Wed Sep 11
Labour’s proposed changes, the details of which should be available on 30th October, Budget day, will apply from 6th April 2025, which means that given the next General Election must be by July 2029, Labour hope to raise £5.2bn in four tax years.
Summary
In short, the Chancellor fails Colbert’s famous test namely, “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”
We would be very surprised, for the reasons we set out below, if the Chancellor achieves her target tax collection from non doms. If you need advice in this area, whether for offshore trusts or GROBs, please contact the author.
Analysis
Non doms currently benefit from no taxation of
- Unremitted foreign income and gains (FIG)
- No IHT on foreign assets
- Similar benefits for offshore trusts settled by them. UK resident beneficiaries of offshore trusts settled by others are already taxable on a receipts basis.
Recent reports suggest that a significant proportion of the 74,000 non doms (as reported by HMRC in July 2024) have already left the UK or are planning to do so. Clearly if you are a non dom and have significant offshore income, including income in trusts or companies which, if you exercised every right you have you could get hold of for your benefit, then there is good reason to leave the UK now.
Capital gains
Where capital gains are the issue, people are already planning to defer disposals of significant assets until they have left the UK (which given our current rules and temporary non-residence rules is no mean feat).
Taxes on death
But the main impetus seems to be the Government’s plans for inheritance tax. Given that any assets given away to children or grandchildren more than 7 years before death avoid IHT altogether, IHT is arguably a voluntary tax! After all, both Labour and the Liberal Democrats have concerns about wealth being hoarded by boomers and Generation X, so why not assuage their concerns and give it all away.
A billionaire could give away £980m and live comfortably off the remaining £20m, including meeting future healthcare needs, always an issue for the elder person. IHT risk reduced from £400m to £8m.
But giving assets away is not that easy because of our rules on gifts with reservation of benefit (GROB). For example, our billionaire gives his UK mansion to his children, but leaves his art and library collections behind so he can see them if and when he visits. That is a reserved benefit of part of the mansion.
There is the question of how HMRC would discover this, but if they have reasonable grounds they can assert that there is a GROB, it is then for the taxpayer to prove otherwise, which can be difficult if your key witness is the deceased.
Also any attempt to retain control over assets will bring them back within the deceased’s estate
Offshore trusts and IHT
Any trusts of which our non dom is the settlor are likely to be within the scope of UK IHT, but hopefully on the current basis of the ten year charge rather than in his death estate.
It is however, the risk of IHT, which seems to be the last straw for many.
So how likely is it that £5.2bn will be collected?
First non doms already pay £8.9bn p.a. in taxes, mainly income tax and CGT (see table 2 etc here).
For 2023 the estimated tax to be collected from non doms is £6.2bn of income tax, £384m of CGT and a surprising £2.3bn of national insurance which indicates salaries of £17.78bn (using only the employer’s contributions), which more than accounts for the income tax paid.
But if say 30% of non doms leave the UK, 23,700 individuals, who are mobile in where they live, (they have already moved at least once to live in the UK), then that could result in a £2.67bn deficit in revenues in 2025/26 (assuming rates remain the same). Add that up over the life of the next Parliament and one could be looking at a £10bn shortfall which means the Government has to raise £15.2bn from the remaining 55,300 non doms.
Would IHT close the gap? It would if they all (i) had net assets of £10m each and (ii) died in the next 5 years, but that is extremely unlikely.
Offshore trusts settled by the non dom settlors who remain in the UK would only come in to charge within the next five years under the ten tear charge regime, if created in April in a year ending in a 5 through to July in years ending with a 9. In theory 47 months out of 120 months in a ten year period, but of course it is not a linear spread. Many trusts were established in 2017 prior to the last lot of non dom changes, and some in 2007 for the changes to residence rules before then. As 7 falls between 5 and 9, then maybe the Government will get lucky but at a maximum effective rate of a little over 3%, one would need trusts with aggregate net assets of £506bn to be taxed! To collect the initially promised £5.2bn would require trust values of £173bn to be taxed in that period.
But the collective threat of £15.2bn of value going from such trusts would be enough, I am sure, for settlors resident in the UK to move to Italy, Dubai, Switzerland or elsewhere. Individually and given a low rate of tax, maybe some would stay, but note IHT is rarely creditable against other taxes abroad.
Our assumptions
No repeal of the requirement for a general election after five years1 or ban of general elections or opposition parties. If the Government pass a law saying that the current Parliament lasts until for ten, or one thousand years, then that would be a serious moving of the goal posts.
No return to CTT
Inheritance tax replaced capital transfer tax (CTT) in 1984 although it built on the wording and concepts of CTT. CTT had no seven year rule. CTT taxed gifts made on a rolling ten year cycle, with death being the final gift of all.
Will it return? I think not.
Why? First it was a nightmare to compute and monitor. Second, and more importantly I think that a global wealth tax is more likely (for those tax nerds who advise very large global businesses, think PILLAR 2 for individuals), where individuals and their related trusts and entities are aggregated, and tax paid on say 2% of that value. The tax would be allocated to the countries holding those assets, on what will no doubt be a very complicated formula apportionment basis. Ireland has already started to benefit hugely from PILLAR 2’s 15% minimum corporation tax; so much so it is increasing the capacity of its own sovereign wealth fund.
Change of tax rates
The Government could increase tax rates for everyone including non doms, but given non doms are more mobile than most of us, it could mean less tax collected.
References
- Dissolution and Calling of Parliament Act 2022, section 4.
