Labour's non-dom update

While Rachel Reeves was busy laying the blame for the parlous state of the UK's finances at Jeremy Hunt's door in the House of Commons today, the Treasury released three papers giving more details on the key tax policies from the Labour manifesto, which had not been expected until the Budget (now confirmed for 30 October 2024).

Taxation of non-doms

FIG regime

The Government has said that it largely intends to follow the proposals set out by Jeremy Hunt this March and will replace the remittance basis of taxation with a new 'foreign income and gains' (FIG) regime from 6 April 2025.  Further details on this proposal can be found here.

Settlor interested trusts

The Government has also confirmed that the current 'protected settlement' regime that applies to settlor interested trusts established by non-doms will also be removed from 6 April 2025 and income and gains of those trusts will become taxable on settlors from that date.

In a welcome announcement, the Government says that it will review the anti-avoidance legislation that will apply to such settlements to remove any ambiguity and uncertainty (of which there is much), but any changes are unlikely to be introduced before 6 April 2026, leaving non-doms to face at least a year of further ambiguity and uncertainty until those rules catch-up with the FIG regime. 

Transitional arrangements 

The Government confirms that they will not introduce the one-year 50% reduction in income tax on foreign income for non-doms exiting the remittance basis that they had objected to in opposition.

Jeremy Hunt's Temporary Repatriation Facility will be introduced to encourage the remittance of income and gains that arose before 6 April 2025, at a rate and for a period to be determined.  Intriguingly, the government says it is exploring ways to expand the scope of this mechanism to income and gains currently held within offshore structures, perhaps opening up an avenue for former non-doms to unlock assets currently trapped in inefficient structures to use for investment in the UK.

Inheritance tax

The Government will also press ahead with the Conservative proposal to reform IHT so that it becomes a residence-based test, rather than one linked to domicile, with individuals who have been resident in the UK for 10 years being subject to IHT while they remain resident and for a further 10 years after they leave the UK.

This reform will also be extended to bring settlor interested trusts within the scope of IHT, although the manner in which this will be done remains subject to consultation and the possibility of transitional arrangements to allow for the 'appropriate adjustment' of existing arrangements.

Carried interest

The Labour Manifesto had committed the party to 'closing the carried interest loophole'.  This apparently cast iron guarantee to tax private equity managers to income tax on their carried interest in the funds they manage, which always sat incongruously with a desire to stimulate growth in the UK, has morphed into a call for evidence.  While the Government assures us (repeatedly) that they are 'committed to taking action', they will also 'seek to protect the UK’s position as a world-leading asset management hub'.

How these two apparently contradictory propositions will be resolved will become clearer after the Budget.

School fees

Parents hoping to circumvent the application of VAT to school fees have had mixed blessings in today's announcement.  Firstly, it is confirmed that there will be no change in the VAT treatment of school fees until 1 January 2025.  

However, they have also confirmed that anti-forestalling legislation will apply so that 'Any fees paid from 29 July 2024 pertaining to the term starting in January 2025 onwards will be subject to VAT.'  

Any parents hoping to avoid the application of the VAT charge by paying their school fees in advance, but who have not already done so, will be disappointed to have missed that opportunity, but relieved to have one more term before their fees are increased.

While these announcements bring some clarity to a very uncertain situation for non-doms, PE managers and parents (including many who are all three), the lack of a more wide-ranging consultation on how to attract wealth creators and entrepreneurs to the UK is a missed opportunity.

Further analysis of the changes their implications can be found here.