Legislation Day – points to note for private clients

Legislation Day (also known as “L Day”) is an important date in the UK’s tax policy calendar, on which the Government publishes draft clauses for the next Finance Bill, alongside various other documents including tax information notes and responses to consultations. The aim is to allow for technical consultation in respect of draft legislation, as well as to provide taxpayers with greater certainty on future tax changes. 

This year’s Legislation Day took place on Monday 21 July, and we summarise the key points to note for private clients below.

Non-dom reforms – technical amendments to the new “FIG” regime

With effect from 6 April 2025, the UK’s “non-dom” regime was abolished and replaced by a new four-year residence-based foreign income and gains (FIG) regime. Further details on these reforms can be found on our non-dom hub. 

Recent press reports have suggested that the Government is considering softening various aspects of the non-dom reforms, given the level of departures from the UK by affected individuals, but there were no announcements along these lines.

A written statement by James Murray, the Exchequer Secretary to the Treasury, did, however, note that the Government intends to make a number of “technical fixes” to the FIG regime to ensure that it “works as intended”. An exhaustive list of these amendments has not yet been provided; however, they will include changes to the Temporary Repatriation Facility (TRF - a three-year facility which allows former remittance basis users to bring FIG which arose before 6 April 2025 to the UK at a favourable tax rate) to address existing problems with the legislation which limit the effectiveness of the TRF in respect of trust structures which hold “offshore income gains” (profits realised on the disposal of interests in certain non-UK funds).

Business property relief and agricultural property relief reforms

Business property relief (BPR) and agricultural property relief (APR) currently provide (potentially unlimited) relief from inheritance tax (either at 50% or 100%) in respect of eligible business or agricultural property. However, at the Autumn Budget on 30 October 2024, the Government announced significant reforms to APR and BPR, with a technical consultation (focusing on how the proposals would apply to trusts) running from 27 February 2025 to 23 April 2025.

In particular, it was proposed that, from 6 April 2026, the following will apply.

•  Individuals will qualify for 100% APR or BPR up to a combined limit (for both reliefs) of £1m, paying no inheritance tax up to the £1m threshold. Any value over and above the £1m threshold will be taxed at 20% (i.e. 50% of the main rate of 40%). The £1m allowance will refresh every seven years on a rolling basis.
• For trustees subject to the “relevant property regime” (which imposes inheritance tax charges at a rate of up to 6% on each 10-year anniversary of the establishment of the trust, with proportionate “exit” charges if assets are distributed between anniversaries), there will also be a £1m cap for 100% relief on qualifying assets in respect of 10-year anniversary and exit charges. The £1m allowance for trusts will refresh every 10 years.
• Relief on shares traded on but not listed on the markets of a recognised stock exchange (for example, shares quoted on the Alternative Investment Market (or AIM)) will reduce from 100% to 50% in all circumstances (i.e. without the £1m allowance).
• Trusts and transfers made before 6 April 2026 (and, in particular, trusts and transfers made between 30 October 2024 and 6 April 2026) will benefit from various transitional provisions.

Further details on the proposals, as well as the points set out in the technical consultation, can be found in our separate article.

On Legislation Day, a summary of responses to the technical consultation, together with draft legislation, was published. Key points to note are as follows.

• Despite much publicised opposition to the reforms in recent months, the Government has no plans to deviate from the proposals set out at the Autumn Budget 2024 and in the technical consultation. In particular, the summary of responses to the technical consultation acknowledged that many respondents had criticised the fact that the £1m allowance will not be transferable between spouses or civil partners (and that this is at odds with the position in respect of an individual’s nil rate band). However, the Government has confirmed that no changes will be made to this aspect of the proposals, as doing so “would carry an Exchequer cost”.
• Although the Government is continuing with the implementation as envisaged, two points have been announced which will be welcomed by taxpayers.
  • The £1m allowance will increase in line with the Consumer Prices Index (CPI), although indexation will not apply before 6 April 2030. (This point had not previously been mentioned in the Government’s original proposals or the technical consultation.)
  • In order to disincentivise individuals from using multiple trusts to access additional £1m allowances or to achieve discounts for inheritance tax valuation purposes, the technical consultation had proposed introducing two “anti-fragmentation” provisions: (1) introducing a single £1m allowance where a settlor transfers APR/BPR property into multiple trusts on or after 30 October 2024; and (2) extending existing rules for valuing “related” property so that APR/BPR property settled by the same settlor across multiple trusts could be connected for valuation purposes. The Government has confirmed that, although it intends to proceed with the first of these provisions, it will not introduce the second provision (on the basis of concerns raised by respondents to the technical consultation relating to anticipated difficulties in administering such a provision).
• It was confirmed that, as set out in the technical consultation, the inheritance tax due in respect of APR/BPR property can be paid in 10 interest-free, annual instalments. Representations by professional bodies and advisors had been made to the Government, highlighting the fact that, even if the tax can be paid by way of instalments, many business owners will face increased effective tax rates due to additional tax charges arising on the extraction of funds from the business to pay the inheritance tax liability, and suggesting various options for mitigating this. However, the draft legislation published on 21 July does not include any provisions in this regard, so this will remain an issue for many taxpayers.

Inheritance tax – unused pension funds and death benefits

Currently, unused funds within a pension scheme generally pass free of inheritance tax on death. However, at the Autumn Budget 2024, the Government announced that most unused pension funds and death benefits would be brought within the value of an individual’s estate for inheritance tax purposes with effect from 6 April 2027, the aim being to remove the incentive to use pensions as a tax-planning vehicle for wealth transfer after death. 

A consultation on these changes was published on 30 October 2024 and, on Legislation Day, the Government published a response to the consultation alongside draft legislation. Key points to note are as follows.

• The consultation had indicated that all lump sum death benefits would fall within the scope of inheritance tax, and so this would have included death in service benefits which are provided as lump sums from registered pension schemes. However, respondents to the consultation raised concerns about this, and the fact that it would create inconsistencies with death in service benefits paid in other ways (for example, payments of lump sums from a non-pension group life policy held in trust). The Government has now confirmed that it agrees with these concerns, and so all death in service benefits payable from a registered pension scheme will remain outside the scope of inheritance tax. 
• It had originally been proposed that pension scheme administrators (PSAs), rather than an individual’s personal representatives (PRs), would be liable for the reporting and payment of any inheritance tax on the pension component of an individual’s estate. However, in light of concerns raised by respondents to the consultation, the Government has now decided that PRs – who are already responsible for administering the rest of the estate – will bear this responsibility.
• The existing rules which provide an inheritance tax exemption for death benefits passing to a surviving spouse/civil partner or a registered charity will be kept in place.
• Further draft legislation will be published in due course, dealing with the framework which will be required to enable PSAs and PRs to exchange all necessary information regarding tax due on inherited pensions.

Reforms to the taxation of carried interest

Draft legislation for the new carried interest tax regime which takes effect from 6 April 2026 was also published on Legislation Day. Under the new rules, carried interest receipts will be brought within the scope of income tax and subject to Class 4 NICs rather than capital gains tax. Amounts which qualify for this new carried interest regime will be treated as deemed trading income and the normal rates of income tax and NICs will apply, but the taxable amount will be reduced by a “multiplier” of 72.5%. The effective rate of tax will depend on an individual’s specific circumstances, but an additional rate taxpayer otherwise subject to income tax and NICs at a combined rate of 47% will be subject to an overall effective tax rate (ETR) of 34.1%.

Under the new framework, the deemed trade will be treated as carried on in the UK to the extent that the investment management services were performed in the UK. One of the consequences of this approach is that non-UK residents will be subject to income tax on carried interest proceeds to the extent it relates to relevant investment management services that were performed in the UK. This domestic charge will be subject to any applicable double tax treaty and a series of statutory guardrails designed to limit the territorial reach. Broadly, the operation of the guardrails should exclude qualifying carried interest received before 30 October 2024; instances where fewer than 60 workdays have been spent in the UK during the relevant tax year; or where three full tax years (in addition to the current tax year) have passed during which time the individual was neither UK tax resident nor met the 60 UK workday threshold. 

UK residents who benefit from the new FIG regime for a tax year should be exempt from tax in respect of carried interest arising to them during that tax year, to the extent those proceeds relate to relevant investment management services performed outside of the UK. 

The legislation also makes changes to the Income-Based Carried Interest (IBCI) rules by removing the current exclusion for carried interest that is an employment-related security (ERS), and instead make targeted changes to make the rules work more appropriately for private credit fund managers (who typically rely on the ERS exclusion).

Another consequence of shifting carried interest into the income tax framework is that it will be subject to the Income Tax Self Assessment (ITSA) payment on account regime such that the income tax and Class 4 NICs paid on carried interest in one tax year will feed into the default estimate for the next tax year. As a result, individuals will need to consider their compliance obligations and reduce their payments on account if they believe their taxable income will reduce from one year to the next.

For more detail on the above carried interest tax reforms, see our separate note.

Personal tax offshore anti-avoidance legislation

On 30 October 2024, the Government published a “call for evidence”, seeking views on possible reforms to the UK’s offshore anti-avoidance legislation (including in particular the rules dealing with non-UK trust and corporate structures) in order to “modernise the rules and ensure they are fit for purpose”. 

A summary of the responses to the call for evidence has now been published, with respondents highlighting the need to “simplify the application of the rules, improve certainty for taxpayers, and provide clearer scope”. Although the original call for evidence indicated that reforms in this area might be implemented with effect from 6 April 2026, it has now been confirmed that there will be a delay of at least one year and that any changes “are not expected to take effect before the 2027 to 2028 tax year, at the earliest”. Further updates will be provided at the Autumn Budget 2025.

Closing the tax gap

At the Autumn Budget 2024 and Spring Statement 2025, the Government made a number of announcements, designed to raise additional revenue through closing the tax gap (i.e. the difference between tax due and tax paid). 

Draft legislation in respect of various measures was published at Legislation Day, including:

• legislation to strengthen HMRC’s powers to take action against tax advisors facilitating deliberate non-compliance by their clients (to come into force from 1 April 2026);
• provisions which require tax advisors to register with HMRC and meet minimum standards, before being able to interact with HMRC on behalf of clients (also with effect from 1 April 2026); and
• draft primary legislation which enables HMRC to make better use of third-party data, including the introduction of a new obligation on third-party data-holders (including, for example, financial institutions) to report data to HMRC for tax administration purposes (although such measures will not come into force before April 2027).

The Autumn Budget - further announcements?

The draft legislation published on Legislation Day reflected pre-announced tax policy changes so, although clarity was provided in respect of various points, there were no major surprises. However, as confirmed in James Murray’s written statement on Legislation Day, “the final contents of Finance Bill 2025-26 will be decided by the Chancellor at the next Budget”. 

As noted, recent media reports have suggested that the Government is considering backtracking on certain aspects of the non-dom reforms; however, it seems likely that the Chancellor will also be under significant pressure to take action to put the public finances on a more sustainable footing. Private clients and their advisors should therefore be prepared for the possibility of further significant tax policy announcements before the end of the year.