UK Chancellor Rachel Reeves is understood to be reconsidering planned changes to the taxation of non-doms (overseas individuals resident in the UK).
This is a response to concerns raised by tax advisers that non-doms are either leaving or making plans to leave the UK if changes to the tax regime are introduced in the way the Government has proposed up to now. The chief area of concern is their plan to bring non-doms fully within the scope of UK inheritance tax (IHT) after ten years of UK residence.
Currently, all UK-based assets are within the scope of IHT regardless of the owner's domicile or residence. However, overseas assets owned by non-doms only become taxable once that individual has been resident in the UK for at least 15 of the previous 20 tax years, at which point they are deemed to be domiciled in the UK for tax purposes. Even then, any overseas assets held in a trust that was settled by a non-dom before they became deemed domiciled in the UK are treated as “excluded property” and remain outside the IHT net.
To date, the Government has indicated that they intend to prevent long-term resident non-doms from shielding their overseas assets from IHT by placing them in trust. This change would also apply to such “excluded property trusts" already in existence.
Many non-doms understand and, in some cases, even welcome a time-limited residence-based test for the UK taxation of their foreign income and capital gains, even if they agree with many tax advisers that the planned 4-year limit is too short.
Their principal concern relates to their entire worldwide estate, whenever acquired, being brought into the IHT net, with a potential tax rate of 40%. This possibility is unacceptable to many non-doms, leading them to either leave or make plans to do so.
In addition, and perhaps of even more long-term concern for the UK economy, the proposals for change are deterring overseas individuals and their families who were considering moving here and investing in the UK.
Some commentators have pointed to previous overhauls of the non-dom tax regime, made between 2008 and 2017, as evidence that non-doms may talk about leaving but ultimately decide to stay. However, much has changed since 2017 - including Brexit - and the anti-wealth rhetoric in the UK has grown. The perception of the UK as a stable economy that welcomes foreign investment has also been affected by the non-dom regime changes in 2008 and 2017, along with regular adjustments in that period to taxes affecting non-doms or non-residents, particularly concerning the taxation of residential property. These include the introduction of higher rates of stamp duty land tax (SDLT) including for second and subsequent properties, non-resident SDLT, the annual tax on enveloped dwellings, non-resident CGT on all forms of UK property, and IHT on enveloped UK residential property. With the worldwide nature of the current proposals, non-doms are far more serious about their plans to leave this time than in the past, and, again, many have already done so.
Furthermore, it is not only the non-dom tax regime proposals that are an issue, but also recent reports of possible increases in rates or other changes to IHT and CGT. As the FT reports, if CGT rates are increased in the forthcoming UK Budget, many business owners, both non-dom and otherwise, are planning to leave the UK before selling their businesses in order to avoid paying more tax, and will either do so permanently or for at least 6 years in order to avoid a charge on their return.
While the news that the government is reconsidering their proposals for the taxation of non-doms is welcome, more is needed. For the benefit of the UK economy the measures the Chancellor announces at the Budget need to demonstrate that the UK is a welcoming environment for both UK and overseas investors.
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