Welcome to the March 2024 special edition of our international e-bulletin for private client, family office and trustee clients and contacts.
Although rumours abounded in the two weeks leading up to the Chancellor’s Spring Budget speech on 6 March 2024 about potential reforms to the tax regime for non-UK domiciled individuals (“non-doms“), few could have envisaged the radical scope of what was announced. The articles in this issue focus on providing an in-depth analysis of the different elements of the proposed non-dom changes, whereas below I give my thoughts on the political backdrop behind the announcements and how this may shape the final regime once enacted.
I also comment briefly on changes to the Register of Overseas Entities (“ROE“) regime that came into force on 4 March 2024. Although, given their timing, these changes are at risk of being overshadowed by the non-dom announcements, they are another important development relevant to UK-linked international private clients and their advisers.
Non-dom reforms
UK resident non-doms will, understandably, be questioning why the UK government is suddenly moving from a tax regime that allowed them to keep their foreign assets (and the income and gains arising on these) outside of the UK tax net for up to fifteen years, to a regime that will exempt those income and gains for four years only, whilst subjecting them to UK inheritance tax (“IHT“) after ten years.
The answer to this question is, in part, that the Chancellor needed revenue to fund his electorate-sweetening tax cuts: the non-dom reforms are projected to raise £2.7billion. At the same time, it is hard to ignore the idea that these reforms are primarily, and quite overtly, political.
The Labour party have been in favour of abolishing, or at least significantly scaling back, the non-dom tax regime for some time; and this aspect was set to become a key part of their election manifesto. Up until shortly before the Spring Budget, however, the government had not shown any sign of supporting this initiative. If modest tweaks had been made to remove some of the irrational elements of a regime that discourages non-doms from bringing funds into the UK and investing in the UK economy, make the regime more competitive and modernise the concept of “domicile”, this would have probably got by without too much batting of eyelids; but the extreme nature of the proposed changes suggests that the Conservatives wanted to grab headlines and steal a march on their Labour counterparts on a key plank of their election strategy. By extreme, I am referring to the four-year limitation (retroactive) on the exemption period for non-doms’ foreign income and gains not being subject to UK taxation – down from fifteen years, albeit admittedly at the expense of the remittance basis charge and the ability to remit such foreign income and gains to the UK tax-free during this four-year period- as well as the proposed ten-year “tail” for IHT whereby worldwide assets remain within the charge to IHT for ten-years after an individual leaves the UK.
Whilst there will be non-doms who benefit from the announcements, particularly those thinking of coming to the UK for a short period, there will inevitably be those who will now seriously consider relocating as a result. There are more competitive foreign tax regimes to choose from (and sunnier climes to enjoy).
The tricky issue for non-doms who are now considering their position, however, is the uncertainty that the political undertones to the new policy have created. Firstly, whether there will be sufficient parliamentary time to enact the new regime before the general election. The IHT changes will be consulted upon, and this will take time. The government may also be less concerned about speed of enactment if the very announcement of the regime in the Budget serves their political purposes anyway. Secondly, whether Labour will tweak the regime if they come into power later this year or early next year. It is not beyond possibility (apart from the logical question of how much further can they go?) that they will want to put their mark on a regime, the concept of which they consider their own.
None of this helps UK resident non-doms, or indeed non-doms thinking of coming to the UK. They will need to start planning on the basis of current announcements but ready to be reactive to any changes that a new (potentially Labour) government may introduce. Whilst it is difficult to see which aspects of the regime could be tightened further by Labour, the proposed ten-year qualifying period for IHT liability on worldwide assets is one possible area. We will be keeping a close watch on developments (and speculation in the lead-up to the general election) and will keep clients updated.
Transparency
In our interim issue published in December 2023, we explained the changes to the ROE regime set out in the Economic Crime and Corporate Transparency Act 2023 (“ECCTA 2023″) which received Royal Assent on 26 October 2023. Some of these changes were included in the Economic Crime and Corporate Transparency Act 2023 (Commencement No. 2 and Transitional Provision) Regulations 2024 which were published on 1 March 2024 and came into force on 4 March 2024. Key among these changes are: i) nominee entities are now fully within the scope of the ROE regime; and ii) beneficial owners of trusts must now be disclosed even where the trust is managed by a corporate trustee subject to its own disclosure requirements. These changes are explored in further detail in Rachel Morris’ article within this issue: “Update on the Register of Overseas Entities“.
Many of the ROE provisions within the ECCTA 2023 are not yet in force and we still await implementing regulations; in particular, provisions affecting the extent to which trust information on the ROE should be publicly accessible. In connection with this issue, in December 2023, the government published a consultation document, “Transparency of land ownership involving trusts“. The closing date for responses has now passed and the government’s response is awaited but this is expected to shape the regulations in respect of transparency of trust information on the ROE. This is a delicate area, which requires a difficult balancing act between transparency (for legitimate and necessary purposes) on the one hand, and the need for trust information to be kept private for safety reasons as well as on human rights grounds, on the other. As with the non-dom developments, depending on the date of the general election and whether there is parliamentary time to pass the regulations beforehand, this could be another area that may be vulnerable to change if a Labour government comes into power, and Labour are unlikely to be in favour of a more cautious approach towards transparency.
What is clear is that there is a great deal of uncertainty at present around the final form of the new non-dom regime announced, and the extent to which trust information on the ROE will remain protected from public disclosure, but we would be pleased to discuss planning options with affected clients.