Labour’s painful budget could fuel wealth exodus to Gulf

Matt Crossick/Empics/Alamy

The UK’s new Labour prime minister Sir Keir Starmer and his chancellor of the exchequer Rachel Reeves warned of a “painful budget” – and they delivered precisely that. 

While it was framed as necessary for the larger UK populace, it also imposes a particularly heavy burden on non-doms and British expats in the Gulf, especially those with substantial estates.

One of the most impactful changes is the proposed “simpler” residence-based system for UK inheritance tax (IHT), which extends the tax’s reach over non-British assets, based on UK residency. 

From April 6 2025 IHT will apply to non-UK assets if an individual has been UK-resident for at least 10 of the previous 20 tax years before the chargeable event (such as death).

The time a former resident remains liable for IHT after leaving the UK will also be adjusted, based on their years of residency, scaling from three to seven years for those with between 10 and 19 years in the UK.

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For internationally mobile British expats, this Labour budget is a gamechanger.

Originally, non-doms faced up to 10 years of “tail” tax liability after leaving the UK. Now, depending on their residency history, that period could be as short as three years. 

This shift places the UAE and other global jurisdictions in a much stronger position to attract UHNWIs (ultra-high-net worth individuals) seeking to shield their wealth from UK taxes.

For long-term expats, the potential to pass on assets free of UK IHT creates substantial estate-planning opportunities.

Meanwhile, those considering repatriation may find new advantages in the four-year “foreign income and gains” exemption window.

Adding to this, from April 2027, the government plans to bring inherited UK pensions into the IHT fold.

Previously, most pensions fell outside the taxable estate, a significant incentive for many British expats to retain their post-UK residency. Now, this change demands reconsideration of pension strategies.

Those in the Gulf region aged over 55 may find a strategic advantage under the UK-UAE double taxation treaty, allowing for potentially tax-free receipt of UK pension funds.

In another move targeting expats, the Labour budget has removed the exemption from the 25 percent charge on transfers to qualifying overseas pension schemes in the EEA (European Economic Area) or Gibraltar unless the individual is a resident in that country.

This change closes a loophole left after the abolition of the lifetime allowance in April, but it could create currency complications for retirees who depend on these schemes.

For Middle East-based Britons, investing in UK property just became even less appealing

The budget’s changes to capital gains tax (CGT) also merit attention.

Effective immediately, CGT rates rise from 10 percent to 18 percent for basic rate taxpayers and from 20 percent to 24 percent for higher rate taxpayers.

This uptick may come as an unpleasant surprise to investors, especially those who rely on income from UK assets while residing abroad. 

For Middle East-based Britons, investing in UK property just became even less appealing. 

UK property investments, already laden with high costs and extensive paperwork,  now face a 5 percent stamp duty surcharge on additional properties, effective immediately.

Those eyeing property for long-term savings might do better with stocks and bonds, which offer a more optimal return while abroad.

Unsurprisingly, this Labour budget could accelerate the exodus of British wealth to tax-friendly havens.

While much of the media attention focuses on wealthy non-doms, the real story may lie with UK business owners, many of whom are likely to find the UAE and similar regions increasingly attractive.

Rupert Connor is a partner at Abacus Financial Consultants, based in Dubai