19 July 2024
With the Labour government’s recent election victory, significant changes are anticipated for the UK's non-domiciled (non-dom) tax regime. This status, which allows UK residents to avoid tax on offshore income and gains unless those funds are brought into the UK, is set for a considerable transformation.
Current System and Proposed Changes
Currently, non-domiciled UK residents can enjoy tax-free status on their offshore income and gains, provided these funds are not remitted to the UK. However, if a non-dom has been a UK resident for 15 of the last 20 tax years, they become deemed domiciled and are subject to UK tax on their worldwide assets.
In March 2024, then-Chancellor Jeremy Hunt announced a significant overhaul of the non-dom regime, marking a major shift in the UK personal tax system. The proposed changes would focus on the individual's residency status. Those who have not been UK residents for the preceding 10 years would benefit from the Foreign Income and Gains (FIG) regime for their first four years in the UK. This regime would allow them to avoid tax on their non-UK source income and gains, enabling remittance to the UK without triggering a tax charge. After four years, their worldwide gains would be taxed without exception.
The proposal also aimed to change the Inheritance Tax (IHT) treatment for non-doms. Currently, non-doms pay IHT only if deemed domiciled in the UK or if a non-dom spouse of a UK domiciled person elects to be treated as UK domiciled. The Sunak government suggested that non-dom foreign assets would be subject to UK IHT after 10 years of UK residency.
Labour's Approach
Labour’s election victory has brought an even stricter approach to the non-dom tax regime. Prior to the election, Rachel Reeves indicated Labour's intent to extend the proposed Conservative changes significantly. Labour plans to eliminate transitional measures that would have softened the withdrawal of the remittance basis, which is projected to generate an additional £600 million in revenue. Although Labour has not clarified their stance on the proposed repatriation facility—allowing previously taxed non-doms to remit foreign income and gains at a reduced rate of 12% in the tax years 2025/26 and 2026/27—it is suggested they might support this to boost UK investment from non-doms.
Labour is also targeting offshore trusts. Currently, non-doms can place non-UK assets in a trust before becoming deemed domiciled, keeping these assets outside IHT. Labour intends to bring all foreign assets in trusts within the UK IHT regime, addressing a potential £430 million annual gap.
Broader Fiscal Policy Implications
The shift in the non-dom tax regime is part of Labour's broader fiscal policy, focusing on increasing tax revenue without raising VAT, Income Tax, NIC, or Corporation Tax rates beyond 25%. Instead, they aim to target wealth and make specific, short-term adjustments. Additionally, Labour may reintroduce the lifetime allowance charge for pensions, revise IHT protections, and reform Business Property Relief (BPR) and Agricultural Property Relief (APR), particularly impacting farming sectors. Potential changes to Capital Gains Tax (CGT) rates might prompt increased property and company sales, as taxpayers seek to take advantage of current lower rates before new measures come into effect.
Estate and Pension Planning
In response to substantial changes in the Spring Budget 2023, Labour is expected to introduce further pension reforms. Previously, the lifetime allowance—a cap on the total value of pension savings subject to tax—was abolished. Labour might reintroduce a similar charge or impose a cap on the IHT protection that pensions currently enjoy. Individuals with substantial pension savings should consider utilising the 25% tax-free withdrawal option while it remains available. This strategic move could limit future pension contributions, requiring a comprehensive assessment of investment strategies and tax implications.
Labour's anticipated changes to CGT and the abolition of FHLs could significantly impact the real estate market. Property owners may accelerate sales to take advantage of current tax rates, potentially leading to increased market activity. Investors in the rental and holiday home sectors need to consider the long-term viability of their investments under the new tax regime. Business owners contemplating sales or succession planning should act swiftly to benefit from current tax rates. The uncertainty surrounding future CGT rates and reliefs highlights the importance of timely transactions. Exploring options like management buyouts or employee ownership trusts can provide favourable tax outcomes while ensuring business continuity. The current tax landscape is favourable for gifting property or companies within families. While hold-over relief is rarely available for property, the low CGT rate makes gifting between family members advantageous. Quick and efficient transactions can be easily completed in this favourable tax environment.
Non-UK Domiciled Individuals
For non-UK domiciled individuals, the tightening of the non-dom regime necessitates a thorough review of international tax obligations. Potential changes to the repatriation facility and the inclusion of foreign assets in the UK IHT regime require strategic planning. Cross-border tax planning can help minimise the impact of these changes and ensure compliance with international tax laws.
VAT and Independent Schools
Labour's plans to impose VAT on independent school fees and other potential VAT reforms could affect a wide range of taxpayers. Those involved in sectors likely to be impacted should seek advice on mitigating strategies, including contract reviews and exploring alternative funding structures.
Private Equity and Carried Interest
Labour is likely to target carried interest in private equity, potentially increasing the tax rate from the current 28%. Significant changes could lead to tax planning for non-residence in another jurisdiction, whereas smaller adjustments may not deter senior fund managers with substantial investments. Pre-emptive planning will be crucial for individuals potentially affected by these changes.
Monitoring and Adapting to Policy Changes
The evolving tax landscape under the Labour government underscores the need for continuous monitoring and adaptation. Businesses and individuals should stay informed about policy developments, engage with tax advisors, and adjust their strategies accordingly. Proactive planning can mitigate risks and leverage opportunities arising from the new fiscal environment. Labour's comprehensive overhaul of the non-dom tax regime and other fiscal policies represents a significant shift in the UK's approach to taxation. As the government finalises its plans, staying ahead of these changes is crucial for effective financial planning.
By understanding the potential impact and engaging in strategic planning, individuals and businesses can position themselves to thrive under the new tax regime, ensuring financial stability and compliance with the changing regulatory landscape. As Labour solidifies its policy details, individuals and businesses are advised to stay informed and consider their financial strategies in light of these impending changes.
To ensure you are fully prepared for these significant changes and to explore how they might impact your financial planning, contact our expert team at LEXeFISCAL LLP. We provide tailored advice to help you navigate the evolving tax landscape, optimise your tax position, and secure your financial future. Get in touch with us today to arrange a consultation and stay ahead in these transformative times.
Contact us:
Mr Angelo Chirulli
Master’s Degree, ACA, ADIT, BFP
Tax Partner
Email: angelo@lexefiscal.com
Mr Pedro Pittan Doring
Junior Tax Associate
Email: pedro@lexefiscal.com
Telephone: +44 (0) 208 092 2111
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