Labour plans further crackdown on non-doms – legal experts react

by | Apr 9, 2024

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Following the news that Labour plans to raise £2.6bn by closing “loopholes” in the government’s plans to abolish non-dom exemptions as discussed by Shadow Chancellor, Rachel Reeves, on the Radio 4 Today programme earlier this morning, legal experts have been sharing their reactions to the latest proposals as follows:

Sophie Dworetzsky, Partner, Charles Russell Speechlys said: ‘Labour’s intentions to modify the tax treatment of non doms even further than already announced by Jeremy Hunt a few short weeks ago, are disappointing.

Specifically, the ability to settle trusts and protect assets from IHT is in their sights, as is a transitional measure with regard to non-UK source income.

These measures feel like trying to squeeze out every last drop until there’s nothing left.  The UK operates in an environment of tax competition, and if the UK makes itself yet more unattractive from a tax point of view, we could lose out to other countries, such as Italy, which have more favourable tax regimes.  One can but hope this is realised before any legislation is implemented’.

 
 

Also commenting on Labour’s latest non-dom plans, Dominic Lawrance, Partner, Charles Russell Speechlys said:

“The proposed IHT changes are causing alarm to wealthy internationally mobile individuals. We have already seen some individuals making plans to leave the UK, and the latest Labour announcements will undoubtedly result in further people being spooked.

Both main parties should commit to undertaking a genuine consultation process, and listening to tax professionals with a wide range of perspectives, before embarking on reform of the territorial limits of IHT.

 
 

Any reform needs to be undertaken with real care, so that it does not drive away internationally mobile individuals and the investment that they have the potential to bring into the country”.

Camilla Wallace, Senior Partner at Wedlake Bell has noted:

Whether this stringent outlook might lead to the exodus of wealthy foreign individuals?

 
 

“It’s likely we will see a surge in wealthy foreign individuals looking to relocate out of the UK; many are already looking to do so prior to todays news.There is a plethora of other countries with their arms wide open ready to welcome such individuals.  Italy, Dubai, Spain, Portugal, Greece, Switzerland – they are all very keen to attract our wealthy residents and arguably have far simpler and more beneficial regimes, for example some countries you can pay a flat fee for a fixed period of time during which your foreign income/gains are tax free.

If the weather and food are better as well, then the decision for such individuals may not be that difficult – many are already incredibly mobile and have no qualms about relocating to wherever best suits their lifestyle – and assets.”

“For wealthy individuals who are concerned about potential new tax considerations, we would urge them to seek advice but not to panic. Retrospective legislation is rare because it is arguably unfair to adopt, and while the usual course with tax matters is for the government to announce and legislate for anti-forestalling measures to preclude pre-emptive action by taxpayers, it would be unusual for a shadow government try to introduce this.” 

 
 

“It is to be expected that the regime announced by the Conservatives will be tightened up by a Labour government looking to recapture ownership of one of their flagship policies  – and filling the blackhole in their funding plans generally – and anybody, whether domiciled in or out of the UK, should be looking for advice, not only on their tax affairs but on the possible impact of a Labour government on their property portfolios, investments, wealth management and inheritance planning.”

Tax planning considerations that wealthy individuals need to take to address the likelihood of these policies coming into play.

“For wealthy individuals who are concerned about potential new tax considerations, we would urge them to seek advice but not to panic. Retrospective legislation is rare because it is arguably unfair to adopt, and while the usual course with tax matters is for the government to announce and legislate for anti-forestalling measures to preclude pre-emptive action by taxpayers, it would be unusual for  a shadow government try to introduce this.”  

 
 

“It is to be expected that the regime announced by the Conservatives will be tightened up by a Labour government looking,to recapture ownership of one of their flagship policies and filling the blackhole in their funding plans generally – and anybody, whether domiciled in or out of the UK, should be looking for advice, not only on their tax affairs but on the possible impact of a Labour government on their property portfolios, investments, wealth management and inheritance planning.”

Marilyn McKeever, Partner, BDB Pitmans has commented:

“The Conservatives’ bombshell announcement in the Budget of the “abolition of non-dom status” caused widespread alarm among wealthy foreigners living in the UK. Many were already preparing to leave before Rachel Reeves’ announcement that Labour would close the “loopholes” in the Conservatives’ proposals.

 
 

Labour proposes to abolish the one year 50% discount and, more importantly, to bring trusts set up before 6 April 2025 into the inheritance tax net on day one of the new regime. It is not clear whether this will apply only to trusts made after the date of the announcement or to all trusts. 

“Anecdotal evidence suggests that many wealthy families, who already pay large amounts of UK tax, will leave the country before the changes come into effect and many who would have come to the UK will go elsewhere. It is more likely that the Treasury will lose money as a result of these changes.

“Other countries, in Europe and further afield have introduced “non-dom” regimes designed to attract wealthy foreigners to their shores. For example, Italy has introduced a flat tax regime under which new immigrants pay €100,000 but pay no tax on their non-Italian income or gains and can bring them into the country.

 
 

“There are good arguments that the non-dom regime should be reformed in order to attract inward investment and encourage wealth to be brought to the UK. Unfortunately, neither party’s proposals are likely to do this. It is clear that the rules will change but the Conservatives’ announcement was light on detail and the inheritance tax changes were to be the subject of consultation. 

“The new Labour proposals add further uncertainty which makes immediate planning risky. In the light of this uncertainty and turmoil, many non-doms may conclude that the safest option is to pack their bags and go.”

And, according to James Austen, partner at Collyer Bristow, “The recent Budget announcements by the Conservative party about the introduction of a statutory regime to determine an individual’s domicile status (similarly with the existing statutory residence test) were widely welcomed and made good sense: clarity is always welcome.  That said, we are already aware that non-domiciled individuals have already left the UK, or are planning to leave this year, as a result.

 
 

“The Labour party has today announced further changes, building on the Tory plans, which it will enact if it forms a government after the next general election.  The details remain unclear, but the plans as announced seem problematic.  First, and most fundamentally, it is unclear how so-called “excluded property trusts” used by UK-resident non-domiciled individuals could be eradicated without a wholesale rewriting of the current Inheritance Tax regime, which has been in place since 1975.  The technical difficulties which would be encountered in implementing this policy this are formidable and should not be underestimated.  As a result, until the full technical details are known and understood, any tax savings Labour hope to achieve from this change should be seen as speculative.

Secondly, Labour plan to invest in HMRC to tackle tax avoidance and evasion to narrow the so-called “tax gap”, which is the hypothetical difference between the tax actually collected by HMRC and the total amount which might, in theory, be collected if: (1) all taxpayers reported their taxes correctly; and (2) everyone accepted HMRC’s interpretation of tax law.  Over the years, governments of all parties have provided HMRC with ever-greater powers and investment to tackle tax evasion and avoidance.  As a result, the UK’s “tax gap” is actually very small in comparison with other advanced economies.  Additional investment in HMRC might well be welcomed by taxpayers in the hope of fixing well-publicised difficulties (such as the unavailable helpline).  But, the immutable law of diminishing returns unfortunately means that ever greater investments are likely to be required to chase ever smaller returns from tackling avoidance and evasion.  Given HMRC’s existing wide-ranging powers and increasing use of sophisticated IT technology, it is unclear how much more can be achieved in practice.  Again, further details are needed before the likely success of Labour’s plans can properly be assessed.

Whilst Labour’s proposals might well make good political sense in the short term (and this is likely to be their overriding objective at this stage of the electoral cycle), banking on their success to characterise other spending commitments as being “funded” might well turn out to be over-optimistic.

 
 

Meanwhile, our advice to all UK-resident non-domiciled individuals remains that they should review their current tax arrangements and consider their options for the longer term: changes are inevitable whoever wins the next general election.

And finally, Damian Bloom, partner and Head of UK Private Client at law firm Taylor Wessing said: “While it is helpful that Labour have responded to the changes announced at the Budget, ‘non-doms’ are being left in an increased state of flux in the face of competing proposals. This further perceived crackdown on non-doms will likely increase departures of both people and wealth from the UK, and reduce inward investment, which will inevitably also reduce tax revenues. Neither party are currently using the opportunity for reform to introduce a regime that will increase inward investment, raise UK tax revenues and enable the UK to compete against other leading economies to attract the best entrepreneurial talent.”

All the best,

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