UK's Labour Confirms Non-Dom IHT Squeeze, Says It Will Change Private Equity Tax

Tom Burroughes Group Editor London 14 June 2024

UK's Labour Confirms Non-Dom IHT Squeeze, Says It Will Change Private Equity Tax

The party reiterated its desire to end the non-dom system, and cut off the ability of such persons to shield offshore assets from inheritance tax. Private equity "carried interest" also figured in the proposals.

The Labour Party, which on opinion polling evidence is slated to win a comfortable majority in Westminster in the 4 July general election, set out in its manifesto yesterday. A number of items are likely to grab wealth managers’ attention. 

As expected, the document reiterates Labour’s desire to end the UK’s non-domiciled residency system. It also wants to change the tax treatment of private equity carried interest.

The document said ending the non-dom system will raise £5.23 billion (£6.67 billion) in the period 2028-29. That figure, it said, does not include £600 million in revenue it said would be gained from removing a non-dom “discount loophole” in 2025-26. Under UK chancellor Jeremy Hunt’s proposal to replace the non-dom system with a temporary residency one, he suggested a 50 per cent discount on the amount non-doms have to pay in tax in the first year of the new ban. Labour wants to remove that discount. 

The inheritance tax status of non-doms, so lawyers have told this publication, has been a potential deal-breaker. The manifesto gave them no cause for cheer: “We will end the use of offshore trusts to avoid inheritance tax so that everyone who makes their home here in the UK pays their taxes here.”

Tax battles
The ruling Conservatives, trying to retain power after being in office for 14 years, have promised to raise the tax-free pension allowance every year, and take 2 pence off National Insurance (aka payroll tax) by April 2027. In the long term, the party said it wants to completely abolish NI. The Conservatives, like Labour, have pledged to end the non-dom system. Instead, they would bring in a temporary residency system under which those living outside the UK for at least 10 years could avoid paying tax on foreign-sourced income and gains for four years.

The Conservatives are in trouble, based on polling evidence. The Reform Party, which on certain issues such as immigration positions itself to the Right of the Tories, has an opinion poll level of 14 per cent, with the Conservatives at 22 per cent and Labour way ahead at 43 per cent (source: BBC poll tracker). The Liberal Democrats are at 10 per cent, and the Greens at 6 per cent. Given the first-past-the-post electoral system in the UK (unlike under proportional representation) a split in non-Labour voting intentions gives Labour a big majority in the House of Commons.

With complaints, rightly or wrongly, about wealth inequality, lack of affordable housing, crime and sluggish growth concerning voters, the Conservatives face a battle to persuade the electorate that they deserve yet another shot at office. Labour, however, has been under pressure to clarify its stance on tax and spending at a time when public debt is high and taxes at their highest level, in proportionate terms, since the early 1950s. Labour has also recovered after being heavily defeated in 2019, when it was led by hard-Left figure Jeremy Corbyn, and when Brexit was a dominant issue.

Other tax changes
On private equity, the manifesto pledges to raise £565 million on closing the carried interest “loophole” on private equity, in which such interest currently attracts capital gains tax, not income tax. 

Elsewhere, Labour said it will raise £1.51 billion by imposing value added tax on private schools. Opponents say this will force some schools to close or push up fees, adding to demands on the state system, and that £1.5 billion is a small figure in the context of overall education spending. 

The manifesto also said it will cap UK corporation tax at its 25 per cent current level for the duration of the entire parliament – saying this is also the lowest such rate in the Group of Seven industrialised nations. It added that “we will act if tax changes in other countries pose a risk to UK competitiveness” – leaving open the suggestion that the rate might fall. 

“We will retain a permanent full expensing system for capital investment and the annual investment allowance for small business. And we will give firms greater clarity on what qualifies for allowances to improve business investment decisions,” the document said. 

Sir Keir Starmer, Labour leader, said the party has ruled out rises to income tax, National Insurance and VAT for households.

For overseas owners of UK property, Labour plans a 1 per cent hike to the higher rate of stamp duty land tax on purchases of residential property by non-UK residents to raise £40 million. Currently non-resident buyers face a 2 per cent surcharge on UK stamp duty rates.

Within the private client and wealth sectors, reactions to the Labour plans were mixed.

"Virtually all politicians vow to tackle tax avoidance, but Starmer neglects to mention specific areas of tax the Conservatives have not dealt with during their term in office, which makes this seem a glib throwaway,” Miles Dean, partner and head of international tax at Andersen, said. "The non-dom regime is being significantly overhauled per the Conservative Budget 2024 and we have already seen non-doms leaving the UK in droves, which was perhaps inevitable given that Labour is so far ahead in the polls.”

"Labour's plans to remove the remaining benefits of the non-dom regime left in by the Conservatives will almost certainly cause many more non-doms to leave the UK. It is doubtful that the changes to the non-dom regime will have the impact Labour suggest, as the number of remaining non-doms will fall dramatically as they can so easily relocate to friendlier jurisdictions,” Dean said.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “For anyone who sends their child to private school, this will be another challenge on top of runaway fee rises in recent years. However, anyone tempted to consider one of the schemes that are claiming to get around VAT should think twice. Rules are highly likely to include measures designed to catch these schemes out, so you could end up wasting money, or stretching yourself to pay early, and facing the tax charge anyway.”

“Starmer made it clear that nothing in the manifesto will need additional tax rises, but Labour has not ruled out changes to capital gains tax. At this stage, it’s difficult to know exactly what these changes might be, or whether they would be needed, but for investors with holdings outside tax wrappers, there could be an extra cost. Labour said it is advocating for wealth creation, so it will have to tread carefully on CGT if it wants to ensure the right incentives are in place to create this wealth,” Coles said.

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