Could a 4-year tax residence amnesty attract investors?

Labour may look to introduce a 4 year tax residence amnesty to attract overseas investors to help them with their plans for economic growth. So, what does that mean?

Foreign Investors – Who, what and where

One of the recognised governmental measurements of foreign investment is by tracking Foreign Direct Investment (FDI). This is broadly defined as investment in an enterprise operating in a foreign economy, where the purpose is to have an ‘effective voice’ in the management of the enterprise. FDI can be inward, where investment is made into the country, i.e. introducing capital into the country from overseas, or outward where investment is made outside the country.

A recent report measuring FDI in 2023, makes for interesting reading. The UK reported FDI projects were up 6% from 2022, ranking us second in Europe. Inward European investment also grew by 1.7% to 17.3%. In general terms, the UK’s FDI project total has grown, driven by growth in technology and financial services, whilst Europe recorded an overall decline. Going forward, it suggested that 69% intend to invest in the UK in 2024.

Whilst FDI statistics essentially capture corporate projects and investments, and we can never be sure of the connection to the relocation of global talent, it is probable that individuals, in the form of senior business leaders and key employees, will inevitably be required to lead such significant investment projects. This in turn might mean that global relocation is necessary, simply to allow them to be physically present in those same investment locations, including the UK.

A New UK 4 Year Tax Residence Window?

If we assume international corporations are seeking to relocate key employees, they may now find it easier to persuade them to come to the UK for up to 4 years,  particularly those with significant overseas wealth and assets.

This is connected to the previous Government’s Spring Budget proposals, where in addition to the proposed abolition of ‘non-dom’ status, they announced an entirely new tax regime for new UK arrivals, which they planned to be effective from April 2025.

Their proposal provides significant tax savings for those who, before their arrival here, have never been UK tax residents in the previous 10 years.

Essentially, an individual can, after 10 years of non-UK residence, relocate to the UK and be exempt from UK tax on all overseas income and gains for the first 4 tax years. Not only that, but unlike the Remittance Basis of assessment associated with the non-dom regime, this same overseas income and gains, can also be remitted to the UK, with zero UK tax consequences.

We have previously discussed the outcome of the Spring Budget and the changes expected to come for Non-Dom Status and also the Tax Twilight Zone non-Doms find themselves in however, a reminder of the key suggested changes are outlined below.

• The remittance basis and non-Dom status will be abolished from 6 April 2025
• It will be replaced by a Foreign Income and Gains ‘FIG’ regime whereby long-term non-UK residents can crystallise foreign income and gains during their first 4 years of UK tax residence completely free of UK tax.
• Current non-dom UK residents on 6 April 2025 who were not resident in the UK for at least 10 years before their arrival will be able to benefit from the FIG rules for the remainder of their first 4 years of UK residency i.e. if someone came to the UK on 6 April 2023 (2023/24 tax year) they would be able to access FIG for 2025/26 and 2026/27.
• To access FIG the individual will give up their UK personal tax allowance (12,570) and UK Capital Gains Tax Allowance (£3,000).
• The FIG is an annual election via the UK Self-Assessment Tax Return.
• Following the end of the 4-year FIG period the individual will be taxed on their worldwide income and gains in the UK.

Will the Labour Government implement these Conservative proposals?

So, the question is – will Labour press ahead with the existing proposals?

Rachel Reeves has yet to reveal Labour’s detailed plans, both in terms of the non-dom changes and the new residence tax regime.

Labour made no secret of the fact that they will, as outlined in their pre-election manifesto, abolish non-dom tax status. The Conservatives very much pre-empted this, which leaves the new Chancellor of the Exchequer with an unexpected, but probably fiscally considered, tax policy, which she can perhaps now readily impose.

Labour has also suggested they will close perceived loopholes in the transitional reliefs connected to non-dom abolishment, but interestingly have remained silent on the 4-year new residents’ proposals. They have, however, indicated they would explore methods to incentivise overseas investment in that 4-year new tax residence window, but again we have had no details as to what that might look like.

Many professional commentators have in the interim, criticised the short 4-year window for new UK residents, comparing this to other EU countries where a variety of tax incentives for new residents are in place for far longer periods. Italy’s Flat Rate scheme, for example, allows up to 15 years of residence, the Swiss Forfait lump sum scheme of say 10 years and Spain’s new Digital Nomad Visa scheme, up to 5 years. It could mean that Labour may extend this 4-year window of tax exemption, simply to try and encourage the right investors from overseas to help drive UK economic growth.

So, whilst it seems clear that Labour will abolish non-dom tax status, what is not clear is their approach to new UK tax residents and the Conservative-led/proposed new tax regime for new UK tax residents.

The UK can only benefit from further overseas investment and so given Labour’s economic growth targets required to help fund their spending plans, it will be interesting to see what happens to this proposed 4-year scheme in their first budget statement. Labour will likely not announce any final decision on tax policy until the Autumn, and even then, changes to tax legislation may not be implemented until April 2025

For those individuals who are perhaps thinking about a move to the UK, there are many things to consider, not least the tax position, which for most can be way down on their ‘to-do’ list. We always advocate careful tax planning ahead of any relocation, but given the uncertainty connected to any new UK residents, we suggest that any such plans must include ‘what if’ policy changes, simply to allow for flexibility in the event this proposed tax policy might change.

If you have any queries about non-dom tax status or want to know more about how this could affect you please do not hesitate to get in contact with Lynn Gracie, Carol Edwards our Private Client International Tax Team  who will be happy to help and discuss your bespoke position.