The Government back-tracking on newly announced policies is not a brand-new phenomenon. It has been an issue for many years. In particular, this reconsideration by the Chancellor of the Ex-Chequer, Rachel Reeves, is highly significant because of the policy’s potential repercussions it could have on the UK economy. The Treasurer has previously called the current system “outdated” and said that it should be replaced.
In the Labour Manifesto for the General Election of 2024, which was held earlier this year, the party promised the nation ‘sustained economic growth’. On July 29th, following the election, the Labour Government published their first policy paper, which spoke with regards to non-domicile tax changes. The paper brought to light a £22 billion “hole” in the United Kingdom’s public finances.
Currently, non-doms are only obliged to pay tax on capital gains that are made in the UK. Any income gained outside of the UK remains outside of the Inheritance Tax bracket. After fifteen years, the global income made by a non-dom falls under the UK’s typical income tax and personal tax regime. However, there are ways to get around this. The ‘protected settlement’ trust allows capital gains of the wealthy to remain outside of tax charges.
To counteract this, the new Government announced the introduction of the ‘non-domicile tax’. This tax was expected to bring in lots of funds into the United Kingdom’s economy. It is these funds that Labour would use to pay for investment into schools, roads and the NHS.
Originally, the Office for Budget Responsibility (OBR) predicted that Labour’s plans would raise about £3.2 billion per year, which would majorly help towards the “black hole” in the UK’s public finances. However, OBR has speculated that these plans may not raise more money at all and has the potential to discourage the wealthy from residing in the UK. The ‘protected settlement’ trust allows capital gains of the wealthy to remain outside of tax charges.
This could lead to even less money being brought into the economy than under the previous government. Reeves has recently spoke on plans to reverse this. It is for this reason that the Rachel Reeves is reconsidering plans moving forward, as it uncertain the true damages it will cause for the economy.
