What are Labour’s plans for non-doms?

Following changes to the non-dom regime proposed by the current Conservative government and included in the Spring Budget 2024, which you can read about here, the Labour Party announced their own plans on 9 April 2024.

Labour’s plans to increase investment in public services

The Labour Party has announced its commitment to increase public spending on the NHS, housing, education, and green projects (Labour’s Green Prosperity Plan). Implementing all these new public measures means finding new revenue sources and it looks like the taxation of non-doms is their stellar idea. Labour’s shadow Chancellor, Rachel Reeves, has been relying on a report published by the University of Warwick when trying to explain why the non-doms regime is part of the current UK’s tax gap and why scrapping it could raise billions.

Labour’s plans for the non-dom regime

According to Labour’s announcement, they support most of the Conservatives’ measures included in the Spring Budget, which can be summarised as follows:

1. Replacing the UK tax framework for non-domiciled individuals with a residence regime, allowing those individuals who have not lived in the UK for the past 10 years not to be taxed in the UK on their income and gains for 4 years.
2.  Substantial changes to offshore trusts are proposed as well, with the removal of current income and capital gains tax benefits on protected trusts. However, the Inheritance Tax (IHT) treatment of non-UK assets settled into trusts by non-domiciled individuals prior to becoming deemed domiciled in the UK and before 6 April 2025 will not change and will remain outside the scope of UK IHT.
3. Transitional provisions from the existing position to the new 4-year regime, basically stating that:

i. Non-doms will be allowed to remit their foreign income and gains for a 12% flat rate tax for two years.

ii. Non-doms losing access to the remittance basis and not eligible for the 4-year regime mentioned above will only be subject to UK tax on 50% of their foreign income for the tax year 2025/26.

However, as expected, Labour plans regarding the non-doms regime are even more severe. The main differences announced in comparison with the above are:

1. Regarding the transitional rules, Labour will remove the 50% reduction in foreign income for tax year 2025/26. Therefore, if a non-dom has been living in the UK for the past 10 years, all their worldwide income and gains would be taxable in the UK without any reduction.
2. Regarding trusts and IHT, all foreign assets held in a trust would be within the scope of IHT regardless of when they were settled. This would result in a major change in wealth and tax planning, as trusts settled outside the UK before arrival (non-dom settlor) would not be outside the scope of IHT as the relevant tax point here would be the settlor’s tax residency, not domicile anymore.

Possibly after realising the severity of the above measures and trying to avoid an exodus of non-doms, Labour also announced some encouraging positive measures:

1. Exploring different ways to incentivise UK investment during the new four-year tax regime. The idea is to bring foreign income and gains into the UK, offering a beneficial tax treatment if invested here.
2.  Finding measures to encourage the remittance of income and gains to the UK after tax year 2026/27, when the 12% flat tax rate will not be applicable anymore.

Conclusion

What seems clear, regardless of who wins the election, is that the days of the non-doms regime are numbered. However, many important details remain to be determined. Labour’s plan to include all trusts in the IHT scope (depending on the settlor’s tax residency) should be carefully followed as it would be a game changer from a wealth and tax planning perspective.  For now, it brings more questions to mind, such as how the rules will apply to excluded or non-resident settlors.  

Finally, the main goal of scrapping the non-doms regime is to allegedly raise billions to be invested in public services. Nevertheless, this will only happen if non-dom individuals decide to stay in the UK and not move to other countries with very similar or more competitive tax regimes, such as Spain, Greece or Italy.

Next steps

In an election year, it’s worth noting that some of these changes could be shelved or altered depending on the outcome. Nevertheless, given the extent of the changes to the non-dom regime, it would be wise for all affected individuals to understand their future planning options as soon as possible.  For further advice, please contact our expert Wealth and Estate Planning team.