Labour responds to the Government’s proposed Non-Dom Reforms

Following on from the significant announcements made by the Chancellor in the Spring Budget regarding the non-dom reforms (as discussed in our previous article), the Labour Party has now set out its plans with regards to the reforms should it form the next Government after the General Election.

The response comes as part of a wider announcement including Labour’s plans to reduce the tax gap and establish a panel of experts to advise on improving tax compliance and modernising HMRC which we cover in our separate article in today’s edition.

We understand that Labour supports most aspects of the proposed residence-based replacement regime, including the four-year time period and, in terms of the forthcoming Inheritance tax (IHT) consultation (also discussed in a recent article), the ten-year period of residence in the UK before worldwide assets are subject to IHT. However, Labour is proposing certain changes that it expects to raise £2.6 billion over the course of the next Parliament including £1 billion in year one. 

Under the proposals Labour plans to:

• Include all foreign assets held in a trust within the scope of UK IHT, whenever they were settled; and

• Remove the 50 percent reduction in foreign income subject to UK tax in 2025/26 under the proposed transitional rules for those non-doms who are subject to UK tax on a worldwide basis from that date.

We also understand that Labour will:

• Consider whether there should be an investment incentive available to those individuals eligible for the new four-year regime, so that UK investment income is free of UK tax; and
• Explore ways to encourage people to bring unremitted foreign income and gains to the UK beyond 2026/27 to encourage UK investment and end the ‘tail’ of the historic non-dom provisions.

Many questions still remain after the Spring Budget, with draft legislation yet to be released by the Government. Labour’s response has the potential to extend that period of uncertainty ahead of 6 April 2025. It removes some of the targeted transitional provisions and the confirmation that non-UK assets settled into non-UK trusts prior to 6 April 2025 by non-UK domiciled individuals would continue to enjoy excluded property status and be outside the scope of UK IHT indefinitely. Individuals will be keen to see more detail on how UK investment will be encouraged through the proposed changes, although it is unclear when such detail might be available.

Questions that come to mind include: how will the rules differ between settlor and non-settlor interested trusts; and how will the gift with reservation of benefit rules interact with the relevant property rules? 

Clearly further changes may be still to come to the taxation of non-doms, offshore trusts and the proposed transitional arrangements, with draft legislation yet to be released and Party Manifestos expected later in the year. In particular, details of the UK IHT consultation announced at the Spring Budget are still to be released and it will be interesting to see how trusts settled by a UK resident settlor would be subject to UK IHT if that settlor died or became non-UK resident in the future, when they were outside the proposed ten-year IHT ‘tail’.

For individuals likely to be affected by the non-dom reforms it will be important to analyse the changes and to monitor developments as they arise. And of course on the wider front, there is a question around what effect changes to the non-dom regime, whether those be as proposed by the Government in the Spring Budget or as potentially amended by Labour should it win the next election, may have on the UK’s overall attractiveness as an investment location. It is always challenging to estimate what the future impact of a proposed change to the tax regime will be but the current uncertainty around the detail of what the actual changes will look like makes this even more difficult.

We are working with individuals, trustees and their advisors to assess and analyse the above. Please feel free to reach out to us if you would like to discuss this development.

For further information please contact:

• Gavin Shaw
• Hannah Keens