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Economic & political implications of tax reform in an election year.

Updated: Mar 19

 



 


February 2024 Blog-compressed
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Non-dom status and IHT are expected to take centre stage in politics, at least in the context of The City.


If the uncertainty surrounding the pre-election period characterised the British tax scene in 2023, then the outcome of the election will define 2024. Is it true that everyone hopes so?

The general election won't take place until "the second half of the year," according to Rishi Sunak. However, tax experts and their ultrahigh net worth customers have already started to prepare for both scenarios financially.


Given the uncertainty surrounding the non-dom regimes and inheritance taxes (IHT) futures, tax professionals are recommending taking preventative measures.

Plans for "fire escape" are being created, other legal jurisdictions are being examined, and tax relief programmes are being talked about.


The focus on these two contentious tax battlegrounds will only intensify as the election date becomes more certain and manifestos are prepared. Tax advisors have a responsibility to make sure their customers are prepared for the future.


Labour, remittance basis, and the non-dom regime: Should Labour seize control of tax policy in 2024, it has promised to change the non-dom regime, which has alarmed the 54,000 UK citizens who presently benefit from the programme. The planning for this event began months ago with the advisers.


Suppose Sir Keir Starmer wins the next general election. In that case, the Labour Party has made great efforts to reassure several groups of people, including the middle classes, businesses, and even individuals who would be subject to a wealth tax, to mention just three. However, certain individuals have not been treated equally: the approximately 54,300 non-domestic residents of the UK.


In April of last year, Labour declared that it would replace the UK's non-dom regime with a shorter-duration plan for foreign-domiciled UK tax residents, in response to a media uproar over Rishi Sunak's wife Akshata Murty's non-dom status. Shadow chancellor Rachel Reeves told the BBC at the time, "With Labour, people who make the UK their home will contribute to this country by paying tax on their global income."


The "remittance basis," which states that no tax is due on overseas income if it is not brought into the UK, now benefits non-doms. (The arrangement may include an annual fee of £30,000 or £60,000, dependent on the length of time a non-dom has resided in the UK.) However, the Wealth Tax Commission estimates that doing away with the current system may add £3.6 billion to the Treasury.


In the last fifteen years, HMRC's regulations have already gotten less lenient for non-doms. Following changes in 2017, individuals who have been in the UK for 15 of the previous 20 years are now considered to be "deemed domiciled," meaning they will be required to pay UK tax on their worldwide income just like other taxpayers with a UK domicile.


Not a surprise, there are fewer and fewer non-doms. 137,000 taxpayers in the UK used the non-dom rules in 2008.


In 2018, the number dropped to less than 80,000. Despite this, in 2022 the amount of revenue collected from non-doms and considered domiciles reached a record £12.4 billion.

"Fire escape plans": New opportunities for residency and taxation but now, many non-doms are contemplating their tax-planning alternatives or even deciding to "exit" UK Plc entirely if Labour wins the general election. Rich customers are being helped by some tax advisors to create "fire escape plans," which are emergency evacuation plans that give HNWs who travel abroad new alternatives for citizenship and residency and access to more alluring tax regimes.


After being enticed by the UK's culture, legal system, business climate, advising services, and top-notch educational institutions, many foreign HNWs are now concerned about the potential costs of staying put. London's appeal as a family destination makes it a simple sell at the breakfast table.


However, Starmer has since "nailed his colours to the mast by pursuing Sunak's wife." Many of these same non-doms are inquiring as to what would happen if they were suddenly obliged to pay UK taxes on their money earned abroad.


Millions might be involved, especially for foreign founders who might be liable to UK capital gains tax in the case of a liquidity event or if the inheritance tax net were expanded to include more assets than previously. Even if living in London has been fantastic, it appears that non-doms might not be infatuated enough to give it a 40% hit.


Non-doms are wishing to think about their alternatives for residency; it makes sense to be able to relocate quickly and establish residency outside of the UK.


International UHNWs frequently contact us with questions regarding potential relocation locations for the wealthy. Some are considering Switzerland and Italy. Under Italy's "Special Tax Regime," foreigners can pay a fixed annual rate of €100,000 on their overseas income. That is the annual amount that certain clients pay EY, Deloitte, KPMG, and PwC, the Big Four accounting companies.


There has been a sharp reduction in the number of non- dom taxpayers in the UK because of HMRC rule changes in 2017. These changes limited the amount of time non-doms may claim the remittance basis.


Certain regimes have unique characteristics that will influence how desirable certain nations are to prospective immigrants.


While citizens of Italy are permitted to work under the [flat fee] regime, residents of Switzerland are also permitted to pay a flat charge on their overseas earnings; however, if they do so, they will not be permitted to work in Switzerland.


Travelling to the Amalfi Coast: The Italian regulations, which were implemented in 2017, permit the participation of supplementary family members upon payment of €25,000 apiece, and the programme has a maximum 15-year duration. Reports where the policy was used by 549 and 1,339 persons in 2020 and 2021, respectively.


Because of how fragile the Italian political system is, there was a lot of scepticism when it was originally introduced. Nonetheless, their non-dom lifestyle has endured for several years and has grown in popularity as more individuals decide to jump and move. It appears to be more credible than it has ever been. The scheme's sustainability in the event of "an influx" of foreign UHNWs from the UK, however, is still up in the air.


Before daydreaming of pastel-coloured mansions on the Amalfi coast, the foreign community would want to consider whether they are legally allowed to live in Italy. They might require an Italian investor visa or a passport from an EU nation to go there for longer than 90 days after Brexit. A two-year visa can be acquired in several ways, including by investing €1 million in a charitable endeavour or €250,000 in a start-up, according to Italy's Ministry of Enterprises and Made in Italy (MISE).


Many affluent families are searching to determine if any of their grandparents were born in Europe. If so, this would allow them to apply for the appropriate passport and eventually relocate without needing an investment visa.


If UHNWs wanted to investigate residence alternatives in other sunny European locales, some of the same difficulties would apply. 2009 saw the implementation of Portugal's non-habitual residence regime (NHR), which exempts foreign nationals holding the status from paying extra Portuguese tax on their overseas earnings. We helped a client obtain a Golden Visa to Portugal last year because they were not citizens of the European Union yet desired the ability to choose their preferred living arrangements among the member nations.


However, in July 2023, the nation substantially tightened its Golden Visa policy. There is a limited amount of time left for those considering other nations because of internal political pressures and modifications to the requirements, which have historically been far more lenient.


More durable than a golden visa: Obtaining citizenship, as opposed to mere residency, offers a more durable alternative. It may take up to 28 months for a Maltese citizenship application to be approved.


You're looking at three years for Austria. You will also need to jump through a lot of hoops and shake hands a lot in addition to making a sizable upfront donation.


While Europe is one of the most popular locations for UK non-dom travellers, there are other choices as well. Entrepreneurs who have commercial ties to the United States may choose to relocate to North America or somewhere close by, like Bermuda. Some, like Singapore, Australia, or New Zealand, go a bit farther. Living in safe, opulent affluence without the freedom is pointless:


Setting aside the practical aspects of relocation, lifestyle factors must be weighed against any potential tax savings. It normally doesn't work if you're living on an island somewhere with a very low standard of living. Your lover will grow bored and move back after six months. It makes no sense to be incredibly wealthy and then to essentially live in a golden cage.

Monaco frequently draws "empty nesters," those free of parenting responsibilities: If they have children enrolled in school, it is the sole reason they already spend more than six months in the UK. If they watch their days, Anglophiles might still come for the Chelsea Flower Show or important Premier League games.


Some tax advisers do not predict a "full-scale" flight of affluent individuals from the UK due to all the options accessible to HNWs, which may have occurred if Jeremy Corbyn had taken the Number 10 seat in 2019. Nonetheless, those who plan to stay will continue to exercise prudence.


A lot of non-doms might now think about "parking" a portion of their wealth "outside the UK, outside their name" by utilising tools like excluded property trusts. A few clients have voiced their concerns that Labour would consider imposing a distinct tax on trusts and tightening the tax laws around trusts.


There is, of course, a hint of crystal-ball gazing here. The UK must exercise caution so as not to destroy the golden goose. And one assumes that advice on that will be given to the Labour politicians.


According to calculations made by the Wealth Tax Commission, the Treasury might receive an additional £3.6 billion if the scheme is discontinued. According to a recent Withers assessment, the non-dom regime should be reformed rather than eliminated.


Many people are hopeful Labour would adopt a reforming stance. Maybe a little like the Beckham Law, also known as the Spanish regime. This means that overseas profits, even if they are remitted to the UK, are free from taxation for a period of, say, five years following the date of entry for new immigrants. It's an international tax after that.


Get ready for a post-election exodus: A move this significant would inevitably lead to some sort of exodus. While the exodus of non-doms might not happen right away, the Withers report pointed out that it might eventually get to the stage where there was a net outflow of UHNWs.


Throughout the past two to three years, UHNW non-dom have been getting ready to leave the UK. To retain their standard of living and minimise or completely avoid paying taxes, a growing number of non-doms who do not wish to return to their native countries—Russia, Ukraine, Saudi Arabia, China, or India—are seeking residency privileges in other nations.

Options include tax-free locations like Monaco or the United Arab Emirates; fixed-tax jurisdictions like Italy, Switzerland, or Greece; remittance jurisdictions like Ireland or Malta; or locations that let them plan to reduce or manage their tax liability, like the United States, Canada, Australia, or Singapore.


The big hope of the Conservatives is an inheritance tax. Analysis reveals that families have already paid an additional £1.5 billion in death charges because of Jeremy Hunt's "stealth" inheritance tax raid. Families would have saved £1.47 billion if the £325,000 tax credit had increased annually to keep up with inflation starting in 2021.


Mr. Hunt stated that the non-dom tax regime will be phased down as part of the March 2024 Budget. Those who relocate to the UK after April 2025 will not be required to pay taxes on their foreign earnings for the first four years of their residency. If they stay in the UK after that time, they will be subject to the same taxes as everyone else.


A two-year transition period will be granted to those who now have nom-dom status, during which time they will be urged to transfer their foreign assets into the UK system. The chancellor claimed that by 2028–2029, eliminating the non-dom status will generate £2.7 billion annually.


The next course of action for non-doms will be determined by the specifics of Labour's policy, which are still pending. For the time being, we are aware that Labour will eliminate the status and implement a new tax plan for short-term UK residents.


The United Kingdom must exercise extreme caution in its interactions with the global community, especially if it hopes to draw in foreign investment. A mess of political wrangling has resulted from the whole bogus Brexit debacle, intending to cushion the ensuing dire economic forecast. Later this year, we'll be producing a blog post about the UK's membership in the EU. Keep checking back!


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Please note any content contained in this document is informal and given purely as guidance unless otherwise explicitly stated. Our views and thoughts are our own. Any advice attached is not a formal opinion, and neither Juszt Capital nor the author can accept any responsibility to any third party who may seek to rely upon it, as a whole or any part as such. Formal advice, if required, should be sought through the relevant professionals & bodies, including but not limited to, lawyers, tax advisers, accountants, and financial advisers .

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