From landmark reforms to protective strategies, we are taking a deep dive into Labour's manifesto and the impact of potential tax policy changes for high-net-worth individuals (HNWIs) in the UK.
Download PDF VersionFrom landmark reforms to protective strategies, we are taking a deep dive into Labour's manifesto and the impact of potential tax policy changes for high-net-worth individuals (HNWIs). In our Q&A with international tax expert, Gillian Everall, Managing Director at Everfair Tax, she shares what steps HNWIs should take to safeguard their assets.
A distinct warning siren came at the Budget in March this year when Chancellor Jeremy Hunt announced the current Government’s proposals for some significant changes to the way non-UK domiciled individuals are taxed.
This suggested completely doing away with the concept of domicile and moving to a residence-based system to establish how non-UK income and gains should be treated for UK tax purposes. It was referred to by a number of commentators as the most wide-reaching set of proposals since the changes in 2008.
Labour have however indicated that they want to go even further, committing to removing Inheritance Tax (IHT) benefits currently available to non-UK domiciled individuals. They also plan to make non-UK assets held in offshore trusts previously set up by non-UK domiciled individuals subject to the 10 year charge at up to 6% and exit charges on distributions which currently only apply to trusts created by UK domiciled persons. There is also promised reform of the business property relief regime which provides complete IHT exemption currently for assets used in a trading business, including overseas.
They have also suggested they will remove not just the IHT benefits but income and capital gains tax benefits that offshore trust structures can provide even when the person who created the structure becomes deemed UK domiciled.
This is as well as not implementing a concession suggested by the Conservatives under which some individuals would have been able to pay tax on just 50% of their non-UK income and gains for 2025/26.
In terms of cons, it is highly likely that domicile as a concept will no longer be relevant to determining the UK tax treatment of non-UK income and gains from April 2025. Except for those who have only been resident in the UK for a short time, whether up to 4 years or up to 10 years as in Italy, all other international individuals will have to pay tax on a worldwide basis from this point if they remain resident in the UK.
It can be expected that for those resident beyond 10 years, all non-UK assets will be subject to IHT and excluded property status will be difficult to achieve
On the plus side Labour have said they will keep the suggested 12% concessionary rate on remittances made in 2025/26 and 2026/27 which may provide some significant opportunities for longer term UK resident HNWIs. There will also thankfully be an element of certainty provided on tax rates going forward as Labour have committed to not increasing rates of income tax.
Right now, the most common view seems to be that there will not be a Budget rushed through too quickly post-election but there may be a more detailed set of proposals released in November when we usually have the Autumn Statement. It is still a little bit of crystal ball gazing, but we certainly would not recommend making plans on the basis that nothing will change until April 2025!
It is to be expected that the non-dom reform will already be widely discussed and be one of the first orders of business when Labour do hold their first Budget whether in Autumn 2024 or Spring 2025. IHT reform, especially with respect to offshore assets of longer term resident international individuals and business property relief, is also likely to be high on the agenda
Given the high level of scrutiny around how Labour will fund some of their bolder manifesto pledges, we can also expect investment in HMRC’s ability to deal with perceived tax fraud especially where there is an offshore connection to be announced quickly. Apparently, the Chief Executive of HMRC has said that for every £1 invested by the Government in HMRC’s compliance activity there will be an additional £9 in additional tax revenue secured.
In terms of asset protection, it may now be necessary to consider a wider range of options other than trusts, including family investment companies, and family limited partnerships, to create the right structure for each family’s needs and circumstances.
Trusts still have strong asset protection benefits, provide elements of control and provide assurances on funding for beneficiaries outside of probate and other legal processes on the death of the person putting them in place. However, from April 2025 they would provide limited income tax, capital gains tax or IHT benefits. They would potentially also be subject to immediate IHT at 20% on the value of anything transferred to the trust post April 2025 along with IHT at up to 6% on the value of the trust every 10 years and when capital is distributed from the trust. There are also annual running costs where professional trustees are used which can vary depending on how actively the trust assets require management.
Family Limited Liability Companies (FLCs) can also provide asset protection benefits and significant flexibility over how and when wealth should be provided to other family members through the rights assigned to any shares they receive and distribution policy. They can provide IHT protection on the future growth in value of the assets held within them and in the right circumstances can result in income and capital gains tax benefits if dividend distributions are not needed and any funds from asset sales are reinvested within the structure. As you would expect there will be running costs of the company in terms of the compliance obligations and the cost of professional directors. Where funds are needed there is a risk of double taxation as there may be tax at both the company and personal level. There can also be challenges from a tax perspective on transferring assets other than cash to the company.
With respect to Family Limited Partnerships (FLPs), again these can provide asset protection and allow for an element of control through the use of a general partner and the interest retained in the partnership.
They allow for estate planning by the transfer of partnership interests over time using available exclusions and allowances and the seven year potentially exempt transfer rules. They also allow for the spreading of the income and capital gains tax burden and the use of all personal allowances and capital gains tax exemptions. Again, there are administrative costs of running a partnership in terms of meeting annual compliance requirements. The estate tax benefits are not immediate but the loss of rights to income and gains is, so anyone creating an FLP should be sure that they are happy for that to be the case.
It may also make sense to consider whether an FLP and FLC may be an appropriate alternative and what assets you will place within such a structure.
It is important to take advice and review any structures you currently have so that you are informed on potential issues, we can discuss potential options and be ready to take action when you are happy to do so.
For those currently benefitting from the remittance basis it may also be worth reviewing whether the receipt of income or the sale of assets should be brought forward to before 6 April 2025.
This is a difficult one given the current uncertainty. I would definitely review the capital gains tax position on my assets and see if this could be improved post April 2025. I would also review my inheritance tax exposure and see what my options are to reduce it.
As mentioned above, if I was currently still claiming the remittance basis, I would consider any transactions it would make sense to ensure take place before April 2025.
Looking beyond 2025, what trends or future changes should HNWIs, and their advisors be aware of in terms of tax planning and asset protection under a Labour government?
Under a Labour Government it is likely that we can expect an increasing drive to ensure that long term UK residents pay tax on a worldwide basis both in terms of income and capital gains tax. This will be combined with funding for an increased drive from HMRC to close the tax gap, with a greater focus on offshore matters.
As we have explored Labour's proposed tax reforms, it's clear that significant changes lie ahead for high-net-worth individuals in the UK.
These reforms demand proactive financial planning and a deep understanding of the revised tax landscape.
If you are navigating these complexities, we are here to help. Contact us today to ensure your financial strategies align with these changes and secure a robust plan for your wealth management needs.
CEO at Cavendish Family Office
