Globally Speaking News | April 2, 2024

NON-DOM ANALYSIS: A POLITICAL BUDGET

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. Please see the articles in our March 2024 issue of Globally Speaking for in-depth analysis of the different elements of the proposed non-dom changes scheduled to take effect from 6 April 2025, but I comment in this article on the political backdrop to the announcements and how this may shape the final regime once enacted.

Affected non-doms will need to bear in mind this political landscape when planning any action they may want to take over the course of the next year.

What part has politics played in the non-dom announcements?

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).

How will politics shape the final regime?

The tricky issue for non-doms who are now considering their position 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.

What should non-doms do now?

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, whilst there is a great deal of uncertainty at present around the final form of the new residence-based exemption regime, we would be pleased to discuss planning options with affected clients.