Labour's Further Changes to Non-Dom Regime – Introduction
Spring Budget 2024 delivered a shock to the system. Facing a ruinous election, it is almost as if the
Tories were left with one option to steal Labour’s thunder and abolish the non-dom regime themselves.
I am sure they enjoyed themselves in the commons bar afterwards.
However, as the Bard once said, “these sudden joys have sudden endings. They burn up in victory like fire and gunpowder.”
Will the proposals supercharge the UK economy - or do they simply look like the actions of economic arsonists?
Regardless, recent missives from the Labour Party indicate a commitment to not only retain the Government’s proposal, but to further fortify them.
Removing the few silver linings in those original proposals.
The Government’s original proposals
Overview
New arrivals to the UK who qualify for the new regime will benefit from a full exemption on foreign income and gains for the first four years that they are resident for tax purposes.
In contrast to the current remittance basis, those foreign income and gains (“FIG”) can be brought to the UK without penalty at any time (as long as they arose in the four year window).
After the four year window has closed, they will be taxed like any UK resident and domiciled taxpayer.
Who might qualify?
The new regime will potentially apply to:
- new arrivals;
- existing tax residents who have been tax resident for less than four years at 6 April 2025; and
- a transitional rule for 2025/26 for those caught by the fact they have lost the remittance basis and do not qualify for the new regime (see transitional rules below).
New arrivals must have had a continuous absence from the UK for a period of ten years.
Those who are already in the UK may benefit as well, although the window may be much narrower. This is because they will need to have been tax resident for fewer than four tax years from 6 April 2025. They can benefit until their four years are up.
Transitional rules
The above is relatively straightforward. The issues will arise when it comes to dealing with those who have been in the UK for much longer and might also have established trusts and other entities reflecting their status.
We are told that there will be the following transitional rules:
- A temporary 50% reduction in the personal foreign income: For non-doms who will lose the remittance basis and do not qualify under the new regime, they will receive a 50% reduction in their personal foreign income. This looks like it will apply for 2025/26 only;
- Re-basing of capital assets to 5 April 2019 values: The 50% reduction above applies to income only. For CGT purposes a rebasing (to 5 April 2019 levels) for disposals that take place after 6 April 2025 for non-doms who have claimed the remittance basis under the existing regime;
- Temporary Repatriation Facility: A pertinent question is what happens to unremitted income and gains that is currently sitting in financial limbo – as, if remitted under the old regime, it would suffer UK taxes. As a compromise, a so-called Temporary Repatriation Facility is available. Non-doms will be able to remit foreign income and gains that arose before 6 April 2025 at a rate of 12%. This will only be available in the tax years 2025-26 and 2026-27.
Protected Trusts
We were told that all new foreign income and gains that arise within a trust from 6 April 2025 will be taxable.
However, where such income and gains arose in such a trust before 6 April 2025, then it will not be taxed unless:
- distributions or benefits are paid to UK residents; and
- the recipients have been here for more than 4 years
Inheritance Tax (“IHT”)
The main connecting factor that determines a person’s exposure to IHT is domicile. So, if we are digging a hole and burying the concept for tax purposes, what is to be done here?
Under vaguer proposed rules, a new test such that a person would only be subject to IHT once they had been resident in the UK for 10 years. On the other hand, exposure to IHT would only be lost when the person had been resident outside the UK for a further 10 years.
It will be interesting to see if those who have remained domiciled in UK domiciliary can escape the scope of IHT on worldwide assets 10 years after leaving the UK, but it appears this may be the case based on the information available so far. If so, this could be seen as a major ‘sweetener’ for expats.
However, notably, we were told that the treatment of non-UK assets settled into a trust by a non-UK domiciled settlor prior to April 2025 would not change and remain excluded property (subject to existing exceptions).
Labour’s proposals
Overview
Following the release of a document from Labour’s PR team, and oddly not to be located on their website, they have now formally set out their own proposals.
What’s in?
- It will stick to the Government’s proposal of the 4 year FIG exemption for new arrivers and certain others;
- The IHT qualifying period of 10 years will remain the same.
What’s out / amended
- significantly, the IHT protection for trusts will be removed including for trusts created prior to April 2025.
- the temporary 50% reduction for 2025/6 will be axed;
- the temporary repatriation facility might be extended
- they will also look at other reliefs for investment
Labour asserts that its plans on IHT will raise an extra £430m each year in extra IHT. However, the evidence for such claims is pretty shaky.
Conclusion
The Tories proposals seemed like shot in the arm – for all those other jurisdictions looking to attract global wealth, anyway.
The fact that Labour wants to push the envelope even further might be politically bold – but might look like economic self-sabotage.
As Billy boy said, "All the world's a stage, and all the men and women merely players. They have their exits and their entrances.
The question here is will there be more exits or entrances?
Let’s hope there is no Shakespearean tragedy.
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