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Stay or go? UK opposition’s tax hit on non-doms likely to encourage exodus

The UK’s non-domiciled tax system is facing significant changes, as the opposition Labour Party, currently leading in opinion polls, seeks to impose stricter regulations on individuals benefiting from this regime.

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Published 10 April 2024

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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.

Such measures could prompt a greater number of affected individuals to consider leaving the country. 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.

Read our full comments published by IFA magazine and Wealth Briefing on 9 and 10 April 2024.

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Shorter Reads

Stay or go? UK opposition’s tax hit on non-doms likely to encourage exodus

The UK’s non-domiciled tax system is facing significant changes, as the opposition Labour Party, currently leading in opinion polls, seeks to impose stricter regulations on individuals benefiting from this regime.

Published 10 April 2024

Associated sectors / services

Authors

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.

Such measures could prompt a greater number of affected individuals to consider leaving the country. 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.

Read our full comments published by IFA magazine and Wealth Briefing on 9 and 10 April 2024.

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