Are you a private client adviser who would like to share your thoughts on this topic? Please email stephanie.bridger-linning@spearswms.com
The government has confirmed it will scrap the non-dom regime and begin its crackdown on the taxation of wealthy foreigners from April 2025.
The Treasury said this week it will end ‘the outdated concept of domicile status’ as part of a drive to ‘address unfairness’ within the tax system.
[See also: VAT to be charged on UK private school fees from January]
The new policy paper also confirmed the introduction of a ‘10-year tail’ on IHT on worldwide assets, which a leading tax lawyer previously described as a ‘nailed in the coffin’ for the UK’s internationally mobile HNW community.
At the same time, Labour promised to create an ‘internationally competitive’ regime ‘attracting the best talent and investment to the UK’. There is likely to be scepticism among the private client community as to how this can be achieved given the tax proposals.
Non-dom regime will end in April
Under existing rules, HNWs who live in the UK but are ‘domiciled’ overseas are exempted from paying tax on foreign earnings for up to 15 years as long as the assets are not brought into the UK. Eventually they face annual costs of as much as £60,000.
Content from our partners
This will be replaced by a shorter, four-year resident-based system known as the ‘foreign income and gains’ (FIG) regime, which was announced by former Conservative chancellor Jeremy Hunt in the spring budget, adopting a policy originally set out by Labour.
[See also: Non-doms, IHT and VAT on school fees: What’s at stake under Labour?]
This means that individuals moving to the UK will pay no UK tax on foreign income and gains for the first four years of residence, as long as the individual was not resident in the UK for any period of the previous 10 years. After this initial grace period, incoming HNWs will be subject to tax on all income and gains in the same way as any other UK taxpayer.
Will IHT crackdown be the ‘nail in the coffin’?
The Treasury also said it intends to ‘end the use of offshore trusts to avoid inheritance tax’.
Individuals will have to pay inheritance tax (IHT) on worldwide assets following 10 years of residency in the UK. There will also be a 10-year tail, meaning that an individual will have to be non-resident in the UK for 10 years for international assets to be outside the scope of IHT. t
[See also: Where are the new non-dom hubs? Advisers reveal leading destinations after Labour win]
Private client advisers have warned that these changes in particular could be a massive deterrent to internationally mobile HNWs.
Speaking at the Spear’s annual conference, Camilla Wallace, senior partner at Wedlake Bell, explained the tightening of the IHT rules could be the ‘nail in the coffin’.
‘The IHT rules – this 10-year tail – is extremely long and punitive,’ she said. ‘I’ve got clients who are thinking about leaving. They’ve been here for 12 years; imagine they go back to a far-flung part of the world and they die in year eight with no ties to the UK at all. But apparently their global assets will be subject to IHT; how on earth are the Revenue going to enforce that?’ She added: ‘This all means that clients are thinking: “What do I do now, and where do I go”.’
[See also: More non-doms call UK home – but for how long?]
There are also major changes expected to the taxation of trusts, although details have not yet been revealed.
Private client advisers have said they are eagerly waiting for greater clarification in the budget, which will take place on October 30.
It comes after recent figures from HMRC showed the number of high-net-worth residents benefiting from the non-dom scheme rose to 74,000 during the tax year ending April 2023, up by 7.4 per cent from 68,900 in the previous 12 months. The number of newly-arrived non-doms also increased – up by 18 per cent to 12,900.
Non-doms are also contributing more to the public purse: they paid £8.9 billion in taxes in the tax year ending 2023, up 6 per cent, or £474 million, from the previous year.
However, the overall number of non-doms has been in decline, dropping by almost 50 per cent in the 10 years to 2022.
Are you a private client adviser who would like to share your thoughts on this topic? Please email stephanie.bridger-linning@spearswms.com
