The UK General Election – Impact on UK Resident Non-Doms. How will the Islands fare?

Many headlines have been made in recent months in the UK in relation to “non-doms” and the perceived tax loophole which exists to enable certain wealthy individuals who reside in the UK, but who maintain their domicile (i.e. long-term intention to reside) elsewhere, to claim what can be a highly beneficial UK tax regime.  Broadly, it allows them to live in the UK, but only pay taxes there on their UK sourced income and capital gains, and not on overseas income. It also can save significant amounts of UK Inheritance Tax (“IHT”).

The UK is far from the only country which has tax regimes in place designed to incentivise desirable individuals to move to its shores, and the non-dom regime is just one such incentive which, in various guises, has in fact existed since the late 1700s.

Non-dom regime

The non-dom regime benefits a wide range of people (including footballers, hedge fund managers, UK based business owners, foreign entrepreneurs)  each of which, it could be argued, bring much needed investment and income into the UK economy. One thing they tend to have in common is that although they may call the UK home for now, they openly state that they intend to leave at some point in the future.

From the Islands’ perspective, many of these non-doms maintain trust and corporate structures which assist them in managing significant assets and wealth. Whilst tax is certainly far from the only reason to set up an “offshore” trust structure, it certainly plays a part in many considerations. Traditionally, such non-dom individuals and their structures have helped shape and allow significant growth in the Islands’ trust and corporate services sector. Clearly this has been of significant benefit to the Islands and would, in the absence of change, continue to be so for many years to come.

A radical shake-up?

Recent months had seen announcements from the now former Conservative government that they would look to undertake a radical shake up of the current system. In brief, this would see the current non-dom rules being replaced with a system whereby many of the beneficial reliefs from UK income taxes on non-UK income and gains would be removed after 4 years’ residence in the UK. Whilst there was not much detail in the proposals they published, it did appear that the protections from UK IHT would be maintained, and this would continue to be the case where assets are owned in trusts. This could allow non-doms to maintain trust structures which, although no longer benefitting from the income and gains reliefs, would at least allow them to protect the value of their assets from UK IHT both for themselves, and the beneficiaries. 

These proposed changes, whilst far from ideal for the Islands’ trust industry, would arguably be unlikely to see a radical reduction in existing structures being administered from the Islands, although it may well have reduced the number of those setting up trusts in the future.  The potential for continued protection from IHT was seen as a major positive factor, albeit the information published to date was light in detail.

Conversely, the new Labour government have stated at various times recently that they do not feel the proposed changes go far enough.  Fundamentally, it appears that they take a dim view of asset ownership through trust structures, in particular those owned “offshore”, including in the Islands, and wish to apply as much UK tax as possible to these in order to disincentivise such ownership for UK based individuals. 

In their published election manifesto, Labour appear to have gone further than the Conservatives. They have indicated that they will remove all IHT protection for trusts, and potentially also backdate this to trusts which have been in existence for many years.  The words in their manifesto are fairly strong, including “we will end the use of offshore trusts to avoid IHT…” They also state that a figure of £600m will be raised by “removing the non-dom discount [built into the Conservative proposals] loophole in 2025-26.”   This suggests that change, and significant change at that, will be forthcoming.

A cause for concern

The Conservative’s original non-dom changes were due to take effect from 1 April 2025.  This Labour statement could signal an intent to implement the changes announced by the Conservatives by that same date, and then possibly make further changes to these rules during the year to April 2026. 

One thing we do know is that all the uncertainty will be causing much alarm certain amongst existing non-doms, and putting off an incalculable number who may have otherwise moved to the UK. There has been some suggestion that these non-doms are voting with their feet and are moving elsewhere to more favourable tax regimes, which offer similar but more favourable regimes for ”arrivers” into the country. It is no coincidence that we are already seeing certain locations promoting themselves strongly as the jurisdiction of choice for non-doms who may now feel unwanted by the UK government.   

If these people leave the UK, will they look at coming to the Channel Islands, possibly? We are certainly seeing an increasing number of enquiries in this regard.  However, they may look further afield which in the long run will pose future problems, as the Islands are not always the preferred offshore centres for global financial powerhouses. The Islands most definitely do not offer the cheapest residency routes.

Manifestos and speeches are by their very nature only a signal of intent. They tend to be designed to appeal to the mainstream voters and other stakeholders, but allow a fair bit of creative licence when it comes to actually implementing the measures.  The Labour manifesto claims (as a good vote winner) that they will crack down on offshore tax avoidance, so expect to deal with even more unwanted and unmerited correspondence. We are recently seeing an increase of the number of ‘nudge letters’ being sent from HMRC, and one must be particularly careful in how these are responded to.   

Labour also promise to create a more level playing field between the UK taxes on income and gains. Typically, the rates of capital gains tax are lower than those of income tax, often with good intentions to generate a spirit of entrepreneurship. This is another area that Labour appear to have earmarked for some form of legislative amendment, which will have created a lot of interest for certain investors.

Free reign for Labour? 

It is very difficult to read too much into what we have heard to date to be certain of what will make its way onto the UK statute books, and when. However, when one listens to the various interviews from Sir Keir Starmer and the new Chancellor Rachel Reeves, the messages would not appear to bode well.  Should Labour go down the road of implementing the most severe changes, the impact on the Islands’ trust industry would certainly be keenly felt. With the landslide that they have won by, this certainly would look to offer Labour the free reign to implement the changes that they wish, without having to rely on doing deals with other parties who may have differing viewpoints.

It is important to note that recent UK governments have been tightening the screws over the years, in particular since April 2017.  Adapting to changing UK legislation is something that as Islands with a strong trust industry, we have certainly become adept at.  In addition, the industry has diversified over recent years to remove such reliance on the UK based client market, and this is something that we would expect to see continue.  

It should be noted that there have been some fairly significant questions raised as to the economics and figures which were used to put forward the changes originally proposed by the Conservative government. The initial report suggested a positive increase in tax revenues for HMRC, but were based on a very small number (77, to be precise) of non-doms leaving the UK. Recently the Institute for Fiscal Studies appeared to raise some questions behind these figures, raising the spectre that the changes could in fact bring about a negative result for the UK economy. It will be interesting to see the extent to which these and other concerns are listened to by the Labour government.

Conclusion 

We wait keenly to see when Labour will hold their first budget, which one would expect to be in the Autumn, together with the follow on draft legislation and guidance off the back of this.  In the meantime, there are actions which trustees on the Islands should be taking for those UK based clients that hold trust structures on the Islands. This includes having conversations with their clients to understand their intentions, together with ensuring that all calculations for relevant income and stockpiled gains are fully up to date. Having this information available will allow for informed decisions to be made at the relevant time, once we know more.