What does the new Labour government mean for our industry?
The Labour manifesto re-affirms the previous Conservative government’s proposal to abolish the UK’s tax regime for non-UK domiciled individuals. The manifesto states that it plans to close the ‘non-dom loophole’, however there are no specific proposals published.
In April 2024, Labour confirmed that they support many aspects of the original Conservative proposals. One change it looks likely they’ll implement is to ensure that all foreign assets within trusts would be liable to UK IHT.
What is non-dom status?
Simply put, the system has enabled UK resident individuals whose permanent home is outside the UK to benefit from the ‘remittance basis’ of taxation, removing their foreign income and gains from UK taxation unless remitted to the UK. It has also ring-fenced their non-UK situs assets from UK IHT. The rules have changed numerous times, with the most recent material changes coming in 2017 when a 15 year ‘cap’ was introduced, limiting the number of years an individual could benefit under the rules.
What were the original proposals?
The current remittance basis regime will be replaced with a residence-based test, with effect from 6 April 2025. The new regime will be available for up to four years starting from 6 April 2025, or, if later, the first tax year in which an individual becomes resident in the UK. During these four years, new arrivals will not be subject to tax on their foreign income and gains, nor on distributions from non-resident trusts. Those opting into the four-year regime will lose their entitlement to personal allowances and annual exempt amounts for CGT.
This new regime will only be available to any individuals who have been non-UK resident for at least the previous ten tax years, but qualifying individuals who have been tax resident in the UK for less than four tax years by 6 April 2025 will be able to use the regime for any remainder of the four-year term. After the initial four years, individuals will be taxed on their worldwide income and gains in accordance with the normal tax rules for UK residents.
Are there other relevant proposals?
Labour intend to increase the SDLT surcharge applied when overseas nationals acquire UK residential property by 1% (taking this surcharge to 3%). This represents a substantial increase which may well detract investment in UK residential property from overseas investors, who for a long time have been propping up the high-end market in London.
Labour have pledged to impose VAT on private school fees. There are suggestions that anti-forestalling legislation on pre-payment of private school fees may also be brought in to stop individuals seeking to avoid this new tax charge. Again, with the UK becoming more unattractive for wealthy individuals, this material cost increase could see parents choose to educate their children elsewhere.
Conclusion
Labour plans to ‘close the loophole’ through which private equity carried interest is currently taxed at 28% because it is treated as a capital gain. The rate that might apply in future is yet to be confirmed. Though it has been reported that where a fund manager puts their own capital at risk, capital treatment may be allowed.
It was apparent that no matter whether the new government is Labour or Conservative, each of their proposals were going to make the UK generally more unappealing for wealthy individuals. The question is, will the changes be so laborious that we’ll see a mass migration of these people.
With alterative jurisdictions providing enviable taxation benefits, less uncertainty and better quality of life, it’s likely that we’ll at least see a portion of those affected relocating to pastures new.
At Convici Capital, we can finance the acquisition of property in the Channel Islands, prime European cities, and the UAE. We also have all the contacts required to assist in the process of relocation to these places. Get in touch if we can be of help.