In response to the spring budget announcements by the Conservative government aimed at reducing the tax gap, the Labour Party has unveiled their own set of proposals in early April, which are notably more stringent.
What is the Tax Gap?
The tax gap represents the disparity between the tax owed and the tax actually paid, currently standing at £36 billion in the UK. Notably, over half of this gap is attributed to small businesses, comprising 56%, while less than 5% stems from High-Net-Worth Individuals (HNWIs).
Labour’s Strategies to close the tax gap
Labour’s proposed measures primarily revolve around enhancing compliance to ensure accurate and timely tax filings. One key initiative involves boosting HMRC’s manpower by an additional 5,000 personnel. However, the most striking proposal by Labour has been the elimination of the Inheritance Tax (IHT) protection on trusts established prior to the impending rule changes.
What does this mean?
The current rules state that Excluded Foreign Property trusts (EPT) set up prior to an individual becoming deemed domiciled are considered exempt from income and inheritance tax.
The Conservatives’ plan was to eliminate income tax protection, which isn’t the worst outcome for UK residents since it allows them to access funds in the UK without extra charges.
Labour’s plan is to remove both income and the inheritance tax benefit. For example, if a US citizen coming up to deemed domicile status has put $5m into an EPT (when the US lifetime allowance was this in 2015), this would be a gift, and considered outside their estate for US and UK taxes. The US taxes the income on an arising basis so many Americans opt to pay UK tax arising to give them access to the funds and avoid double taxation. Under the Labour proposals this $5m now falls back into UK IHT, and any amount above the exclusion of £325,000 will be taxed on death.
Considering the tax gap future
It’s essential to note that Labour’s proposals are currently in the discussion phase. Various factors come into play, including the likelihood of Labour gaining power and the potential impact on the tax revenue. The plan is to close the tax gap, but there are concerns that achieving this may come at the expense of reducing revenue for HMRC.
As these are just proposals the current plan of action for most non-domiciled individuals in this situation is to sit and wait. If you would like to discuss the implications, please do contact the Tax & Advanced Planning team at London & Capital.
