The recent political shift in the UK with prime minister Keir Starmer assuming office has prompted discussions on significant tax reforms. Among these are proposed changes to the inheritance tax (IHT) and the potential elimination of the long-standing ‘non-domiciled’ (non-dom) tax regime. These reforms have sparked concerns among ultra-wealthy entrepreneurs about the financial implications of remaining in the UK.
The UK government, under the leadership of Starmer and chancellor Rachel Reeves, is considering an overhaul of the IHT system. The aim is to create a fairer tax landscape and generate additional funds for public services. However, these proposed changes, particularly the elimination of the non-dom tax regime, have raised alarms among the wealthy.
Historically, the non-dom tax regime has allowed wealthy individuals residing in the UK to avoid paying taxes on income earned overseas. This policy has been a significant attraction for international business owners and investors, making the UK a desirable location for many affluent individuals.
See more: Reeves leaves door open to IHT hike with business relief under threat
Proposed changes
The Labour government plans to abolish the current tax regime for non-doms and replace it with a residence-based regime. The aim is to address tax avoidance and ensure a more equitable tax system.
According to a recent government statement, the new policy will provide 100% relief on foreign income and gains (FIG) for new arrivals in their first four years of tax residence, provided they have not been UK tax residents in the preceding 10 years.
Key points from the government statement
The key points to note from the new paper are:
- Implementation date: 6 April 2025 is the target for the new rules to become effective.
- Consultation: There will be no formal consultation on core proposals; instead, the government will engage with stakeholders in other ways.
- Budget announcement: More details will be provided in the Budget on 30 October 2024.
- 4-Year FIG regime: Available for up to four tax years.
- Transitional rules:
- Rebasing of foreign assets for current and past remittance basis users.
- Temporary Repatriation Facility (TRF) will become available on 6 April 2025.
- IHT: Individuals will be within the scope of IHT on their worldwide estates once they have been UK tax residents for 10 tax years.
For trusts:
- Protected trust status: Abolished from 6 April 2025.
- Anti-avoidance regimes: To be modernised, with changes effective from at least 6 April 2026.
- IHT protections: To be removed, with transitional arrangements to adjust existing trust arrangements.
Potential economic impact
Critics argue that these reforms could have unintended consequences. One primary concern is that the changes might drive wealthy entrepreneurs to relocate to countries with more favourable tax environments, such as the UAE. This could undermine the UK’s reputation as an incubator for international businesses and lead to a loss of valuable.
Non-doms have played a crucial role in the UK economy. According to the Institute for Fiscal Studies (IFS), non-doms collectively paid around £6bn in UK income tax, National Insurance contributions, and capital gains tax in the 2020–21 fiscal year. Eliminating their tax advantages could potentially deter these high-net-worth individuals from remaining in the country.
See more: IHT receipts climb by £400m to record breaking £7.5bn
Historical trends show that wealthy individuals are often willing to relocate to protect their assets. The UBS Global Wealth Report for 2024 predicts that nearly one-in-six UK millionaires could leave the country by 2028, citing unfavourable tax changes and other factors.
Conclusion
The proposed tax reforms in the UK present a complex challenge. While aiming to create a fairer tax system and increase public funds, there is a significant risk of driving away the ultra-wealthy who contribute substantially to the economy.
Finding a balanced approach that retains these individuals while ensuring equitable taxation is crucial for the UK’s economic stability and growth.
As these discussions continue, it will be essential for policymakers to engage with stakeholders to develop solutions that support both public interests and economic vitality.
Mauro De Santis Bo is a partner at GSB Wealth
