With promises of 'change' ringing through Westminster and across the nation, Sir Keir Starmer has been appointed the new Prime Minister of the United Kingdom. As had widely been expected, the Labour Party obtained a significant majority in the UK General Election and will have a strong mandate to govern. With a new party in Government, what does the future hold for the UK's non-dom regime?
Background
The previous Conservative Government announced on 6 March this year that it would seek to abolish the current tax regime for individuals who are UK resident but not UK domiciled in favour of a residency-based system, which would apply from 6 April 2025.
The proposals were that, from 6 April 2025, the remittance basis of taxation, which allows UK resident individuals who are not UK domiciled to pay tax only on foreign income and gains that are "remitted" to the UK, would be abolished and be replaced with a new regime under which those who have been UK resident for at least four years would pay income tax and capital gains tax ("CGT") on their worldwide income and gains. It was made clear that the new rules would also apply to income and gains arising within trusts, such that the generous trust protections introduced in 2017 would no longer be available to those who have been resident for four years, even if their trusts were set up before 6 April 2025.
For further details of the original Conservative proposals please read our briefing here.
Labour's plans
Income and gains
No legislation in respect of the proposed reforms to income tax and CGT was put before the previous Parliament, and with that Parliament prorogued on 24 May 2024 (and subsequently dissolved on 30 May 2024), it will be up to the new Parliament to enact legislation to reform or abolish the non-dom regime.
Labour's General Election manifesto stated that they would "abolish non-dom status once and for all, replacing it with a modern scheme for people genuinely in the country for a short period." This has been a long-standing, and much mentioned, aim of the Labour Party, but unknown is
(i) the extent to which the new regime will mirror the proposals set out by the previous Conservative Government, (ii) when we might see the detail of Labour's proposals, and (iii) from what date the new regime would take effect.
Following the March 2024 Budget, Labour expressed broad support for the Conservative proposals, but argued that the proposals still contained a number of "loopholes", with reference to the transitional reliefs proposed by the Conservatives.
In particular, Labour have indicated that they would eliminate the proposal that non-domiciled individuals already resident in the UK would only be subject to income tax on 50% of their foreign income in the 2025/2026 tax year. Their manifesto refers obliquely to removing the "non-dom discount loophole in 2025/2026", which seems to indicate their intention to follow-through with the Conservative proposals with fewer restrictions and that they intend for the changes to take effect from 6 April 2025. Whether the changes will remain a legislative priority now that Labour has gained power remains to be seen.
At the same time, however, Labour have also suggested that they recognise the need to encourage UK investment and would consider additional incentives. We could, for example, see an extension or reformulation of the Temporary Repatriation Facility. This is likely to be an area where there will be extensive lobbying, so we will need to wait to see what any draft legislation looks like.
Inheritance tax
On IHT, Labour have indicated that they do not agree that trusts established prior to 6 April 2025 should continue to be sheltered from IHT.
In their manifesto, they stated that they "will end the use of offshore trusts to avoid inheritance tax so that everyone who makes their home here in the UK pays their taxes here." From this, it would seem that Labour also intend to tie the IHT status of assets held in trusts to the residence status of the settlor or the beneficiaries of a trust.
However, Labour have not commented in detail on the Conservatives' proposals for a reformed residency based IHT regime, so again we will have to wait for further detail on this front.
Labour were conspicuously silent on IHT generally in their manifesto and prior to the election refused to rule out reform of the regime. It has been suggested that Labour may also seek to restrict certain IHT reliefs not aimed specifically at non-doms, in particular agricultural property relief and business property relief. It has been suggested that there will be a consultation process on the IHT regime generally and the concept of domicile.
What next?
Rachel Reeves, the newly appointed Chancellor of the Exchequer, has said that there will be no "emergency" Budget and that there will not be a Budget before September, and she has stated that she would not deliver a Budget without a formal forecast from the Office of Budget Responsibility, which requires 10 weeks' notice. Labour's Annual Conference will take place from 22 to 25 September 2024, so it may be that any Budget is delayed until after this.
It is possible, if Labour decide to substantially mirror the Conservatives' proposals, that we might see draft legislation prior to a Budget. However, given that there will be a summer recess (albeit there have been suggestions that the recess may be shorter than usual), and that there will be other legislative objectives, it is more likely that draft legislation will coincide with Labour's first Budget.
It is, therefore, likely that we will need to wait a little longer to see the substantive details of Labour's proposals.
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