Technical News: Issue 23
Watch out for tax rises
What would a Labour government mean for our clients’ finances?
The manifesto includes a commitment not to increase income tax, national insurance or VAT. That’s a relief, but Labour will have to cut spending or raise taxes to meet fiscal targets, according to the Institute for Fiscal Studies (IFS).
That means it is likely to target more of our money. Even if Labour doesn’t officially
increase tax, we will pay more.
Labour says it will maintain the freeze on income tax thresholds. This fiscal drag will see more of people’s earnings go in tax and many people pushed into higher tax bands.
The IFS estimates that it is the equivalent to putting up income tax by 6p. While Labour is keen to say it won’t raise taxes, several weren’t mentioned in the manifesto. Capital-gains tax (CGT), inheritance tax and the pension lifetime allowance were all absent, leaving the door open for the future.
Those who face CGT in the UK – primarily higher-rate taxpayers and entrepreneurs who realise gains from the sale of residential property, investments, and other chargeable assets – have already seen their annual exempt allowance slashed by the current Conservative government to just £3,000 a year.
We may be in for a double whammy with higher rates and lower exempt allowances considerably increasing
the capital-gains tax take.
There’s good news and bad news for pensioners if Labour wins. Keir Starmer has committed to keeping
the state pension triple-lock. This means that the state pension rises every year either by inflation, average earnings, or by 2.5%, whichever is highest. This year it meant the state pension rose by
8.5% (the wage-growth figure) to £11,502.40 a year. But this creates another problem.
The personal allowance – the amount of income you can receive before tax is due – is frozen at £12,570. If the state pension rises beyond that level (which it is predicted to do in 2028-2029) pensioners will have to start paying income tax, if they don’t already. Labour has refused to commit to protecting state-pension income from tax.
So, pensioners could find themselves hit by a tax bill on their state pension under a Labour government. Finally, Labour may have said it won’t increase VAT, but it is planning to add the tax to private-school fees.
The average fee for a senior day- school pupil is about £17,500 a year. If the full cost of VAT at 20% was passed on to parents, this would jump to about £21,000.
Death tax on the rise
Frozen inheritance tax thresholds are squeezing more and more people.
The threshold for when estates become liable for IHT has been frozen at £325,000 since 2009 and will remain so until at least 2028. If the threshold had increased annually with inflation since 2017 it would be worth an estimated £458,931 by 2028. Instead, that year the average family will pay an extra £53,000. There are steps you can take to reduce a future IHT bill long before you die. We can all pass on up to £325,000 to our beneficiaries without paying IHT. On top of this so-called nil-rate band you also get an allowance of £175,000 for passing on your main residence to your children or grandchildren. So, you can have an estate worth up to £500,000 before IHT is due.
Married couples and civil partners can leave anything to their surviving partner, and it will be IHT-free. Also, any of their unused IHT allowance can be used by the surviving spouse when they die. So, if one partner dies and leaves everything to their spouse or civil partner without using any of their IHT allowance, then when the surviving partner dies, they can pass on up to £650,000 of assets and £350,000 of a main home without paying IHT. That’s up to £1m you can pass on without worrying about the taxman.
You can also give away £3,000 a year and that money is exempt from IHT. Any unused amount of this allowance can be carried over from the previous tax year. This means that couples can give away up to £12,000 in one tax year. Plus, you can give up to £250 per person to as many people as you like every year – provided that person hasn’t already benefited from the £3,000 allowance. Any other financial gifts are subject to the seven- year rule. If you live for more than seven years after the gift, the money won’t be counted as part of your estate for IHT purposes. However, if you die within seven years, that money will be included in the value of your estate and if the total tops the £325,000 IHT threshold, tax will be due. The amount of tax you’ll pay on that gift will depend on how many years have passed between the gift and the donor’s death.
Clients should start IHT-planning earlier in your life to maximise the odds of living beyond seven years after gifts. Then, make the most of the gifts-from-income rule, which can make a huge difference. One can give away as much money as they want every year if it comes from surplus income. The key is that the money you give away must not affect someone’s standard of living or force them to use capital or savings to cover day-to-day costs. Advisers should keep records of all gifts and what allowance, or IHT rule, is being used to make the gift. If gifts are being made from surplus income, keep bank statements so income and expenditure for each year can be evidenced, proving that the money given away was not needed. For the gifting rules, a spreadsheet showing who got what will help executors sort out the estate after a client’s death.
What we can learn from Singapore
Since its founding in 1965, this island nation has become a beacon of stability and economic progress. What can we learn from its example?
While Britain may be about to get its sixth prime minister since 2016, Lawrence Wong, a 51-year-old US-trained economist, was recently sworn in as Singapore’s fourth prime minister since 1965, when the city-state separated from Malaysia and became independent. Wong had been Finance Minister since 2021, and succeeded Lee Hsien Loong, who had led the island nation since 2004. Wong’s succession was carefully choreographed by the ruling People’s Action party, which has governed Singapore since 1959. He’s the first PM to be born after independence, and (unlike his predecessor) is not part of the political dynasty founded by Lee Kuan Yew – the founding father of modern Singapore, who served as PM from 1959 to 1990.
Lee Kuan Yew turned a colonial outpost with seething racial politics into a gleaming metropolis with a rapidly growing economy. Since Lee’s time, and over the past two decades led by his son, Lee Hsien Loong, Singapore has continued its dramatic trajectory. It now boasts GDP per capita of an astonishing” $88,000 – more than the US (about $82,000), and far in excess of the island’s former colonial master the UK (about $49,000). Lee’s formula for transforming Singapore was based on openness to trade, geopolitical neutrality, the forging of a national identity based on multiracial civic nationalism, anti-corruption and meritocracy; and a strong role for long- term social and economic planning. At the same time, Lee’s vision left scant room for political dissent or free speech. Today, Singapore remains a managed quasi- democracy, with multi-party elections but only ever one winner.
Singapore’s success is about strong leadership. But also about culture. Productivity and growth are seen as matters of existential importance in this small island, whose population even today is less than six million. Making it an attractive place for investment was not merely a matter of national pride but of survival, given the much larger Malaysian and Indonesian nations right next door.
James Vitali of Policy Exchange recently emphasised these deep cultural roots by recounting a story of a recent visit to a Singaporean church. The writer was startled to hear the deacon leading the prayers imploring God to ensure that “Singapore remain an attractive place for foreign direct investment” and the labour force flexible. The congregation’s response: “Father – hear our prayer”.
Singapore does face challenges. In a downbeat initial speech, the new PM warned that Singapore was grappling with a “dangerous and troubled world”, and that a 30-year era of peace in the Asia-Pacific since the end of the Cold War was now over. He cautioned that, as a small country with an open economy, Singapore would find itself buffeted by international conflicts, “geopolitical tensions, protectionism and rampant nationalism”. Singapore has always traded on its neutrality. It welcomes US warships, but insists it’s open to all navies. It hosts the regional HQs of Silicon Valley firms, and also those of Alibaba and ByteDance (owner of TikTok). Hence a breakdown of relations between the US and China is a big danger for the city.
An ageing population and shrinking workforce will also hurt growth and send healthcare costs soaring. Singapore has always relied on immigration – both of cheap labourers and skilled foreigners – and 40% of residents are non-citizens. But unhappiness among the local population is rising, as housing and other living costs surge. The other big issue is climate. Singapore is a low-lying island, which is at grave risk from rising sea-levels. It is investing $75bn in sea walls and other protection. Continued economic openness and resilience in the face of these challenges should help Singapore to continue thriving.
The most fundamental lesson we can learn from Singapore is that economic enrichment ultimately depends on order and cohesion. Merely to note that Singapore’s per-capita income now tops that of the US is to understate the radical transformation of a once-fractious Chinese-Malay-Indian society. More broadly, Singapore is simply too singular and particular to constitute a template for other nations to follow. Its most meaningful lesson is probably the importance of keeping an open mind and avoiding ideology in policy-making. This is a libertarian nanny state : a high-income nation where most people live in public housing; a private-sector paradise where civil servants can earn a fortune.
Singapore’s greatest example to the world is that it prizes mental agility an entrepreneurial flair over dogma and predictable patterns.
What about specific policy lessons?
The idea of Singapore that is often promoted in British political debate – focusing on low tax and light-touch regulation – is too simplistic and underplays the role of a strong state underpinning a strong economy. But there are specific elements of the “Singapore model” that would certainly help foster long-term economic success in the UK – an efficient legal system that robustly protects property rights, a state that minimises bureaucratic barriers to entrepreneurship and business growth and invests in education and infrastructure. A country that promotes innovation and invests in industry, and a public administration that can devise and deliver policy effectively.
Looking at the current election campaign in the UK and the parties’ lack of ambition and strategic intent, all of this might seem like a dream. Singapore’s success proves that it needn’t be.
Non-Dom Reforms
In March, Chancellor Jeremy Hunt delivered his budget speech and secured his place in the tax history books by announcing the government would end the ‘non-dom’ tax regime. It will be abolished and replaced with a fairer system from April 2025, where new arrivals to the UK pay the same tax as everyone else after four years.
The budget speech was followed by the publication of a policy paper entitled: “Technical note: Changes to the taxation of non-UK domiciled individuals.” Whilst the announcement has widely been dubbed an “abolition” of the non-dom regime, it would be more accurately described as a replacement regime.
Broadly speaking, successive governments have concluded that the non-dom regime is valuable for the UK, as it encourages wealth-creators to locate to the UK, resulting in tax revenue from people who otherwise may not decide to live or invest there. The chancellor of the exchequer echoed this sentiment when he stressed the importance of protecting the UK’s attractiveness to international investors and stated that the new regime aims to introduce a system that is “fairer and remains competitive with other countries”.
The government’s new proposals have addressed the most perverse element of the current remittance basis regime which encourages people to move to the UK but keep their created wealth outside of our economy. Under the new proposals, individuals will no longer be dis-incentivised from bringing their foreign income and gains to the UK in the way that they have been under the remittance basis regime.
From 6 April 2025, the remittance basis regime will be abolished and replaced with a new residence-based tax system under which new arrivers to the UK, or individuals returning to the UK after at least 10 years overseas, can elect not to be taxed on their foreign income or gains during the first four years of UK tax residence (the FIG regime).
Electing into the FIG regime will result in the loss of personal allowances and the capital gains tax annual exempt amount as is the case for remittance basis users. However, qualifying individuals will not be taxed on their foreign income or gains regardless of whether that income or those gains are brought to the UK. They will also be able to receive distributions from offshore trusts without paying UK tax on those distributions. Current remittance basis users who have been in the UK for fewer than four tax years on 6 April 2024 will be eligible for the FIG regime for the remainder of their first four years of UK tax residence.
Individuals who have already been resident in the UK for four tax years on 6 April 2025 will not be eligible for the FIG regime and will be subject to UK taxation on their worldwide income and gains as it arises.
However, the following concessions are offered to soften the blow:
• For 2025/26 only, individuals moving from the remittance basis to the arising basis of taxation will only be subject to UK tax on 50% of their non-UK source income arising in 2025/26
• Individuals who have claimed the remittance basis and are neither domiciled nor deemed domiciled in the UK on 5 April 2025 will be able to elect to rebase a personally held foreign asset to its 5 April 2019 value on disposal provided they held the asset at 5 April 2019
• A so-called Temporary Repatriation Facility (TRF) will be available for 2025/26 and 2026/27. The TRF will allow individuals to bring to the UK pre- 6 April 2025 income and gains to which the remittance basis has applied at a reduced rate of tax of 12%. The TRF will not apply to pre-6 April 2025 foreign income and gains generated within trusts or trust structures. This measure includes a “relaxation” of the mixed funds ordering rules with the objective of simplifying the process, but no detail on this is available yet.
Individuals returning to the UK having spent a period of over 10 UK tax years overseas will be able to benefit from the FIG regime on their return. In many cases, these individuals will have more favourable tax treatment under the new proposals than they do currently. This is particularly true for UK domiciled returning ex-pats and those who fall into the category of “formerly domiciled residents” under the current rules.
The government will enter a consultation to move from a domicile-based system for UK inheritance tax (IHT) to a residency based one with effect from 6 April 2025. Under the current system, UK domiciled and deemed domiciled individuals are within the scope of IHT on their worldwide estates, whereas non-UK domiciled individuals are only within the scope of IHT on assets situated in the UK and certain categories of non-UK situs assets connected with UK residential real estate.
The new residency-based system will bring all individuals within the scope of IHT on their worldwide assets after 10 years of UK tax residence (the residence criteria) with the provision that once an individual meets the residence criteria, they will remain within the scope of IHT on their worldwide assets for 10 years after leaving the UK (the tail provision).
The IHT consultation will consider various issues such as transitional provisions, the length of the residence criteria and tail provision, any connecting factors other than residence, gifts with reservation, domicile elections, formerly domiciled residents and calculation of trust charges.
What’s next for non-doms and tax?
These changes to the non-dom regime were described on budget day by ITN’s political editor Robert Peston as the closing of one of the last vestiges of Thatcher’s Britain. It is a regime that the Blair and Brown Labour governments have enthusiastically continued and it has remained with us since.
Non-doms, tax practitioners and HMRC officials alike will have to accustom themselves to a world of tax planning without the use of the concept of “domicile”. It will be quite a change.
The big unknown in all this is how an incoming Labour government will respond to these changes. Will they respect the proposed changes, or change them further? This unknown makes it challenging for non-doms and their advisers in deciding what actions to take.
