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Is the end in sight for non-doms? What tax changes can we expect from the UK’s new Labour Government?

Insight

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It will be no surprise to most that following the general election on 4 July 2024, the UK’s Labour Party is now in government. Labour has wasted no time in confirming a range of policies which formed the basis for its election campaign. However, so far very little has been said around tax.

In the light of this silence, this briefing aims to summarise what tax changes we can expect the new Government to implement, the likely timeframe for these changes and, most importantly, what clients should be doing now.

The big picture is as follows. Labour has committed to spending measures, including significant investment in the UK’s national health service and education system which it states will be largely funded by anticipated economic growth. However, there is a concern (especially given the sluggish nature of the UK economy) that funding will also need to come from tax increases. The new Government has indicated that it will start working on detailed proposals immediately and it will pass these proposals to the Office for Budget Responsibility (an independent public body whose remit is to report on public finances to review). This means that the Government is unlikely to be in a position to present its Budget (its formal fiscal proposals) until October.

Non-dom proposals

It is very likely that Labour will implement the changes to the non-dom regime broadly as proposed by the previous Conservative Government (see our briefing here). In fact, nothing of significance has been announced since we issued our briefing on Labour’s proposals and very little detail on Labour’s plans is available.

It is possible that implementation of the proposed tax changes for non-doms will be delayed, especially for inheritance tax. However, we recommend that clients assume there will not be a delay when planning and that the changes will take effect from 6 April 2025.

As a reminder, the changes are expected to look broadly as follows:

  • Individuals first moving to the UK, or who have been non-UK resident for at least 10 years (New Arrivers), will benefit from a special regime for their first four years of tax residency in the UK (rather than 15 years under the current regime). It is proposed that under this new regime all non-UK income and gains (profits) will be fully exempt from UK tax. Unlike the current regime where foreign profits are taxable if they are brought to or spent in the UK (remitted), under this new regime individuals will be able to spend their foreign profits in the UK without triggering UK tax.
  • Labour have also said that they will include an additional tax incentive for UK investments (details as yet unknown).
  • After the initial four years of tax residency, New Arrivers will be subject to UK tax on their worldwide assets, potentially including income and gains which arise in non-UK structures (such as companies and/or trusts and foundations).
  • After 10 years of UK tax residency, individuals will be subject to inheritance tax on their worldwide assets (rather than just UK assets). This will include non-UK assets held in trust (which under current rules remain protected from UK inheritance tax even where the settlor remains in the UK long term). There is a suggestion that, even if they leave the UK, individuals’ worldwide assets would remain exposed to inheritance tax for a further period – a period of 10 years has been discussed but may be reduced as a result of strong negative feedback.
  • Various transitional provisions were included in the previous Governments’ proposals. Labour have not been clear as to what transitional provisions will be included. It appears that:
    • There will be an incentive for existing non-doms to bring their foreign profits into the UK. The exact shape of this is not clear.
    • However, contrary to what had been proposed by the previous Government, trusts set up before 6 April 2025 will not benefit from existing protections from inheritance tax.

What tax advantages remain?

If these changes go ahead as expected, the tax regime for non-doms will be very different. However, whilst in principle non-doms will be subject to worldwide tax on income and gains, there will still be circumstances in which their tax can be sheltered. For example:

  • Where the settlor of a non-UK resident trust is dead or non-UK resident, we expect that most income and gains will only be subject to UK tax if a UK resident beneficiary actually receives a distribution (or other benefit) from the trust.
  • Similarly non-UK structures (including trusts and/or companies) which were not created (and have not been managed since) to avoid any UK taxes should also continue to benefit from tax free roll up of most income and gains.
  • The exclusion of the settlor (and spouse/civil partner) from benefitting from a non-UK structure could achieve tax free roll up for income tax and mitigate an inheritance tax charge on the settlor’s death.
  • Some ongoing sheltering of tax can be achieved through certain investments – for example the UK has a specific regime for certain life insurance bonds which allow the investor to withdraw 5 per cent of their capital a year tax year without triggering UK tax on profits made on the investments held in the policy.
  • Where an individual is resident in another country as well as the UK, they may be able to reduce or eliminate UK tax under the double taxation agreement between the UK and the other country, if, broadly, they are more closely connected with the other country.

Who are the likely winners from the non-dom changes?

Some clients will benefit from the proposed reform of the non-dom regime. In particular, this new regime could be very attractive for those wanting to realise a large gain, perhaps on the sale of a business, where they would otherwise be subject to tax on the gain where they live currently. This is because, under the new regime, they could move to the UK and pay no tax on a non-UK gain provided it is realised within the first four years of UK residency. We may therefore see an influx of people who come to the UK to take advantage of the new regime for up to four years and then leave again, quite possibly without laying down real economic connections in the UK.

Other tax changes

Capital gains tax

Labour have said its Government will not increase rates of National Insurance, income tax or VAT but it has remained silent on capital gains tax. Given the fiscal pressures, it therefore seems likely that there will be an increase in the capital gains tax rate and that it will likely be implemented fairly quickly. The increase could be substantial – for example it may be aligned to the UK income tax rates (up to 45 per cent from the current main rate of 20 per cent) as it was for many years historically (although there were allowances for inflation, which could be reintroduced).

Any such increase in the rate of capital gains tax could have a dramatic effect on the rates payable when UK resident beneficiaries receive a capital distribution from a non-UK trust. Distributions can be taxed on these beneficiaries by reference to historic gains in the trust and, in certain circumstances, a supplemental charge of up to 60 per cent of the rate of the tax can apply. This means that, if the capital gains tax rate is returned (say) to 40 per cent, the maximum charge on beneficiaries could be 64 per cent of the distribution.

Labour have also said that it will address the perceived unfairness of hedge fund managers being subject to tax on part of their reward (carried interest) at capital gains tax rates rather than income tax rates. An immediate increase in the capital gains tax rate to match income tax rates would address this issue and mean that additional, and no doubt complicated legislation would not be needed.

Inheritance tax

It is also possible that there will be an effective increase in inheritance tax (currently at 40 per cent, with various reliefs available). There has been mention of the restriction or elimination of certain valuable reliefs, including a relief for business property and for agricultural land. An increase in the headline rate is also possible – although perhaps less likely. There is likely to be a consultation announced on changes to inheritance tax as part of the Budget expected in early October.

The consultation is also likely to address how inheritance tax should apply to gifts. Currently gifts to individuals are exempt from inheritance tax if the donor survives seven years from the date of the gift (with a reduction in the inheritance tax rate after three years). It is possible that this will change to a system where inheritance tax (or a gift tax) is payable when a gift is made – similar to many European systems.

Stamp Duty Land tax (SDLT)

SDLT is the tax paid on purchase of UK property. The rate of SDLT payable increases with the purchase price. There is also an additional 3 per cent the buyer owns residential property anywhere in the world and a further 2 per cent if the buyer is non-UK resident (under a specific SDLT residency test). Labour have said that they will increase the charge for non-residents by 1 per cent to an additional 3 per cent. This would bring the top rate for a non-resident who owns residential property to 18 per cent on the purchase of a high value UK residential property.

Wealth or Mansion tax?

Labour has previously provided reassurance that it would not implement a wealth tax or “mansion” tax (ie a levy based on the value of an individual’s overall wealth or of their UK real property). However their manifesto was notably silent on it (in contrast to income tax, National Insurance and VAT where assurances were given that they would not increase). This gives rise to the suspicion that the introduction of these taxes remains a possibility, possibly one that the Government might resort to in a few years if the economy does not grow sufficiently to fund the Government’s spending ambitions.

When are these changes likely to happen?

As noted above, clients should continue to assume that the non-dom changes come into force as announced on 6 April 2025 unless and until any delay is confirmed.

There is a real risk that capital gains tax will be implemented before that. It could be as soon as “Budget day” - as noted above, expected to be early October. We suggest that clients plan on this basis.

The changes to inheritance tax may take longer, perhaps a further year or more, as they will require more detailed consultation and complicated changes to the legislation. It is still sensible to assume that the inheritance tax changes specifically aimed at non-doms (including non-UK assets held by trusts settled by UK resident non-doms coming within inheritance tax), will come in from 6 April 2025 and for clients to plan accordingly.

So what should clients be doing?

Prepare for possible pre-Budget implementation

  • Review and take advice as soon as possible;
  • We expect that it will be sensible for many clients to take steps before the Budget (expected to be in early October) to mitigate the impact of any immediate increase to the capital gains tax rate. In particular this may apply to:
    • Clients who are deemed domiciled under the existing non-dom regime and who hold assets personally which stand at a large gain;
    • Clients who hold UK assets standing at a gain;
    • UK resident beneficiaries of a trust which is a protected trust under the current rules
  • In many cases such planning may involve complicated steps, it is important that the thinking is completed as soon as possible to allow time for the planning to be implemented.

Clients on non-dom regime – prepare for pre 6 April 2025 implementation

  • Most clients who can still benefit from the current non-dom regime, and who do not have significant UK gains, should be in a position to wait until the detail of the changes is clearer before implementing any planning.
  • However, as it is likely that action will need to be taken before 6 April 2025, clients with complicated affairs should start their review as soon as possible to avoid running out of time. This will also enable the few situations where immediate action might be worthwhile (for instance excluding UK resident settlors who do not intend to benefit from trusts in the future).

Leaving the UK

  • Current non-doms considering leaving the UK should still be planning to become non-UK tax resident before 6 April 2025 if that is possible and practical for them.
  • Those that still intend to spend some time in the UK will need to make sure they comply with the UK’s statutory residency test and avoid a few complicated traps – particularly for those who have been working full time in the UK and/or intend to retain their home here.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

If you would like further information, please feel free to get in touch with, Claire Randall, Russell Cohen, or your usual contact at Farrer & Co.

© Farrer & Co LLP, July 2024

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About the authors

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Claire Randall

Partner

Claire advises UK and international clients on their estate and tax planning affairs. She is recognised for her ability to find practical solutions to complex issues involving UK taxation, including for individuals moving to or back to the UK, and UK resident individuals setting up or benefitting from offshore structures and investing in the UK. Claire also has experience in making tax disclosures and settlements with HMRC.

Claire advises UK and international clients on their estate and tax planning affairs. She is recognised for her ability to find practical solutions to complex issues involving UK taxation, including for individuals moving to or back to the UK, and UK resident individuals setting up or benefitting from offshore structures and investing in the UK. Claire also has experience in making tax disclosures and settlements with HMRC.

Email Claire +44 (0)20 3375 7465
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Russell Cohen

Partner

Russell has over twenty years of experience in advising clients how to navigate the complexities of private wealth. He has a personable and collaborative style, and is known for advice that is practical and pragmatic.

Russell has over twenty years of experience in advising clients how to navigate the complexities of private wealth. He has a personable and collaborative style, and is known for advice that is practical and pragmatic.

Email Russell +44 (0)20 3375 7144

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