My election forecast: UK nationals in Gulf should brace for tax reforms

“At last we can return to sanity … the mad hysteria is at an end. After the chaos of a general election, we can return to normal.” So says Edmund Blackadder in the first episode of Blackadder the Third.

I doubt many in the UK will be echoing that sentiment on July 5 – especially when it comes to inheritance tax. 

The Labour party, which is all but certain to win Britain’s general election on Thursday, has been largely silent on its tax plans and has not been pushed to comment.

All the party has said is “working people” will not pay more tax and it will clamp down on “tax dodgers”. These statements are sufficiently vague to imply that everyone is fair game for future tax rises.

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However, both Labour and the Conservatives have said there will be significant reform of the rules around inheritance tax (IHT) – especially the regulations on non-domiciled status. We think that policy will move to become more aligned to a person’s residence, rather than their domicile. 

What will the reforms mean in practice? In essence, we think Labour will bring people into the scope of inheritance tax sooner and keep them in it for longer.

British nationals living in the UAE and elsewhere overseas will remain subject to UK IHT on their worldwide assets, no matter how long they are out of the country. We do not see that changing. Taxable amounts start above £325,000 ($412,000) for individuals (unless they leave everything to their spouse). The rates are steep at 40 percent.

However, as it stands, non-domiciled individuals have to be resident in the UK for 15 years before their worldwide estate is subject to IHT. This, we think, will be reduced to 10 years. 

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Conversely, when a non-domiciled individual leaves the UK, it will be 10 years before they fall out of the scope for UK IHT. There is currently no “UK inheritance tax tail” for those who are non-domiciled unless they have been a UK resident for 15 out of the last 20 years. Up until that point, they can leave Britain and forgo UK IHT on their non-British worldwide assets.

A change in these rules may affect non-domiciles who have recently left the UK and now reside in the UAE. It is not yet known if any of these changes will be applied retrospectively.

Capital gains and income tax

There has also been speculation that the next British government could align capital gains tax rates with income tax rates. There is unlikely to be much opposition to such a shift among voters as it is seen as a “rich versus poor” type of policy. 

If tax rates remain as they are, British nationals who live in the UAE and have rental properties in the UK will continue to receive a personal allowance of £12,570 ($15,900).

So far, Labour has stayed silent on another possibility: taxing the overseas income of British passport-holding expatriates. This would mirror the US citizen model, which taxes incomes over a certain threshold whether domestic or foreign. A new government in Downing Street could look at this option.

In terms of financial planning, aligning capital gains tax to income tax will have the knock-on effect of making offshore investment bonds more attractive than so-called platform-based investments, as they will incur capital gains on a consistent basis.

An offshore bond is a tax-efficient wrapper that holds a variety of assets, such as stocks and shares or mutual funds. There are potential tax and investor protection advantages, one of them being that taxation is deferred. This is down to low (or no) tax on gains and income arising on the underlying investments during the term of the investment.

Labour has previously said it will review the pensions lifetime allowance, but the party has since gone quiet on this subject. It remains to be seen whether there will be any new restrictions or old rules reinstated on more types of transactions. Any new government will need to raise money and taxing pensions is often seen as an easy route. 

Other than the hullabaloo that Labour has made around the non-domiciled rules, we do not know much yet – and are unlikely to do so until after the election. However, future tax reform appears to be a certainty. And this may mean higher tax rates on the migration of wealth from the UK to the UAE and surrounding region. 

Rupert Connor is partner at Abacus Financial Consultants in Dubai