David Andrews
Head of International Private Clients
So, we have a surprise General Election next month. The Prime Minister popped up, virtually unannounced in the pouring rain to say that he’d been off to see the King who was happy to grant his request to dissolve Parliament. This not only wrong footed the Tories’ nemesis, Nigel Farage, who initially said he had no time to mount a campaign in Clacton on Sea, cancelling his order of “stop the boats” mugs and tea towels, but has also shocked many of the Prime Minister’s own MPs who quickly had to swap their summer holidays for some urgent campaigning, though the polls would suggest that for many of them, their time may be better spent seeking alternative employment.
The virtual certainty of the upcoming plebiscite aside (as I write, Paddy Power is quoting odds of 25/1 for a Conservative majority and 1/16 for Labour to prevail), there is still an election to fight, at least cosmetically and herein lies a problem. It’s no good arguing about what to do with the economy as everyone knows we’re all being taxed to the hilt and there is no money left to boost growth via any serious tax cuts or to spend on something worthy. Sort out the underfunding in the NHS? There’s no money left. Sure up our armed forces? Ditto. More policepersons on the street? You get my drift…
It’s depressing stuff for the voters as well as the policymakers and in such a vacuum of practical differences between the two main parties, attention turns to those things which are less about what is necessarily economically beneficial and more about philosophy.
Labour seemed to have struck a chord with the voters a few months back when it announced that it planned to target foreigners coming over and starving the Treasury of much needed cash. No, not the ones who Nigel bangs on about, arriving in inflatable toy dinghies via the English Channel and the RNLI but the ones who arrive via Business Class via Heathrow Airport with a family and a passport and a job and pay tax (at least on the wealth they bring with them or generate while they are here).
Buoyed by some clumsy handling by Number 10 of reports of Mrs Sunak’s non-domiciled tax status and a general lack of understanding on the part of the public about just how much wealth is created (and UK tax paid) by this group, Labour’s stance was received well by the media and the Government decided it must act.
And so it did. By announcing essentially the same policy as Labour. And then Labour responded by tweaking its approach in order to look tougher still.
Mrs Sunak, by the way, has agreed to pay tax on her foreign income, at least until she jets off to the USA with her husband and the kids and so will be unaffected by all of this but what does it all mean for those that remain here?
Let’s start with the provisions in Jeremy Hunt’s last Budget. From 6th April 2025 those who have been resident for four years will be treated as UK domiciled and pay tax on their entire worldwide income and gains as they arise.
Things aren’t quite so bad for the first four years’ residency where individuals will be able to avoid UK tax on foreign income and gains arising in that period and can also bring assets into the UK without further tax.
There will also be a number of transitional rules including:
- Those who lose access to the remittance basis on 6 April 2025 and are not eligible for the 4-year exemption will only pay tax on 50% of their overseas income in the 2025/26 tax year
- Individuals who have claimed the remittance basis in the past, are non-UK domiciled as at 5th April 2025 and dispose of an asset on or after 6 April 2025 can ignore any gain in value prior to 5 April 2019
- Those who have claimed the remittance basis in the past will be able to remit pre-6 April 2025 foreign income and gains in the 2025/26 or 2026/27 tax years and only pay tax at 12%.
However, the protected trust regime will effectively cease to apply from 6th April 2025, meaning that income and gains from trusts could become taxable thereafter.
Lastly, Inheritance Tax will be determined by reference to residence rather than domicile, though those plans are subject to consultation.
And what about Labour’s follow up, which is really what matters of course?
Well, having watched Jeremy Hunt try to steal their clothes back in November, they have unsurprisingly adopted most of what he announced but with some important variations, though it must be said that the proposals are lacking detail.
Interestingly, Labour plans to consider whether there should be incentives for new arrivals to invest tax-free in the UK during their first 4 years of UK tax residency, which would actually be an improvement on the Government’s position.
That’s where the good news ends though as Labour doesn’t intend to keep the 50% discount for foreign income remitted during 2025/26 and neither does it intend to allow the grandfathering of excluded property status for pre 6th April 2025 Trusts.
So, what to do?
For those who aren’t tempted just to up sticks and leave, the problem is that while any incoming Labour administration is just about as certain as it can be, the detail of the legislation that will follow is not.
That said, it is worth giving some thought to a couple of potential planning opportunities before whatever the changes ultimately are take effect:
- Those who already have significant foreign income and gains may wish to defer remittances until after 6 April 2025 so as to benefit from the 12% tax rate (if it survives)
- It may still be worth creating new Trusts before 6 April 2025 in order to retain preferential Inheritance Tax treatment, just in case Labour has a bout of post-election generosity and decides not to amend the Government’s approach in this respect.
Other than that, what can we conclude from all of this so far?
Well, while the Government’s Rwanda plan has so far resulted in one person voluntarily jumping on a flight to Kigali (along with a £3,000 inducement to do so), the efforts of the two main parties to reduce net migration by instead encouraging the exodus of wealthier non-doms may well already be working a treat. Private client lawyers are reporting a surge of enquiries from those considering heading off for more welcoming shores. And they’ll be paying for their own flights too. Of course, they’ll be taking their money and jobs with them and so will cease to be contributing to the Exchequer or the UK economy at all but let’s not get bogged down in minutia.
All things considered, this is bad news for non-UK domiciliaries and for those who value the contribution they make to the UK economy.
But wait, is there a silver lining? Well, perhaps, and oddly it comes in the form of a potential tax break for wealthy UK domiciled individuals. Until now, trying to relinquish a UK domicile acquired at birth is like trying to get rid of Japanese knotweed and a UK domicile means never escaping the clutches of HMRC when it comes to Inheritance Tax. However, it would seem from both the Government’s and Labour’s plans (if unamended) that if some of my wealthy British friends leave the UK and take their money and assets with them, after ten years there will be no Inheritance Tax for them to pay. Even Nigel couldn’t object to that.
If you have any queries about the implications of the current provisions or those which an incoming Labour administration may introduce, please contact your HFMC Wealth adviser, who will be happy to help.
