While the eyes of the world are on the results of the Republican primaries in the US, in the UK our own general election is looming large.
The date of the election has still not been confirmed, although Sunak has suggested it will be in the second half of the year. With Labour leading the polls, many HNWs and their advisers are already looking ahead to how life might change under a Sir Keir Starmer government. Among them are non-UK domiciled individuals – or “non-doms” –living in Britain, who will be anticipating how the scheme might change,
In every election since 2015, the Labour party has made a manifesto commitment to the abolition of the non-dom tax regime. In 2024 there will be a similar commitment. The difference this time is the very real possibility (the polls would currently say likelihood) Labour will win, meaning what their manifesto says matters.
What should we expect from a Labour government on non-doms?
Labour pronouncements have coalesced around a commitment to bring in ‘a modern scheme for people who are genuinely living in the UK for short periods to allow us to continue to attract top international talent’ to replace the remittance basis.
What this means for the existing regime is unclear. While Labour’s 2017 manifesto committed the party to the outright abolition of the remittance basis, it is to be expected that a more nuanced approach would be taken under Starmer, with the regime being replaced in part and perhaps retained in others.
What does seem most likely is that detailed planning and decisions on the intended changes have not yet taken place and may not until after the election.
What does the current non-dom regime look like and how might it change?
The current regime can be split into three essential components:
- The ‘remittance basis’, which exempts non-domiciled UK resident individuals from the charge to income and/or capital gains tax on income and gains arising and kept outside the UK;
- The ‘protected trust regime’, which prevents the attribution of income and gains of non-UK trusts to UK resident settlors (and which for many is seen as the remittance basis via the back door); and
- The ‘excluded property’ rules which restrict the application of inheritance tax to non-UK assets owned by non-domiciliaries and settlements they establish.
Any change to the rules will certainly replace the remittance basis, perhaps with something along the Danish model that allows inpatriate employees to benefit from a reduced rate of income tax on employment income for up to seven years after their arrival.
Alternatively, the Italian/Greek model could be followed, with a flat tax payable by inpatriates for a set period of time. The Labour party has also referenced the Canadian/German system, which provides for a rebasing of assets on arrival and a subsequent exit tax on departure.
The protected trust regime is more beneficial to individuals with investment assets rather than employment income, and whether this would be abolished or reformed is less clear. A wholesale abolition of those rules would certainly lead to unfairness where UK resident settlers could be taxed on the gains of trusts established many years ago in other countries from which they cannot benefit.
A wholesale revision of the excluded property rules seems less likely (and for many would be a determining factor in their future plans), but with the Tories mulling the abolition of inheritance tax, that may be a moot point. Interestingly, when Withers gathered a group of wealth management sector experts for a discussion of the non-dom scheme recently, the majority (58 per cent) expected to only see changes to the remittance basis, not to protected trusts or excluded property.
A chance for a fresh start
There is a significant opportunity here for the UK to reset its taxation of inpatriates.
Other European economies (notably Italy and Greece) have recognised that a simple, predictable flat tax regime can attract energetic wealth creators and entrepreneurs, bringing economic benefits that are multiples of the tax they pay.
They have also recognised that the flat tax rate must be high enough to justify the political cost of creating a differential tax regime for a privileged class of residents. The UK’s existing remittance basis is too weighed down by its history, decades of tinkering and above all its ludicrously low cost to be justifiable today.
When will new nom-dom rules come into effect?
Without a date being fixed for the next general election, it is difficult to predict when, or even if, any new non-dom rules would take effect. The further into the second half of 2024 the date falls, the less likely it is that there will be time for a new government to devise, draft, consult on and introduce any new changes before the start of the 2025/26 tax year.
If Labour were to get in, it is unlikely there will be any changes before April 2025; any changes are likely to be introduced by April 2026. George Osborne announced changes following the May 2015 General Election in an emergency budget in July 2015. These changes were then not introduced until April 2017, following extensive consultation.
Simpler changes – a straightforward abolition for instance – can be introduced more quickly. Nuance and balance take more time.
What should I do now?
While the Tories maintain the ‘steep and narrow’ path to victory, there remains the possibility no changes will be introduced. Any new rules brought in by a change of government are likely to be transitional, which may negate any action taken now. But for concerned parties, it is good to look ahead and be prepared.
It is implicit in the status of a non-dom that the UK is not a permanent home and for some people, as was the case with the changes in 2008 and 2017, any change will trigger a relocation.
Fortunately, there are options, such as the aforementioned Greece or Italy, as well as perennial favourites Monaco and Switzerland.
For those who feel leaving the UK would be too big a step, at least in the short term, there will remain alternatives for the structuring of assets to reduce tax inefficiencies. Family investment companies, family limited partnerships and family OEICs all offer mechanisms to reduce, or at least defer, the burden of taxation.
It remains to be seen if offshore settlements will be affected, but trustees will want to consider distributions, terminations, the exclusion of beneficiaries or importing settlements into the UK.
At this stage, the most important thing is for individuals to give themselves the ability to make future decisions, to focus on flexibility and to get to know service providers who will be able to offer different options.
Finally, it should also be hoped that Labour’s commitment will open a genuine debate on a new inpatriate tax regime, one that suits the needs of the country and of the wealth creators and entrepreneurs it should attract.
Christopher Groves is co-head of Withers’ UK Private Client and Tax team