Labour's shadow Chancellor Rachel Reeves announced on 9th April her party's plans to close perceived loopholes in the Government's proposal to abolish the current tax regime for non-doms. In particular, Labour has set its sights on two measures:
- Removal of the transitional concession under which only 50% of foreign income would be taxed during the first year of the new regime (2025/26).
- Preventing non-doms from sheltering their offshore assets from inheritance tax (IHT) by transferring them to an "excluded property trust" before the start of the new regime on 6 April 2025.
The Conservatives’ proposal to retain the inheritance tax advantages of excluded property trusts created by non-doms before April 2025 was very deliberate. Their view is that whilst all long-term UK residents should pay the same tax on both UK and foreign income and gains, there should be a window of opportunity for existing long-term resident non-doms to protect their foreign assets from IHT. Otherwise, many wealthy non-doms are likely to leave the UK, taking with them their spending, investment, businesses and employment. This is particularly likely where they are older, unmarried, or facing health issues, and where inheritance tax at 40% on their global assets is a genuine concern.
It now seems clear that Labour’s proposals will affect all existing excluded property trusts whenever they were established (but presumably only where the settlor is a beneficiary and has been UK resident for 10 years). Many affected settlors will accuse Labour of enacting retrospective legislation. Technically, however, it would not be retrospective legislation as it will only create a future tax charge, even if taxpayers were expecting a tax advantage that will no longer be available. This sort of tax legislation is commonly called retroactive and is not uncommon.
With Labour focusing on this perceived IHT loophole, and on the one-year only 50% tax discount on foreign income in 2025/26, this suggests they will accept or adopt the rest of the Conservatives' proposals, if elected. This may offer some comfort to those taxpayers who were hoping to benefit from the other concessions announced in the Spring Budget.
Interestingly, according to a document we have seen that provides background detail on Labour's announcement, they are looking at providing additional concessions beyond those proposed by the Conservatives.
In particular, they think the proposed four-year window for new arrivals to remit foreign income and gains (FIG) tax-free is a disincentive to investment in the UK. They are therefore considering whether UK investment income during that period should be tax-free. Whether that would be in addition to or instead of remitted FIG being tax-free is unclear though if it's to be a true incentive to invest in the UK then arguably it should be an alternative rather than an additional concession.
The other point Labour have picked up on is their concern that after the expiry of the two-year window for remitting historic stockpiled FIG at a discounted tax rate of just 12%, there will remain a big disincentive to bringing in sizeable remaining stockpiled FIG. They will therefore explore ways to encourage people to remit stockpiled FIG to the UK. Although no details are given, that could imply an extension of the two-year period, although they are silent on the relevant tax rate. Notwithstanding their support for abolishing the non-dom regime, it's clear Labour are alive to the economic benefits of wealthy foreign residents investing in the UK or bringing in their historic FIG, and perhaps more so than the Conservatives. This was always a major downside of the existing non-dom regime, which perversely disincentivised wealthy foreigners from bringing in their FIG.