Two manifesto items from the Labour Party – ending the non-dom system and changing how private equity carried interest is taxed – will be enforced, the new government has confirmed. However, the fine details of what will happen on inheritance tax, and how carried interest tax changes will affect taxpayers, remain unclear.

This week, the UK government has moved ahead with its pre-election promise to remove the “outdated concept of domicile status” and has introduced a four-year residence-based system, taking effect from the start of the new tax year in April 2025. 

In another move that figured in the Labour Party election manifesto, the government gave private equity firms and other interested parties until 30 August to submit details to inform how changes to private equity will be taxed. Media reports said a decision, such as the way in which carried interest is taxed, will be made in the budget statement on 30 October this year. 

The previous Conservative government sought to neutralise the non-dom issue by promising to end it, introducing a new system tied to residency. Legislative plans were stymied by the 4 July election date. 

Labour has vowed to take a tougher line on the position of non-doms’ inheritance tax on trusts they have set up – a crucial issue that some advisors say was decisive in encouraging wealthy people to leave the UK. However, a paragraph that some private client lawyers have seized on – based on comments seen by this publication – is whether the government will allow a form of "grandfathering" of non-doms' previously-agreed arrangements. The UK Treasury made this statement: “The government recognises that trusts will already have been established and structured to reflect current rules.”

However, the government has killed the idea that it would change or delay its reforms to the regime, audit, tax and business advisory firm, Blick Rothenberg, said in a note.

“Non-doms holding out for changes or a delay to the original Conservative government proposals will be disappointed, as the reforms will be largely the same as announced by Jeremy Hunt in his last Spring Budget as Chancellor,” Nimesh Shah, CEO of Blick Rothenberg, said. 

“The new government has committed to implementing the four-year Foreign Income and Gains (FIG) regime from 6 April 2025, and there is clear intent to progress that change as soon as possible,” Shah continued. “The policy paper curtails some of the original transitional provisions for the move to the FIG regime – including removing the first-year discount on foreign income, intimating an increase to the tax rate for the temporary repatriation facility and confirming that it will remove the inheritance tax exemption for trusts.”

“Many non-doms have been critical of the proposals and it has been widely reported that non-doms are considering leaving the UK to take residency in Italy, the UAE, Switzerland and similar jurisdictions offering tax breaks. The confirmation that the Labour government is pressing ahead with its plans is likely to reiterate and, in some cases, accelerate plans to exit the UK.”

Lawyers have urged non-doms and their advisors not to wait for the final shape of government plans, but to start making plans immediately.

The new Chancellor of the Exchequer, Rachel Reeves, wants to tax private equity – a sector that has boomed in recent years – to regulate how investors are paid. Carried interest, typically 20 per cent of the gains that buyout fund managers generate when they sell investments, is taxed as a capital gain – at the marginal tax rate of 28 per cent – rather than as income, which attracts a top rate of 45 per cent plus National Insurance. Labour has promised to tax such carried interest as income.

There has been speculation that Reeves wants to raise capital gains tax more broadly in line with income tax, an idea that would seem to clash with Reeves’ stated aim of boosting investment and economic growth. 

The debate about such taxes is a reminder of a long-standing argument in economics about whether raising taxes above a certain point reduces rather than increases revenue, because it blunts incentives and hits entrepreneurship.