"Change begins now” said Labour’s leader Keir Starmer, winner in the UK general election.
The new Labour government is set to implement in the coming months a series of fiscal policies to take effect from 6 April 2025 with the aim of rebalancing the budget deficit and encouraging economic growth, including:
- Abolition of the resident non-domicile status: “non-dom" status refers to a person's tax status and describes a UK resident whose permanent home (“domicile”) for tax purposes is outside the UK.
The existing regime (in force until April 2025) allows those who are resident but not domiciled (or deemed domiciled) in the UK to avoid UK tax on their foreign income and gains until they remit the funds to the UK. This is known as the “remittance basis” of taxation.
Remittance basis is not available if an individual is deemed domicile in the UK. An individual will be deemed domicile if they were born in the UK with UK domicile of origin and UK resident in 2023 to 2024 tax year, or they have been UK resident for at least 15 of the previous 20 tax years and UK resident in 2023 to 2024 tax year.
- Abolition of the remittance basis regime: individuals will have a four-year grace period in which they can bring foreign income and gains (FIG) into the UK tax-free (including non-resident trust distributions) before being subject to UK tax on their worldwide income and gains after their fourth year of tax residence.
Transitional provisions will be provided for existing non-doms who have been in the UK for more than four years. Non-doms will lose access to the remittance basis on 6 April 2025, but those who are not eligible for the new four-year FIG exemption regime will pay tax on only 50 per cent of their personal foreign income in 2025/26 only. All foreign chargeable gains will be fully taxable.
- Changes to inheritance tax: domicile will no longer be the main connecting factor for liability to inheritance tax, so moving it to a fully residence-based system. It is proposed that inheritance tax will automatically apply to an individual's worldwide estate after their 10th year of UK tax residence, with a 10 year "tail" for such individuals who subsequently leave the UK.
- End of use of offshore trusts to avoid inheritance tax: abolition of the IHT exemption for trusts settled by a non-dom who become long-term UK residents with non-UK assets (i.e offshore trusts), no longer providing a “grandfathering” shield for pre-April 2025 trusts settled by non-UK domiciled settlors that the Conservatives offered. This essentially means that all trusts settled by UK-resident settlors will be within the scope of UK inheritance tax from 6 April 2025 after the settlor has been UK-resident for 10 years, regardless of when the trust was settled.
However, the proposed changes do not appear to significantly affect offshore trusts where the settlor is already deceased or is non-UK resident. UK resident beneficiaries may be subject to UK tax on trust distributions outside of the UK if they fall outside of the four year window, but otherwise the foreign assets of such trusts remain outside of the UK tax net.
- Transitional reliefs: Labour will consider investment incentives during the four year window to encourage more investment into the UK and to remit foreign income and gains to the UK. However, they have not given specifics on how they would do so.
Timing
As to when we can expect these policies to take effect, Labour has not provided any precise indications. More details are expected to be in the King's speech at the State Opening of Parliament on 17 July 2024.
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The information provided in this article is of a purely general nature and is not a substitute for specific advice that may be requested here.
