What a Labour government could hold in store for high net worth individuals is the focus of this article. The UK must hold a general election in around a year from now, and the prospect of change in government is very real.

This article, from Judith Millar of law firm BDB Pitmans, examines the proposals from the opposition Labour Party in the UK for a more “fair” tax system, including its desire to get rid of the resident non-domiciled regime (see other commentaries on  that topic here and here). Regardless of the arguments for or against what Labour wants, the party appears – at least on current opinion polls – to be on course to win the next general election, which must be held by the end of 2024. Wealth managers must therefore plan accordingly. 

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In her keynote speech at the Labour Party’s annual party conference this month, shadow chancellor Rachel Reeves vowed to "get Britain its future back." 

The speech, endorsed by the former governor of the Bank of England Mark Carney, focused on the theme of ‘rebuilding’ and achieving growth through business investment. Reeves confirmed that if Labour forms the next government its intention will be to "tax fairly and spend wisely" – although she gave away few specific details about what that might look like.  

Abolition of non-domicile tax status
The main proposals affecting high net worth individuals (HNWIs) announced at the conference, of which advance notice had already been given, were the abolition of non-domicile tax status, and a commitment to raise the stamp duty surcharge (currently 2 per cent) on overseas buyers.  

There is little doubt about the Labour view of non-doms: that the Conservatives have allowed "the wealthiest to avoid taxes, keeping loopholes open" and their intention – if the non-dom tax status is abolished – is for the extra tax generated to be channelled into the NHS. 

In truth, non-doms already make a substantial contribution to the UK economy. 2022 figures from HMRC estimated that there were 78,000 individuals falling into the non-dom categories who added (by way of income tax, CGT and National Insurance contributions) a total of at least £12.4 billion ($15.1 billion) to tax revenues. (1) But this excludes their overseas income and gains, and assets located outside the UK which are also protected against inheritance tax.  

Will these non-doms leave the UK if the regime is abolished?  And will the economy suffer if the additional revenue raised from non-doms who stay is less than the current tax paid by those who end up leaving?  

For the majority of non-doms the decision to stay in the UK is based on a multitude of factors aside from tax, including personal, business and education choices, which makes it difficult to predict the response to reform. A 2022 policy briefing by the CAGE Research Centre at Warwick University notes that past changes have not led to a mass exodus and also concludes that an unfavourable economic result is unlikely. (2) However, it is distinctly possible that internationally mobile HNWIs currently looking to establish themselves in a new jurisdiction will rule out the UK in favour of somewhere with a more attractive non-dom regime. 

Although not mentioned in Rachel Reeves’ conference speech, there have been suggestions that Labour might consider introducing new tax rules, "putting in place a system for genuinely temporary residents." (3) No detail is yet available but the expectation must be that it would apply on a very limited basis.

Business Property Relief 
For other policies that Labour might introduce with implications for HNWIs we need to look at preconference publications and interviews with Labour politicians.

In a recent Sunday Telegraph interview (4) Reeves addressed rumours about changes to capital taxation and confirmed that Labour had no plans to introduce a new wealth tax or mansion tax (i.e. specific annual levies to target wealth and valuable properties), again taking the opportunity to underline the Labour pledge to grow the economy but not through increased taxation.  

Despite Reeves’ denial that she has plans to change inheritance tax there are nevertheless persistent rumours about potential changes to valuable inheritance tax reliefs, in particular business property relief (BPR) on which families with business interests rely in order to avoid a break up of the business when it is passed to the next generation. 

Whilst restricting or removing BPR in these circumstances would seem to run counter to Labour’s recent pledge to "invest in homegrown industries in every corner of our country," business owners would be wise to take professional advice now on ways of structuring business activities as tax efficiently as possible. 

Possibly also at risk is the availability of BPR for companies listed on AIM which would impact investors with AIM investment portfolios the value of which is currently protected against an inheritance tax charge of 40 per cent.

What can individuals do now?
There are some tried and tested steps that HNW individuals might consider taking in advance of a general election to protect their wealth. Although the shadow chancellor has said she has no plans to align income tax and CGT rates (and has ruled out an increase to the top 45 per cent of income tax) there will still be merit in reviewing investments and taking advice on realising gains to crystallise CGT at the current rate of 20 per cent which is historically low.  

Since there has been a suggestion that business asset disposal relief (formerly entrepreneurs’ relief), which enables company owners to pay CGT at 10 per cent on qualifying assets, might be curtailed or abolished, any HNW individual to whom the relief might apply should hasten to explore the sale of their business with an appropriate professional.

If HNW individuals wish to benefit children or grandchildren and the younger generation is financially responsible to receive the gifts, the advice will always be to press ahead, both to set the clock running for the potentially exempt transfer regime that means that gifts drop out of account for inheritance tax purposes after seven years (with a percentage of the tax saving obtained after three years), and to secure the tax benefit in advance of any changes that may be made by a new government. 

Finally, term and whole of life insurance can offer a straightforward and flexible way to protect wealth.

As strong Conservative majorities are overturned in recent by-elections, and commentators suggesting that the main parties may be preparing for a general election as early as next May, there is every incentive for international and UK based HNWIs to review their tax affairs as soon as possible.

Footnotes: 

1 - Statistical commentary on non-domiciled taxpayers in the UK
2 - Reforming the non-dom regime: revenue estimates CAGE Policy Briefing no.38 September 2022
3 - Revealed: Full draft policy platform that could form 2024 Labour manifesto
4 - Rachel Reeves: We’ll loosen planning law to take on Macron and Biden in green jobs race

About the author

Millar specialises in UK and international trust and estate planning,  and her clients include a number of families with substantial UK and non-UK Trust interests as well as non-UK domiciled individuals who may be UK resident, or else thinking of coming to or leaving the UK, and who require advice on domicile and residence issues. Working in tandem with foreign lawyers, she is experienced in cross-border succession planning and has a particular interest in pre-nuptial agreements for clients with connections in a number of different jurisdictions.