that the UK taxes and insurance policies is very complex, however, they do work and they can work but the way in which it would work in the UK for such policies is usually that you are able to withdraw up to 5% a year tax-free and that everything else remains wrapped up in the policy wrapper. The corollary to that is that at the end of the, the policy duration, all those investment gains that you’ve wrapped up then essentially get taxed as income at the end. So that’s the kind of pay the piper moment under the UK tax regime for such policies and that’s why some clients, it’s, it’s not the best because you then have to have a big income tax charge at the end. However, if you have left the UK by the time the policy matures, that’s not really, that’s not really a concern so for shorter term residents, yes that could work if you’re going to leave the UK before such a policy matures. I wouldn’t necessarily say it’s a silver bullet because I don’t believe that anything is a silver bullet. Charlie, I don’t know your thoughts.
Charlie Sosna, Partner
Head of Tax and Wealth Planning
Yeah, it’s a really good point and probably something I should have touched upon discussing wealth planning. There is a lot of discussion about the types of investments clients will make if they’re going to be here beyond the four year FIG regime. I’m aware we’ve passed time, I’m happy to answer these questions but if people have to drop off, no offence taken. The, but yes, I think the use of insurance wrappers, as Steph said, to wrap up income and gains and if you can allow yourself that 5% withdrawal each year with a view to going non-resident and exit, completely agree with everything that Steph said, it, it’s being talked about a lot. It’s just the market in the UK is very different to in Asia and it’s something that people are less, are less frequently advised on and they understand less so it, that’s probably why it gets a little less noise. And then also a further on question about whether it will help with inheritance tax. Well that all depends how the policy is held and owned. If it is in someone’s individual name, it’s still going to be the value of that policy is part of their IHG net once they go passed that ten year window. We will see some sort of different structuring of holding it in trusts and things like that. You then need to be careful what the knock-on effect is that on the offshore income and gain wrapper and how that is going to tie in with whatever the legislation looks like. But the Government haven’t really said much about that and I don’t think it’s high on their radar as something to hit. I’m just reading through the other questions. Okay yeah, so, “If you’re in a business while a non-dom, what happens if you sell the business after 2026? Is there capital gain on the value from ’25 or any specific rebasing prior to becoming dom?” Assuming we’re talking about someone that’s UK resident here, the general position is that the UK doesn’t give someone a rebasing when they arrive. As Steph mentioned earlier, there will, there is anticipated to be a rebasing of assets if you’ve been a remittance basis user or you, you hit certain criteria, we just don’t know what the date is going to be that they rebase those assets. So, yes, we expect there to be a rebasing, we just don’t know when it’s going to be. “If the CGT rate is increased to the same rate as income tax, does it mean it’s not necessary to segregate?” That’s a good question. Yes, I suppose if the CGT rate did come up to…
Stephanie Lim Pierce, Managing Associate
It is a good question, I hadn’t thought about it.
Charlie Sosna, Partner
Head of Tax and Wealth Planning
Yeah, if it did come up to income tax rate, maybe we will be less concerned about, about the segregation of income and gains. I, just thinking that through, yeah, I think that is probably right. It’s going to be interesting what they do with CGT rates, I’m not convinced they will, I mean, saying this, I think there was a while back, eighteen months ago when I spoke at a seminar and I said I don’t think they’ll get rid of the non-dom basis and look where we are, so don’t take everything I say as gospel but I think there is a thought that if the CGT rate comes up, it might not hike immediately to an income tax rate because it’s such a huge deterrent and will push some people out of going non-resident. There is a feeling that it might come up a bit so then the segregation will be relevant still or that they will do what they did with corporation tax rates which is stage the changes over years, so people plan so you don’t end up with one huge rush now of people disposing of assets but actually you could see a more constant trickle effect which is an interesting thought and it’s something that I can imagine would interest a government. And again, if you’re in that case you will need to still segregate, I’m afraid. But under the FIG regime, once you’re going forward, you know you won’t have to bother with that. I think we’ve covered all the questions, I hope.
Stephanie Lim Pierce, Managing Associate
Yeah, I think so, I don’t see any others.
Wei Zhang, Partner
Well, with that, I mean, if there are further questions, certainly feel free to email us and we’ll be happy to be in touch and discuss these issues. Thank you everyone, all of the, to all of the speakers and to everyone who attended today’s session and the ones who raised the questions, it’s been a very engaged discussion and thank you very much. I think we can wrap up here.
Charlie Sosna, Partner
Head of Tax and Wealth Planning
Thank you very much everyone.