The first wholly Conservative Budget for 18 years has been a most significant one for high-net-worth individuals and, by extension, those who advise them.

Despite losing the general election, Ed Miliband of the Labour Party can claim one major achievement: a victory over non-domiciled individuals, the taxation of whom is now high up the political agenda. Because of the exposure that this phenomenon has had in the press, the Chancellor has embarked on a policy of substantial reform, to be implemented in 2017.

George Osborne has stopped short of abolition, but the advisors of all UK-resident, non-domiciled clients will have to assess their situations over the coming months.

In addition, the Chancellor unexpectedly announced an overhaul of the British system for taxing dividends. The details of these measures (and many more) are set out below. All notes refer to personal taxation (and the taxation of HNWs) until almost the end.

Domicile

In a major change to the current rules for non-domiciled individuals, the Government has said that the remittance basis will remain for those non-doms resident in the UK for less than 15 of the last 20 years, and that once one of these people reaches his 16th tax year of residence in the UK, he will have to pay tax on his worldwide income and gains as if he were domiciled in the UK. Inheritance tax will also then be charged on his worldwide assets if he should die whilst still 'deemed domiciled' in the UK.

It will become more difficult for someone to lose the ‘deemed domicile’ tag. An individual who is deemed domiciled under these rules will need to be non-resident for five tax years before they are no longer deemed domiciled in the UK. Should they remain outside the UK for at least five years, then return to the UK, they will again have 15 years of residence before they become deemed domiciled.

In another significant change, an individual who was domiciled in the UK at birth will immediately be treated for tax purposes as domiciled in the UK should he/she reside in the UK once more.

The Government will consult interested parties about these proposals with the changes coming into force in April 2017.

Property and domicile

Individuals who are not domiciled in the UK and hold residential property there through an offshore company, partnership ‘or other opaque vehicle’ will have to pay inheritance tax on the value of that property, regardless of whether it was occupied or let. Such properties in offshore trusts will also become subject to the relevant property regime. Assets that are not in the UK and assets in the UK that are not residential property will remain outside the inheritance tax net, unless or until an individual "becomes deemed domiciled" in the UK, as above.

Pensions

The Government announced that the lifetime allowance for pension contributions will decrease further from £1.25 million to £1 million from 6 April 2015.

Inheritance tax

As expected, the Government announced a new inheritance tax ‘main residence nil rate band’ (‘main residence NRB’). This will come into effect for deaths on or after 6 April 2017 in order to mitigate the inheritance tax liability when an individual’s residence is left to his direct descendants. 'Direct descendants' are children (including step-children, adopted children and foster children) and their lineal descendants.

The value of the main residence NRB will be the lower of the net value of the deceased’s interest in the appropriate residence and the set maximum level of £100,000 (for 2017/18). The set maximum level will increase each year up to a level of £175,000 by the 2020/21 tax year and will (when applied with the existing transferable nil rate band) then amount to the often promised “£1 million nil rate band” for married couples. There will be a tapering of the main residence NRB for estates valued at more than £2 million, reducing the maximum set level by £1 for every £2 over £2 million.

The main residence NRB will be transferable to a surviving spouse or civil partner (operating in a fashion similar to the current transferable nil rate band) and will have a quasi-retrospective effect for those where the first spouse or civil partner died prior to 6 April 2017 (whenever that was).

Its application will be limited to one property (which has to have been the deceased’s residence at some point) although the personal representatives will be able to nominate the property to which it should apply in circumstances where there is more than one property.

It was also announced that the main residence NRB would also be available in cases where the deceased had 'traded down' to a less valuable property, or owned no property at the time of his death, although the technical details of this will be subject to consultation.

Dividends

The dividend tax system will be overhauled next year. The current tax credit will be replaced with a new tax-free allowance of £5,000 of dividend income for all taxpayers.

The rates of dividend tax will be set at 7.5% (for basic rate taxpayers), 32.5% (higher rate) and 38.1% (additional rate) where dividend income exceeds £5,000. This is an increase from the current rates of 0%, 25% and 30.5% although these do not benefit from the £5,000 credit. Because of this, the rate of tax applying to dividends will generally increase other than for basic rate tax payers.

Dividends paid within pensions and ISAs will remain tax-free and unaffected by these changes.

Capital Gains Tax

Further changes were announced to the taxation of carried interest. As a result, individuals will be charged capital gains tax on the full amounts they receive in respect of their carried interest. From now on, deductions will only be allowed in respect of sums actually given by the individuals as consideration for acquiring the right to that carried interest. This measure is designed to stop managers claiming deductions that reduce the amount that is subject to CGT to an amount that is less than the true economic benefit that they receive from their carried interest.

Tax avoidance and evasion

Between 2012 and 2013, the UK was signatory to a number of international agreements that will result in HMRC receiving significant amounts of personal data, particularly under the incoming Common Reporting Standard. In this Budget, the Government announced that it would oblige financial institutions, tax advisors and other intermediaries to notify clients of the information exchange agreements, and will penalise them for failure to do so. It was already announced in the earlier Budget of 2015 that HMRC will introduce a new offshore disclosure facility, offering individuals one last chance to make disclosures in advance of the 2017 exchange of information flow.

Controversially, the Government has introduced legislation to enable HMRC to recover tax debts from individuals’ bank accounts including funds held in ISAs. This was put back in the earlier Budget of 2015. In addition, HMRC’s powers to acquire data from online intermediaries and electronic payment providers will be extended in order to tackle the hidden economy.

The Chancellor also announced that the Government will increase funding by over £60m to allow HMRC to conduct many more criminal investigations.

The Government has also announced that it will consult interested parties about the taxation of personal service companies, as it considers its current IR35 powers to be insufficient.

Corporate Taxation

There will be a reduction in the corporate tax rate from 20% to 19% in 2017. The Government has said that this will be reduced further to 18% in 2020. It is hoped that this will increase the UK’s attractiveness as a business location for multinational organisations.

* The partners can be reached at glen.atchison@harbottle.com; david.scott@harbottle.com; and gary.ashford@harbottle.com. Their office telephone number is +44 (0)20 7667 5000.