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General election 2024: the UK needs to offer certainty, or risk deterring high net worth individuals

Posted: 25/06/2024

One may think that any incoming government has limited scope to raise taxes because the UK is already one of the highest taxed nations. However, that will not stop a government with big spending plans from considering how best to increase revenues with tax rises, whether directly or by stealth; for example, with so-called 'fiscal drag', by not increasing personal allowances in line with inflation.  

Already, people are subject to the highest tax rates in 70 years. With this in mind, we would be keen to see political parties consider the economic impact of their manifesto pledges. Questions have been raised as to how thoroughly the various measures have been costed and there are serious doubts regarding the economic implications of some of the more politically driven proposals.

We are already seeing the impact of recently announced proposed tax changes. In the Spring Budget, the Conservative government announced reforms to the non-dom tax regime, announcing the intention to replace it with a new foreign income and gains regime from April 2025. After four years, individuals will be required to pay tax on their worldwide income and gains. For many, this will be unattractive and an insufficient period to encourage wealthy internationally mobile individuals to settle in the UK.  

However, it is the uncertainty and implications of the proposed inheritance tax changes, and also those changes which affect UK resident settlors of non-UK trusts, which have been most poorly received. That said, as with all changes there are winners and losers, and what is proposed may have a lesser effect on those individuals who benefit from double tax treaty relief, and may also have positive implications for non-UK resident individuals who previously may have remained subject to UK inheritance by retaining their UK domicile. 

Until now, high net worth individuals have been drawn to the UK due to certain aspects of the tax regime. Other countries have now observed the benefit of attracting wealthy families and have created similar regimes. To damage the UK’s attractiveness is to risk driving away people who would otherwise bring significant social and economic benefits.

Labour has been widely expected to continue these changes and its manifesto takes them further, removing the proposed 50% reduction for foreign income and bringing offshore trusts within the scope of inheritance tax. It is this latter measure which is likely to be most unattractive to non-domiciled individuals who were encouraged to move to the UK based on the ability to ring-fence previously held foreign assets when settling here.

Whilst Labour has guaranteed not to increase rates of income tax, National Insurance, VAT or corporation tax, that leaves plenty of room for raids on inheritance tax, with a restriction of the rules in relation to reliefs available for business interests and agricultural land the most likely targets. Capital gains tax has been mooted as a further target, where one could see the rates levied being changed to those of income tax. Pension allowances and perhaps a wealth tax for those earning at the highest level may also be considered.  

Another policy Labour proposes relates to the 'loophole' on the taxation of private equity profits, known as carried interest. The term loophole is misleading given that specific legislation has been in place for many years and ultimately, the UK is on a par with how other countries tax private equity. Taxing carried interest entirely as income, or putting capital gains tax on a level with income tax, as many believe Labour could do, would be a mistake and potentially make the UK less competitive. The party’s manifesto is quiet on many related areas, such as business asset disposal relief, but mooted changes could be highly damaging. 

It is unfortunate to see political commitments that appear not to have been clearly costed and which underestimate both the economic impact of the changes and the significant tax contribution that wealthy domestic and international individuals make to the UK economy.  

The main positive to take from each party’s manifesto is the promise of certainty. The changes to non-dom tax announced in the Spring Budget were followed closely by the announcement of the general election. Labour says it would wait to hold a budget until the autumn, when more details will be given. This gives little time to prepare if, as envisaged, changes come into force in April 2025.

We are working closely with clients to assess their options in light of potential new policies. Generally, our message is to take advice and consider whether to act now if there is planning involving sales or gifts that clients know they wish to make imminently but, otherwise, to wait for more details, while getting prepared. Many proposed tax changes will require clients to spend time considering their business and family circumstances, organise valuations or establishing structures which require bank accounts and therefore time to establish (and which can be funded once details of any proposed changes have been confirmed). Preparing now and considering what actions can be taken, or what preparatory work should be undertaken, will make the transition easier when the time comes.

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Penningtons Manches Cooper LLP

Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority under number 419867.

Penningtons Manches Cooper LLP