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April 9, 2024updated 15 Apr 2024 2:49pm

Labour risks ‘spooking’ HNWs with non-dom pledge

Labour hopes to raise £2.6 billion by closing 'loopholes' in the government’s plans to abolish exemptions for non-doms

By Suzanne Elliott

Labour has pledged to raise money by tightening ‘loopholes’ in the government’s plans to scrap the non-dom tax regime.

[See also: HNWs more likely to vote Labour than Conservative, poll finds]

Shadow chancellor Rachel Reeves announced on Tuesday that a Labour government would raise £2.6 billion over the course of the next parliament by cracking down on tax exemptions included in Jeremy Hunt’s revised proposal for the non-dom regime, including the 50 per cent discount offered to non-doms during the first year of the policy.

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It is part of a wider pledge to introduce stricter restrictions on tax avoidance that Reeves pledges will be used to pay for key priorities like improving NHS funding.

Announcing the changes, the shadow chancellor said: ‘I have been clear that everything in our manifesto will be fully costed and fully funded. There will be no exceptions.

[See also: Scrapping the non-dom regime: Hunt must proceed with caution]

‘That process is now complete and the funding a future Labour government will raise from taking on the tax dodgers will fund more appointments in NHS hospitals, new scanners, extra dentist appointments and free breakfast clubs for all primary school pupils.’

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However, tax experts have warned that Reeves’ announcement creates an additional level of uncertainty. Spear’s Top Recommended advisers Basil Dixon, a partner at Payne Hicks Beach, and Sophie Dworetzsky and Dominic Lawrance, partners at Charles Russell Speechlys, were among those critical of the proposals, warning they could drive UHNWs from the UK.

What Jeremy Hunt has pledged

Chancellor Jeremy Hunt
Jeremy Hunt announced plans to scrap the non-dom regime if the Conservatives win the next general election / Image: Shutterstock

The new plans are a bid by Labour to close a gap in its spending plans left by the government’s adoption of the opposition’s policy to scrap non-dom tax status.

Under the government’s plans, announced by Hunt in the spring budget, arrivals will have access to a ‘more generous scheme for their first four years of tax residency’ before ‘paying tax in the same way as everyone else’. There is also transitional relief for non-doms already residing in the UK.

The government anticipates this will generate £2.7 billion a year by 2028/29 ‘without deterring investment’, although this was questioned by advisers who noted Hunt must ‘proceed with caution’.

[See also: Non-doms and the general election: when should HNWs act?]

Reeves wants to take the proposed Conservative policy a step further by removing some of the exemptions.

‘The government’s plans that they announced in March about non-doms, they said they were taking our policy; well, it turns out they’ve taken it but left a load of loopholes in it,’ she said on BBC Breakfast.

‘And so if you are a non-dom you can still get out of paying inheritance tax: in the first year of their policy there’s a 50 per cent discount, we don’t get 50 per cent discounts on our taxes.

‘People who go out and work today – teachers, plumbers, doctors – they don’t get a 50 per cent discount. Why should some of the wealthiest people in the country get that discount? We would abolish that and we would put that money into frontline public services, where it belongs.’

Non-doms are not the enemy

Dixon said while it was ‘no surprise to see the Labour Party start to pick holes in the non-dom plans’ it created a level of uncertainty that ‘many will find disappointing’.

‘In contrast to the pejorative language used by the shadow chancellor, the vast majority of individuals who are taxed under the current regime for non-domiciliaries simply want to follow the law and to be able to plan properly and appropriately,’ Dixon told Spear’s.

[See also: Is this how to save the non-dom regime?]

‘Imprecise statements and political pot shots are helpful to no one and for a party that claims to be a government in waiting it would not be unreasonable to expect sensible comment and detailed explanation of likely tax policy.

‘As things stand, it is difficult to draw any conclusion other than that a Labour government would look to tighten any new non-dom regime (possibly significantly) – the inheritance tax treatment of offshore trusts settled before April 2025 and the one-year 50 per cent income tax discount on offer for some individuals seem to be the subject of particular attention – and this is another factor that taxpayers are going to have to factor into their considerations as they look to plan in an environment of great political and fiscal uncertainty.’

Dworetzsky noted Labour’s plans will make the UK less attractive to UHNWs. ‘Specifically, the ability to settle trusts and protect assets from IHT is in their sights, as is a transitional measure with regard to non-UK source income,’ she continued.

‘These measures feel like trying to squeeze out every last drop until there’s nothing left. The UK operates in an environment of tax competition, and if the UK makes itself yet more unattractive from a tax point of view, we could lose out to other countries, such as Italy, which have more favourable tax regimes. One can but hope this is realised before any legislation is implemented.’

Fellow Charles Russell Speechlys partner Dominic Lawrence agreed, saying the proposed changes to inheritance tax, in particular, were ‘causing alarm to wealthy internationally mobile individuals’.

‘We have already seen some individuals making plans to leave the UK, and the latest Labour announcements will undoubtedly result in further people being spooked,’ he told Spear’s.

‘Both main parties should commit to undertaking a genuine consultation process and listening to tax professionals with a wide range of perspectives, before embarking on reform of the territorial limits of IHT. Any reform needs to be undertaken with real care so that it does not drive away internationally mobile individuals and the investment that they have the potential to bring into the country.’

What impact will proposals have on HNWs?

If Labour does abandon IHT protections and extends the amount of time an individual needs to be a non-UK resident to escape the inheritance tax net from three years to 10 years, the UK ‘could see an unprecedented departure of wealth from the UK before April 2025’.

‘It is hard to see that being in the long-term interests of the country,’ Dixon says.

‘Whilst the UK would not be the only country in the world to adopt this kind of approach, as a general rule, countries that tax on this basis also incentivise wealthy individuals to stay and the UK must remain competitive. We would encourage Labour policy to acknowledge this.

‘Planning in these circumstances is difficult but we expect to be speaking to our clients about leaving the UK, making gifts of assets before the Inheritance Tax net closes, taking out life insurance and investing in vehicles that offer a tax free roll-up function (like endowment funds), all before April 2025.’

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