This week provided confirmation of Labour’s legislative agenda, with tax increases in the limelight – despite the Prime Minister and Chancellor pledging no new taxes ahead of the election.
Tackling tax avoidance was a centrepiece of the Labour Party campaign with commitments to close loopholes and significantly increase taxes on a small number of high-net worth individuals to target carried interest. While Labour has vowed to create a ‘fairer’ tax system, attention is rightly focussed on how Labour will attract private investment which the UK desperately needs if ambitions to reduce the £22 billion fiscal hole in the state budget is to come to fruition.
The Chancellor’s Economic Statement on Tuesday, set out the key legislative measures for Rachel Reeves first Budget on October 30th. The Finance Bill will propose several measures aimed at adjusting the UK’s tax framework, including reform of the non-domicile regime. The previous Conservative government adopted Labour’s policy on non-domiciled status, however the devil will be in the detail and the Chancellor may well make strides to stamp Labour’s mark on these reforms.
Treasury consulted stakeholders on proposed changes to the non-dom regime prior to the election, in which STEP made active contributions on implications to inheritance tax (IHT), capital gains (CGT) and income tax. The Chancellor has since confirmed that there will be no further engagement beyond the stakeholder feedback received during this period.
STEP’s comments expressed some enthusiasm that the government recognised complexities of the reliance on domicile as a connecting factor for IHT and we encouraged Treasury to consider a new residence-based regime. We agree with the premise that if domicile is no longer to be treated as the primary connecting factor for IHT then a test based on tax residency is preferable to, for example, one based on citizenship. We also suggest that the proposed regime for new residents is too short and not competitive in comparison to similar regimes, such as in European jurisdictions. We proposed that a longer period, with a fixed annual charge in respect of foreign income and gains, would offer a more realistic incentive and competitive plan.
In light of the election of a Labour government, STEP has made additional representations, in which we suggest modifications to ensure fairness and consistency with current rules, emphasizing the potential negative consequences on individuals’ decisions to reside or remain in the UK. We urge careful consideration of retrospective legislation which risks leading to unfair outcomes on individuals who leave the UK before April 6 2025, especially if they have never been subject to a worldwide IHT.
The possible implications in changing the tax status of trusts established before April 6, 2025, should also be a consideration – STEP suggests these should retain their excluded property status to avoid penalties for those who set them up under different tax expectations.
Furthermore, STEP suggests that individuals should not be subject to worldwide IHT in a year when they are no longer residing in the UK, which we feel would be a logical application of the ten-year residence test.
We will await with much interest how legislative reforms of the UK tax system will take shape under this new government. Whether the Chancellor can appease her campaign promise of creating a fairer tax system without compromising economic growth and shunning private investment is yet to be seen, but this is a careful balance that will need to be considered.
