Taxation of non-doms under a Labour government

We recently published a summary of the UK Government’s announcements for changes to the taxation of non-UK domiciled taxpayers – Non-Doms and the Spring Budget 2024. In short, the tax concept of “non-doms” is to be abolished and replaced with a series of tighter residency-based tests.

However, the elephant in the room is that most of the changes will not be effective before the next general election (no later than 28 January 2025), which the Labour Party is widely expected to win. Arguably, it is the Labour Party’s tax policy that is likely to be far more relevant than that of the current Government.

Labour’s tax policy

The Government has presented the Labour Party with a dilemma. Many of the Spring Budget proposals started life as Labour policies, and both the Government and the Labour Party agree that the proposals will generate substantial extra tax revenue (£3.67bn by 2027-28 according to the Government). But whereas Labour needed the tax revenue to plug the hole created by their spending plan, the Government has now allocated it to fund its cuts to national insurance. This leaves Labour with little option but to look for opportunities to wring-out some extra tax revenue by tightening the proposals even further.

The Labour Party has not yet published any detailed policy document, but in a BBC interview on 9 April 2024 Rachel Reeves (Shadow Chancellor) outlined some of Labour’s proposals to “strengthen the rules to ensure that non-doms pay their fair share of tax”:

The overall framework

Firstly, and unsurprisingly, Labour supports the overall scrapping of the concept of ‘domicile’ for tax purposes. It seems that non-doms will soon be a thing of the past in the world of tax.  We can expect implementation of the proposed four-year exemption period for new arrivals (or something close to it) after which all worldwide income and gains will be subject to UK tax.  This will be a major period of transition for many existing UK resident non-doms.

2025/2026 transitional 50% discount

Rachel Reeves has criticised the Government’s proposed 50% discount for taxation of foreign income in 2025/2026 and indicated that Labour would “strengthen” the rules. The Government intended this exemption to soften the blow of the new regime for existing non-doms and provide a graduated transition to taxation of their worldwide income. It is likely that this is also intended to reduce the number of non-doms leaving the UK before April 2025.

This exemption recognised the difficulty faced by many clients who have, quite legitimately, structured their worldwide assets, income, and affairs in line with the existing ‘remittance basis’ framework, and who will struggle to adjust to UK taxation (of up to 45%) of their worldwide income on such short notice. The record-keeping requirements alone, for taxpayers to comply with worldwide reporting, will require a huge amount of planning.

However, Rachel Reeves views this as an unjustified tax giveaway, meaning that many remittance basis taxpayers who have not historically been required to pay UK tax on their foreign income (but have been UK resident for over four years) will face a dramatic change to their tax position in April 2025.  

Temporary Repatriation Facility and Stockpiled Foreign Income and Gains (FIGs)

The Spring Budget proposals included a “Temporary Repatriation Facility” which would allow existing remittance basis payers to remit overseas income and gains to the UK in the 2025/2026 and 2026/2027 tax years at a 12% rate of tax (compared to the current rates on remittances of up to 45%). This is something of an amnesty to encourage current non-doms to start the new regime with a clean slate and to bring funds to the UK. 

By minimising the number of taxpayers with historic stockpiles of untaxed, unremitted FIGs, the Government hopes to minimise the need to maintain and implement the soon-to-be-historic remittance rules and the complex web of supporting tax legislation (mixed fund rules, onward gifts, etc). 

Rachel Reeves is likely to carry this policy even further and feels the 12% tax amnesty is insufficient, and some further incentives should be applied to encourage the remittance of historic FIGs on a more rapid timescale. Existing rules designed to discourage the stockpiling of gains in trusts apply a supplemental charge to the tax liability which increases the longer the gain is stockpiled (akin to an interest penalty). One could imagine a similar regime for taxation of historic FIGs.

Trusts and inheritance tax

Perhaps most significantly, it appears that Labour will not uphold the Government’s promise that trusts created prior to the new inheritance tax (IHT) regime should preserve their existing IHT treatment. In interview, whilst describing the Spring Budget proposals, Rachel Reeves said “offshore trusts mean that non-doms will still be able to avoid paying IHT in Britain if they make Britain their home and that’s wrong”.

Traditionally, when governments have changed the IHT regime for trusts, these changes were not applied retroactively to existing structures. This is known as ‘grandfathering’ of existing structures. The last major overhaul occurred under the Labour Government in 2006, when the ‘relevant property regime’ was extended. However, many trusts created prior to 22 March 2006 were not impacted and continue to benefit from the pre-2006 IHT regime to this day.

Government tax policies introduced as recently as 2017 have actively encouraged the use of trusts by non-doms for IHT planning. As a result, many thousands of such trusts exist (the exact number is unknown), usually created at considerable expense and often such that they cannot easily be unwound. 

This grandfathering approach is often a matter of practical necessity since many existing trusts simply lack the records that would allow them to comply with any new IHT regime which requires them to report on historical facts. For instance, if the historic residency of the settlor will be relevant to a trust’s IHT position under the new rules, how can a trustee report this if the settlor is long dead and no such records exist?

Neither the current Government nor the Labour Party have given detailed proposals of the future IHT regime for trusts, but Rachel Reeves clearly supports a harsher tax position than the Government’s proposals, without grandfathering of existing trusts. 

The Birketts view

Labour’s policy on this topic is based on a single interview with Rachel Reeves and a great deal of the detail is lacking. However, as the person most likely to give the next Government Budget, Rachel Reeves’ comments are worthy of note.

The current position is unsatisfactory as there is a lack clarity on what the rule changes could mean for many individuals. Please get in touch with our International Private Client Advisory Team if you would like to discuss any of the points raised in our recent articles.