16 July 2024

At last, we can stop prefixing everything we say with “if Labour win the General Election”.

Now that we know who will be making changes to the UK tax landscape, what will that landscape look like?

At the time of writing, everything is conjecture.  We have comments from Labour following the Spring Budget (see our article of 23^rd May) and we have the Labour Party manifesto. We therefore have some idea of what is coming, but despite what you might have heard, we do not know exactly what and we do not know when.  There are some changes which seem very likely, some which are not unlikely and some which are “possible”. 

This leaves both those wanting advice and those wanting to give advice in somewhat of a quandary.  Once we find out what changes are coming, it may be too late to do anything about it.  Some are therefore looking at the “very likely”, at the very least, and taking precautionary measures.  In the following paragraphs, I mention a few of these and some steps that may be worth considering – but it must be emphasised that great care needs to be taken, in particular to avoid taking steps which cannot be undone, and steps which may be suitable for one person may not necessarily be appropriate for another.

Capital Gains Tax (CGT)

Before the election, Labour showed reluctance to confirm that they would not increase CGT rates if they won. A likely outcome now is that CGT rates will rise, potentially affecting higher and additional rate taxpayers, who could see their CGT rate jump to 40% or even 45%. This would apply to all types of gains, including residential property and carried interest. There would then be little difference for carried interest owners if they are taxed at income tax rates rather than CGT rates (a change which Labour have said they want to implement). Also, beneficiaries of offshore trusts should be particularly cautious, as their CGT rates on payments received from such trusts can be up to 32% and this could increase to 64% or more if CGT rates rise to at least 40%.

Action Points:

1. Crystallise gains now: Trigger a CGT charge on gains to benefit from current rates. It may be possible to achieve this without losing control over the assets in question.
2. Distribute capital from offshore trusts: Ensure capital gains from offshore trusts become taxable at present rates.
3. Become non-UK resident before crystallising gains: Avoid CGT by leaving the UK, though this requires staying away for over five years.
4. Donate to charity: Where CGT cannot be easily managed, gifts to charity typically avoid CGT charges, making it beneficial to donate assets standing at a gain – there may be income tax advantages as well.

UK Non-Dom Regime

Changes to the UK non-dom regime are expected, likely providing beneficial tax treatment for those who have been non-UK resident for a significant period before moving to the UK.

The tricky concept of “domicile” is expected to be replaced by “years of tax residence” as a connecting factor for UK taxation. Those meeting the new criteria could receive special tax treatment for non-UK income and gains, possibly for longer than the four-year period proposed by the Tories in March.

Additionally, long-term UK residents will find their worldwide estate (not just their UK assets) falls under inheritance tax (IHT) while UK resident and until they have been non-UK resident again for an extended period – maybe up to 10 years of non-residence.

Action Points:

1. Wait and bring funds to the UK during the transitional period: Benefiting from the expected much-reduced tax rate for funds brought to the UK.
2. Consider life insurance: Mitigate IHT exposure with life insurance, seeking advice from qualified specialists. 
3. Become non-UK resident: Avoid UK taxation on substantial non-UK income/gains by ceasing UK residence status. Also, avoid coming within scope of IHT by leaving the UK before spending the requisite number of years in the UK.

Offshore Trusts

Labour may withdraw the protections offered by the “protected settlements” regime for offshore trusts, especially for long-term UK residents who are non-UK domiciled. This change would result in settlors being taxed on their trust’s foreign income and capital gains, unless they qualify for the new non-dom regime mentioned above.

Action Points:

1. Settlor becomes non-UK resident: The settlor would cease to be taxed in the UK on foreign income and gains.
2. Avoid income/gains arising in the trust: Use assets or investment vehicles that produce no or less income and capital gains each year.
3. Exclude the settlor (and others) from the trust: Avoid direct taxation on the settlor by excluding them from the trust.  This can work for income tax, but less commonly for CGT.
4. Consider bringing the trust onshore: If taxation is inevitable, it may be beneficial to bring the trust onshore by appointing UK resident trustees.

Excluded Property Trusts (EPT) and Inheritance Tax (IHT)

Excluded property trusts (EPTs) are trusts which are outside the scope of IHT, having been established by non-UK domiciled individuals and holding non-UK assets. Labour may change this so that trusts fall into what is known as the “relevant property regime” if the settlor becomes a long-term UK resident – it is certainly not a given that this will happen to pre-existing trusts. This regime includes 6% IHT charges on the trust fund at each 10-year anniversary of the trust and pro-rated charges on distributions of capital.  Falling into this this regime will also cause the settlor to be treated as owning the trust’s assets for their own IHT purposes (unless the settlor is excluded from the trust).

Action Points:

1. Exclude the settlor: Prevent the trust fund from being subject to IHT as part of the settlor’s estate.
2. Wind up the trust: Avoids the ongoing “relevant property regime” charges, but the assets will then be in the estate of the recipient.  Care needs to be taken to avoid triggering income tax/CGT in doing this, especially if the recipient is UK resident.
3. Combine exclusion and winding up: Depending on the settlor’s needs, a combination of exclusion and winding up may be optimal.
4. Have the settlor instead benefit from a different trust whose settlor is non-UK resident: An option in some families where there is substantial wealth in the hands of more than one individual. There are some particular anti-avoidance rules to consider here, though.
5. Establish a new EPT now: Create a new EPT before the announcement of new rules in the hope it remains IHT-efficient under the new regime.  A slightly riskier approach, but one that we have seen, even though it may prove to be ineffective.
6. Prepare for establishing a new EPT: Do everything required to transfer assets into a new EPT but leave documentation undated until the new rules are announced, in the hope that it will be effective and that there will be time to finalise it before the rules actually change.

Stamp Duty Land Tax (SDLT)

Labour intends to increase the SDLT surcharge for non-UK residents by 1%, adding to the existing 2% surcharge in some parts of the UK. The test for being a “non-UK resident” differs from the ordinary statutory residence test, working for the benefit of those who are not resident but moving to the UK shortly after the purchase – in some case they will be able to reclaim the surcharge later.

Action Points:

1. Bring forward property purchases: Non-UK residents considering buying residential property should do so sooner to avoid increased SDLT charges.
2. Consider CGT implications: If buying a property requires selling a UK property, doing so now may also result in gains being taxed at the present CGT rates, before they increase.

Overall, it is worth considering precautionary measures now, given the potential for significant tax changes under the new Labour government.  The challenge is to avoid doing anything that cannot easily be undone and not to feel forced into doing something which one does not want to do (such as leaving the UK altogether).  That said, for some, the conclusion will inevitably be that it is time to get advice on how to stop being UK resident.

This note is for general information only and is not intended to be advice for any specific situation.