July Newsletter

It seems clear that new UK Chancellor Rachel Reeves is preparing the ground for tax rises in her autumn budget as the government grapples with an estimated £20 billion of unfunded spending in the UK’s public finances. The Budget, which will take place on 30 October 2024,  will be the first Labour Budget for 14 years.

The Labour party has repeatedly insisted that it will “not increase taxes on working people”, and said that National Insurance, income tax, VAT and corporation tax – the largest revenue raisers – would not be raised. But the party has offered no such assurances over capital gains tax (CGT), inheritance tax (IHT) and existing tax reliefs, and is committed to the abolition of the remittance basis, a tax exemption limited to individuals with “non-dom” status.

The most obvious change would be to align the tax rates on capital gains with income tax rates, a significant rise. If Labour does decide to increase CGT rates, it’s likely to be done at short notice to prevent pre-emptive disposals. The expectation is that the likely increases in the rates of CGT may well be effective from announcement on Budget Day.

The only official statement in Labour’s manifesto about IHT is that it will “end the use of offshore trusts to avoid inheritance tax”. But the proposed changes for non-doms and to offshore trusts are significant and may require a substantial rewrite of IHT legislation. This could provide an opportunity for further reforms.

The Labour government published a policy document on 29 July 2024 (https://www.gov.uk/government/publications/2024-non-uk-domiciled-individuals-policy summary/changes-to-the-taxation-of-non-uk-domiciled-individuals) in which it re-affirmed its commitment to abolishing excluded property trusts (EPTs); however, it recognises that EPTs established under the current rules will be “appropriately adjusted” under the new regime, with transitional arrangements for “affected settlors”. At present no draft legislation has been published. The policy document indicates that draft legislation will be released on Budget Day.

The Labour government also confirmed that the new 4-year foreign income and gains (FIG) regime will replace the remittance basis from 6 April 2025; it is essentially implementing the Conservative government’s proposal, but with fewer transitional reliefs being tabled (Labour regards these as loopholes).

Labour will also plough on with the IHT reforms – switching from a domicile to a residence-based system – but the public consultation that the previous government had promised will no longer be offered. The new rules will also take effect from 6 April 2025.

Finally, Labour will conduct a review of the Transfer of Assets Abroad and Settlements legislation which will culminate in these codes being rewritten to ensure they are “modernised” and “fit for purpose”. The changes to these rules – which are designed to tax UK residents on income arising to overseas structures they beneficially own – will take effect from 6 April 2026.

Other measures are expected to be announced on Budget Day to generate more revenue from CGT and IHT. Potential options would include increasing the IHT rate (already 40%), cutting the tax-free allowance, scrapping gifting allowances or revising IHT reliefs, such as the Business Property Relief (BPR) and Agricultural Property Relief (APR). Another option would be to apply CGT on top of IHT.

Pensions are another area of focus for the Labour government, with a Pensions Bill among those listed in the King’s Speech. There could be scope to revise the amount of pension tax relief available or the 25% tax-free lump sum  that pensioners can withdraw. Pension savings are generally exempt from IHT, but this could also come under review.

It pays to consider all options and be prepared. We have been encouraging non-UK domiciled clients to consider placing their overseas assets into trust before the existing trust protections from UK IHT on their worldwide assets are lost. We have also been encouraging long-term British expats to obtain a Counsel Opinion confirming their acquisition of a new ‘domicile of choice’ and then to transfer assets into overseas trusts. The general approach is to take advantage of current solutions while these are still available. But care is required with any planning, and it must remain under review as this process unfolds.

Laurence Lancaster

Group Head of Tax