Back in March and ahead of the Spring Budget, we looked at what some of the potential changes to non-dom status might mean and since then we have been able to advise clients on the proposed changes set out by the Chancellor. And now, following on from the Shadow Chancellor’s announcement in early April, we have more clarity as to what might change if there is a Labour government.
So where are we now? The key questions, whoever is in charge, include what transitional rules and planning opportunities are available to those living in the UK plus who might be unaware they are inadvertently affected.
A number of temporary provisions were originally announced in the Spring Budget to help those currently living in the UK to manage their affairs in an efficient way after the new non-dom rule changes.
In response the Labour party has announced that if it wins the next election, it will remove the proposed 50% tax deduction on foreign income in 2025-26. It has also said offshore trusts will be subject to UK IHT (the current proposal is to retain the IHT exclusion for trusts set up before April 2025). Quite how existing trusts will be affected – whether one considers the position of the settlor or the beneficiaries for example – remains to be seen. This is potentially an extremely complex area that we will be watching carefully.
A lot will depend on the timing of the next General Election and if the changes announced in the Spring Budget make it into law or not. An election held towards the end of the year or early in 2025 might not give a Labour government time to repeal the new legislation in time for April 2025.
We are speaking to our clients and looking at what these proposed changes might mean for their individual circumstances, what the costs of taking action or not might be and seeking to fully understand their plans and objectives for the future.
What is clear though is there is a window between now and the election for those conversations to take place.
Who are the winners and losers?
With the latest news is another set of variables and the key question anyone who has been domiciled or resident in the UK should be asking themselves is, “Am I now back in the net for Inheritance Tax (IHT) or am I now out of it for good?” – as there may be some surprising answers.
Whilst a Labour government will no doubt want to ‘have its cake and eat it’ when it comes to maximising tax revenues, if it chooses to get rid of domicile for taxation purposes then residence will be the determining factor and there may be some unexpected ‘winners’ and ‘losers’. If for example you have been outside the UK but planned to return, you may now have unforeseen tax implications, whilst if you are British and have retained links here but lived overseas for a long time, you may now escape IHT on your Estate where it would currently be payable.
The biggest challenge will be to reach those people who have left the UK already as they may think that future UK tax changes won’t affect them. Under current rules, an absence of five years could be enough to escape the UK IHT net. Unfortunately, the proposed rules might drag them back into UK IHT for up to ten years after they have left the UK. For those who are elderly or suffering from a life limiting disease then this could be especially worrying as we don’t yet know whether people who have already left will be included in the changes. It is also unclear how this could be policed.
Ultimately people just want certainty, consistency, and a fair implementation of the tax system. We don’t want to put people off coming to the UK and doing business here, but many families now need to give thought to this issue in the coming weeks, as if you follow the opinion polls once the election is called, there is likely to be only one outcome.
At Mercer & Hole we are here to help and to discuss your tax status please contact our team.
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