A longer regime than four years would also align the UK more closely with competitors such as Italy, Greece, and Israel, where exemption periods range from 10 to 15 years.
Labour has argued increased tax revenue would be generated from bringing existing offshore trusts within the scope of IHT.
However, at the time this did not factor in the risk of this prompting greater numbers to leave the UK, resulting in a loss of that anticipated revenue, with a knock-on effect on the other figures on which the proposed changes are based.
Indeed, the Institute for Fiscal Studies has pointed out that there are downsides to the proposals, with uncertainty around the extent of the tax revenue that will be generated by scrapping non-dom status.
This uncertainty arises as the government simply cannot predict exactly how non-doms currently living in the UK will react to such wide-ranging changes to their tax status. The proposals have the potential to backfire, resulting in non-doms exiting the UK and putting off others from moving here.
In practice, this is borne out by the increased enquiries we are seeing from non-dom clients who are now keen to leave the UK.
Preparing for the impact of the new regime
Amidst the ongoing uncertainty surrounding the scope of the new rules, individuals who have not already done so should consult with professional advisers to ascertain their options to enable them to take action as soon as the details of the new regime become clearer.
In particular, it is important to review existing offshore asset holding structures to determine how these are likely to be impacted by the proposed changes and to look at the UK residence status of settlors and beneficiaries of offshore trusts.
Investment portfolios should also be reviewed, and individuals who have been living in the UK will need to determine when they will come within the scope of IHT under the new residence-based regime.
If individuals instead decide to relocate, preparations need to start now as it takes time to determine which offshore jurisdiction to move to.
Potential transitional reliefs may offer some respite from the impact of the new rules for an initial period. In fact, Labour indicated before the election that they may extend these to encourage more investment in the UK, which would be a welcome move.
There are also benefits of the new four-year regime: the move away from the concept of domicile to residence will provide greater certainty and individuals will now be able to bring their income and gains generated abroad to the UK with no tax charge during the four-year period. This marks a significant shift.
