27 November 2019

Why the election matters to those outside the UK


Jeremy Arnold
Consultant | UK

It’s understandable that if you don’t live in the UK you might not be showing quite the same level of interest in the UK General Election as those of us who do. However, depending on who wins the Election the impact on how much tax people, with financial interests in the UK, pay could be quite profound. You may be wondering when and if to move to the UK at the same time as people and businesses will be thinking about whether they might need to leave.

All three of the major political parties have published their election manifestos and there is a clear distinction between the direction of travel of the Conservatives on the one hand and Labour and the Liberal Democrats on the other with Labour setting out the most radical proposals on tax, companies and industrial relations. You can see our separate notes on the tax proposals of each of the three major political parties here.

For people living outside the UK but with interests here, the two previous Conservative administrations have introduced some substantial tax changes. We have seen the introduction of the Statutory Residence Test and changes to the treatment of those who are resident but not domiciled in the UK. This has impacted on people leaving and arriving in the UK and the manner in which they would be subject to tax.

The Conservatives have also dramatically altered how UK property is taxed when owned by people living outside the UK. There have been huge rises in Stamp Duty Land Tax on residential property particularly at the higher end of the market. The Conservatives also introduced changes which have meant that residential property will always be subject to inheritance tax and likely subject to capital gains tax when owned by non UK residents. The coalition government also introduced the Annual Tax on Enveloped Dwellings. And, as from April 2019 the investment profits from commercial property are now also subject to UK capital gains tax.

The Conservative manifesto does not set out any specific tax cuts or any relaxation of the tax regime for people living outside the UK but with interests here. Indeed the Conservatives have announced that a 3% SDLT surcharge will be imposed on non UK resident buyers of residential property in addition to the 3% surcharge which already exists for buyers of second homes. This will mean that the top rate of SDLT will be 18%. In respect of foreign investors in UK companies the Conservatives have also announced that the reduction of corporation tax from 19% to 17% will be put on hold. So there is no attempt here to make the UK a more attractive place to live and invest in despite the backdrop of Brexit. Perhaps with the radical changes outlined by Labour and the Liberal Democrats the Conservatives see no need to do that now and feel they would be attacked for doing so.

As far as Labour and the Liberal Democrats are concerned if either were to be elected with a majority or perhaps where there is a coalition with each other or with the Scottish National Party there could be profound changes. Political manifestos tend to be short on detail in relation to tax but there are changes which are common to both Labour and the Liberal Democrats with, Labour’s announcements being more radical and far reaching.

It is clear that both Labour and the Liberal Democrats have identified the need as they see it to tax wealth and the profits from capital more when compared with income from work so both parties state that capital gains tax rules would be changed. The Labour manifesto states that capital gains will be taxed at the same rate as income and Labour intend to increase the top rate of income tax to 50%. Therefore gains arising from the sale of UK property by non UK residents might be subject to rates of tax as high as 50%. The Liberal Democrats have stated that capital gains should be taxed “more fairly” but without setting out much detail. It would seem likely that the Liberal Democrats would increase capital gains tax rates and perhaps also treat capital gains as income. The Liberal Democrats are proposing a more modest 1% increase in income tax rates which would suggest a top rate of 46%.

In statements and policy documents both Labour and the Liberal Democrats have attacked the resident non domicile tax regime. Its abolition was not mentioned in either the Labour or Liberal Democrat manifesto but in its publication “Fair Tax Programme” published just after its manifesto, Labour has stated that is will scrap the status in its first budget “consulting on whether there is a need for an exception for foreign residents in the UK for a short period of time”. The same publication highlights the possibility of further taxes on non UK trusts and companies purchasing UK property including an Offshore Company Property Tax levy of 20%. Reference is made to a consultation on the introduction of withholding taxes being levied on payments to “abusive tax havens”. The easiest form of capital to tax is residential real estate and it therefore seems likely that second homes and homes owned by non UK residents will be subject to the highest rates of SDLT on purchases and capital gains tax on sale. Labour have suggested a doubling of council tax for second homes and the Liberal Democrats have suggested giving councils the ability to levy council tax at 500% on second homes.

Neither the Labour nor Liberal Democrat manifestos set out changes to inheritance tax but in the past both parties have suggested the introduction of a gift tax to replace inheritance tax where each recipient would have a lifetime allowance over which they would pay tax (at potentially) income tax rates on gifts and inheritances received. If implemented this would likely increase inheritance tax (or its replacement) in respect of UK assets and in particular residential property owned by people living outside the UK.

Labour and the Liberal Democrats have said they will raise corporation tax to 26% and 20% respectively which will impact upon the attractiveness of UK corporate vehicles and the UK holding company regime which has become a regime of choice over recent years. Labour’s plan to introduce Inclusive Share Ownership Funds, where large companies would have to contribute 10% of their shares to these vehicles over a 10 year period, may also have a profound impact upon the attractiveness of UK companies. No party has yet suggested the reintroduction of withholding tax on dividends from UK companies but both the Labour and Liberal Democrat manifestos state that dividend income will be taxed as ordinary income. Labour have also highlighted that they would seek to nationalise water and utility companies and has now extended that to part of British Telecom. There is uncertainty as to what value would be attributed to existing share and bond holders. And of course Labour and the Liberal Democrats have highlighted tax avoidance by large multinational companies as something to target. Labour will also massively enhance union and workers’ rights.

The Labour manifesto also confirms the removal of “tax exemptions” for private schools so for those with children at school in the UK fees would be subject to VAT where the current standard rate is 20%.

Another impact of an election could be on GBP exchange rates with possibly violent movements whatever the political situation after the election result is known. There has been concern that if Labour achieved a majority there could be such financial instability so as to trigger a need to impose capital or exchange control mechansims. As a consequence, people in the UK have been taking action because of this possibility even if it might be considered remote. Of course it would not feature as a stated policy of Labour but some commentators are of the view that it could be a policy response to an economic situation a Labour government finds itself in.

Jeremy Arnold Consultant | London

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