A new start - the implications of a Labour government for non-doms and other private clients

And so, the votes have been counted and the results are in - Sir Keir Starmer will be our new Prime Minister and will lead the Labour Party to form the new government of the United Kingdom.  

What does this mean for Private Clients?

After six weeks of media speculation and threats about the catastrophic implications of a Labour government, what is likely to be the truth?

A few things we know from the Labour party manifesto:

• Labour will follow the Tories in planning to change the tax regime for non-doms, and will extend those plans by ending the use of offshore trusts to avoid inheritance tax (IHT);
• Carried interest will no longer be taxed at capital gains tax (CGT) rates - a concern for those in the Private Equity world, many of whom are also non-doms;
• Private Schools will no longer be exempt from VAT or entitled to business rates relief, with any tax raised to be diverted to improving state schools.
• The rate of the stamp duty land tax (SDLT) surcharge for non-UK residents buying UK residential property will be increased by 1%, rising to 3%, in addition to the rate of SDLT otherwise relevant to the purchase.

As well as these key tax announcements, the Labour Party has promised not to raise income tax rates, National Insurance or VAT.  Corporation tax rates are to be capped at 25% for the duration of Parliament.  

Beyond the points mentioned above, CGT and IHT largely escaped mention in Labour's manifesto.  Nevertheless, speculation has been rife that changes may be made to both taxes, whether by raising rates or lowering thresholds, or by withdrawing or amending exemptions and reliefs. 

What should non-doms do?

Some non-doms have already left or have made plans to leave the UK - in many cases, doing so regardless of which party had won the election.  They are tired of the changes to the way they are taxed that have taken place regularly since 2008.  The constant rhetoric in the UK media against wealthy foreigners has also become wearing, and, frankly, there are other more welcoming jurisdictions - many of which enjoy considerably better weather!

For those who would like to stay, or are unable to move for family or other reasons, the best advice will depend on your personal situation.

Sales and gifts generally

The first piece of advice applies to everyone, regardless of your domicile or remittance basis status. If you have property or other assets, that you are intending to sell or give away, or any other transaction planned, it would be a good idea to do this sooner rather than later, in case the new government does make any changes to tax rates or exemptions and reliefs.  Any such changes may be unlikely to be made before the Autumn, bearing in mind that the party has already said there will be one major fiscal event only each year. 

Changes to the taxation of non-doms

Ever since the then-Chancellor, Jeremy Hunt, announced an end to the existing tax regime for non-doms in the Budget in March this year, non-doms have been trying to decide how to plan.  We discussed the detail of the Conservative proposals in our article here.  

The Labour Party's follow-up paper in April, effectively squashed any nascent planning ideas in relation to trusts, by indicating that if they were elected they would “include all foreign assets held in a trust within UK inheritance tax, whenever they were settled, so that nobody living here permanently can avoid paying UK inheritance tax on their worldwide estates.”  We looked at the proposals in that paper, together with the Conservative plans, in an article for Wealth Briefing, linked below.

We know that the Labour party has been listening to industry concerns about the likely impact on the UK economy of their proposed changes, and, in particular, how important the issue of IHT on trusts is for non-doms, including those considering a move to the UK. Taxing all overseas assets in trust, regardless of when they were settled, could be a deal-breaker for many non-doms with significant assets abroad, possibly acquired, or inherited years before coming to the UK. 

Interestingly, while the Labour manifesto re-confirmed that "the use of offshore trusts to avoid IHT will be ended", it stopped short of its original statement that this would apply to trusts whenever settled.  As such, it is hoped that there will be a consultation and, at worst, that any legislation will include a grandfathering provision for trusts settled before a certain date in order to avoid arguments that the changes have unfairly retrospective effect.  After all, few people, prior to the Labour paper being published in April, would have thought that offshore property in an excluded property trust, potentially settled years before the settlor came to the UK, would be brought into the IHT net.

Unfortunately, it is likely to be some time before we have full clarity on the government's plans.  As the April 2025 deadline for the rules to be changed was a Conservative one, the new Government may even decide to postpone the changes  in order to consider and consult on their plans in detail.  However, this cannot be guaranteed and, for the time being, non-doms need to plan on the basis that any changes will take effect in April 2025.

So, what to do?

People planning to come to the UK

• If you are still living overseas but intending to come to the UK, and are able to delay doing so, you may wish to wait until the new Government's plans are clearer, possibly in the Autumn.
• If you need to come to the UK before then, the Government's intentions, as set out in their manifesto, provide for a “modern scheme for people genuinely in the country for a short period”.  Once their proposals are clear, there should be a few years - likely to be between four and ten - for you to make plans to leave the UK, if necessary, before you are regarded as having made a “home here” for the purposes of your worldwide assets being brought into the scope of IHT. 

People living in the UK

• Non-doms who have arrived in the UK recently may be able to take advantage of the proposed short term regime for the taxation of foreign income and gains. This may mirror the Conservatives' suggested 4-year period during which foreign income and gains could be brought to the UK tax-free, but the new Government may have different plans.   
• However, it is likely that the main concern for many non-doms will be in relation to IHT, and especially in relation to any overseas assets you may have settled into trust.  Again, there should be time for you to make any plans you need to mitigate the impact of the changes on your overseas trusts and other assets before you are regarded as having made a home here.
• Nevertheless, depending how the Government's proposals develop, and how long you have already been in the UK, you may need to take action quickly, even before 6 April 2025. For example, you might decide to divest foreign assets by giving them to non-UK based family members, or to explore structures like trusts or family investment companies from which you could be excluded as a beneficiary.  This should minimise their taxable impact, while potentially allowing you to retain some control over the assets.  
• Clearly, any such arrangements will take time to put in place.  Therefore, you should consider taking advice soon, so that you are able to discuss your options, and put in place any necessary structural changes as far as possible in advance of any deadline.

And finally…

Don't panic!  Since March, professional bodies, firms and individuals in the Private Client industry have been discussing the taxation regime for non-doms, and its importance, with HM Revenue and Customs (HMRC), HM Treasury and with the Labour party (while it was in opposition).  We will continue to do so over the summer and beyond, and are optimistic that the new Government will be keen to balance their justified priority to raise revenue for the benefit of the UK economy, with the equally important need to provide a welcoming environment for overseas investors and businesses to help to grow that economy. 

In the meantime, we will update you regularly as the Government develops its plans for the taxation of non-doms, and announces other tax changes relevant to UK and overseas individuals and their families.