Reform to non-dom rules: Labour party announcements

Insight

04.07.2024

This article was published before the UK Government’s Autumn Budget 2024. For our most recent article, published following the Autumn Budget 2024 and therefore reflecting latest developments, please click on the link below.

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This article was first published on 19 April 2024.

Background

On 6 March 2024, the Government proposed a radical reform of the UK’s non-domiciled (non-dom) rules, which would dramatically reduce the tax privileges available to wealthy foreigners living in the UK with effect from 6 April 2025 (see our summary briefing here). On 9 April the UK’s main opposition party, Labour, indicated that they would implement further restrictions on the non-dom regime if they came into power. This announcement needs to be taken seriously as Labour are currently the strong favourites to win the next election, which is likely to take place later this year.

Announcement and press release

The announcement from Labour was very light on detail but we have now seen a slightly more detailed press release.

Labour have indicated their intention to make the transitional reliefs less generous, in particular eliminating the proposal that existing non-doms would only be subject to income tax on 50 per cent of their foreign income received in the first year of the new regime (tax year 2025/26).

However, Labour are also suggesting that they would include an incentive to encourage UK investment as part of the new four year residency regime. It is unclear what shape this would take and in fact whether it would impact on the proposed exemption from tax on foreign income and gains for the four year period.

They have also said that they will consider additional incentives for non-doms to bring their untaxed foreign income and gains to the UK after the two years (at the special low rate of 12 per cent) which the Government has announced. It is not yet clear whether this would involve applying the 12 per cent rate for longer or some alternative incentive.

The most significant proposal is that trusts created by non-doms will no longer shelter non-UK assets from inheritance tax, regardless of whether these trusts are set up now or have existed for many years. It even appears on the face of the announcement this applies to trusts created before the settlor became resident in the UK once they become resident, although it is possible that the trust assets would remain exempt until the Settlor has been UK tax resident for 10 years.

Neither the Government nor the Labour party have proposed that UK resident beneficiaries will be subject to inheritance tax on trusts they have not settled. So trusts should still provide protection from inheritance tax for beneficiaries who are not also a settlor of the trust.

Summary of changes

In an attempt to bring at least some clarity to the proposals, we have put together a table below. This table summarises the existing non-dom regime, the changes proposed by the current Government and what further changes Labour have proposed (in italics).

What is clear is that the Labour party has little sympathy for the argument that the Government’s proposals were already too harsh. The Labour party has set out its ambitions to increase public spending in key areas (such as the National Health Service) and it clearly views the taxation of non-doms as a key source of the revenue required for this spending. Given how mobile wealthy non-doms are and the attractiveness of some non-UK regimes (particularly around estate taxes), time will tell whether this approach will be counter-productive in the long run.

	Existing regime	New regime proposed by UK Governmernt	Further restrictions announced by Labour
Eligibility for regime (income tax and capital gains tax)	Eligible if non-UK domiciled (broadly if your permanent home is outside the UK) and resident in the UK for less than 15 years.	Eligible for first four years of UK residency (if non-UK resident for at least 10 years before that).	No changes announced
Basis of regime (income tax and capital gains tax)	UK source income and gains subject to UK tax. Foreign income and gains subject to tax only if brought to the UK (remitted).	UK source income and gains subject to UK tax. Foreign income and gains entirely exempt from UK tax (and can be brought to the UK without a UK tax charge).	Labour are proposing an additional exemption for UK investment income. The details are unclear.
Trust protections for income and capital gains	Where a trust has been settled by a non-UK domiciled individual, foreign income and most gains can roll up in the trust free from UK tax. They are then potentially subject to UK tax only by reference to distributions made to UK residents.	Trust protections will no longer apply. During the first four years of UK residency foreign income and gains and certain distributions outside the UK will be entirely exempt. After the first four years all profits in the trust will be taxable on the settlor of the trust. Beneficiaries will be taxable on distributions wherever made.	No changes announced
Inheritance tax on assets held directly	Non-dom individuals who have not been resident in the UK for 15 years are only subject to UK inheritance tax on UK assets (including UK residential property held indirectly).	Individuals will only be subject to UK inheritance tax on their UK assets for their first 10 years of UK residency (if non-UK resident for at least 10 years before that). After the 10 years they will be subject to inheritance tax on their worldwide assets.	No changes announced
Inheritance tax on assets held in trust	Non-UK assets held by a trust settled by a non-dom who has not been resident in the UK for 15 years are exempt from UK inheritance tax.	Trusts settled by non-doms before 6 April 2025 will retain existing protection from inheritance tax. Non-UK assets held by trusts settled after 6 April 2025 may be exempt if they are settled in the first 10 years of UK residency. However, they may lose this exemption if the settlor has been UK resident for more than 10 years at a 10 year anniversary of the creation of the trust.	*Labour proposes to restrict this inheritance tax exemption. Trusts, whenever settled, will no longer qualify for the inheritance tax exemption.*
Income tax reduction	Not applicable	Only 50 per cent of foreign income received in tax year 2025/26 will be taxable. Applies to: individuals moving from the existing non-dom regime to the new regime on 6 April 2025.	*Labour proposes to eliminate this relief.*
Capital gains tax rebasing	Not applicable	Foreign assets revalued for capital gains tax so that only any increase in value from 5 April 2019 will be taxed under the new regime. Applies to: individuals who have been taxed under the old regime and who have not yet been in the UK for 15 years.	No changes announced
Temporary repatriation relief	Foreign income and gains taxed at up to 45 per cent on income and 20 per cent on gains when remitted to the UK.	Taxable foreign income and gains remitted to the UK between 6 April 2025 and 5 April 2027 benefit from a special rate of 12 per cent. Applies to: individuals who have been taxed under the old regime and have foreign income and gains which are subject to tax on remittance to the UK.	Labour have indicated that they will consider applying an incentive for non-doms to bring their foreign income and gains to the UK after this relief is due to expire on 6 April 2027. It is not clear whether this relief will be extended or the incentive will take a different form.