Tax implications for Israelis of the UK election

The Labour Party has won the UK election after 14 years of the Conservative Party being in government. There will be mixed feelings from a political standpoint, with both parties having their own stances on Israel as well as their support for the UK Jewish community. But how will the change of government impact taxes?

According to Labour’s manifesto, the party aims to deliver economic stability by keeping "taxes inflation and mortgages as low as possible." We note that whilst Labour won’t be increasing income tax, the tax-free thresholds will remain frozen until 2028. Effectively, this will mean that many UK taxpayers will be paying more UK income tax (as they would have under the Conservative Party too).

We discuss in this article various potential tax changes which may be of interest to Israelis with assets or business interests in the UK, or to Israelis planning to move to the UK. It will be particularly of interest to:

New olim (immigrants to Israel) from the UK;
Israelis who moved to the UK less than 4 years ago; Israelis preparing to move to the UK pre-April 2025 and post-April 2025;
Israelis investing into the UK; and
Those with existing trusts or those in the process of setting up trusts (with UK assets).

Abolition of the non-domicile tax regime

The non-UK domicile status is typically relevant for individuals with substantial foreign wealth and is beneficial to new residents in the UK (subject to their future intentions and certain requirements). The Conservative government controversially announced at the last budget in March 2024 that it intended to abolish the non-domicile status. It was controversial as historically it was the Labour Party that had always sought to restrict or abolish this tax status.

The original proposals

From 6 April 2025, newcomers to the UK will enjoy a UK tax exemption on all non-UK income and gains for their first four years of UK residency. This will still be the case even if the foreign monies are remitted to the UK. From year five, they will be taxed on all profits in exactly the same way as standard UK taxpayers - i.e. on the ‘arising’ basis. A ‘newcomer’ is an individual who has not been UK resident during the previous ten tax years. There are transitional rules available to those who recently moved to the UK and are non-UK domiciled. In very broad terms, some of these rules are:-

A ‘Temporary Repatriation Facility’ for two years post 6 April 2025 to allow monies brought into the UK subject to the remittance basis to be taxed at a reduced flat rate of 12%;
An option to rebase the value of capital assets to their market value as at 5 April 2019 (instead of the historical base cost). The objective here is to reduce future capital gains; and
For the period 6 April 2025 to 5 April 2026, only 50% of foreign income will be taxable for those who previously elected for the remittance basis. This essentially offers a discount for the first year of the new rules.

Labour’s plan

The newly elected Labour Party also intends to abolish the non-domicile regime, or in the words of Labour, "the domicile loophole." Labour publicly stated that "While Labour supports most aspects of the proposed replacement to the non-dom rules, including the four-year arrival window…….we are concerned that major loopholes remain."

Without any firm proposals, Labour has indicated that it will address these loopholes as follows:-

The 50% discount for foreign income in the period 6 April 2025 to 5 April 2026 will not apply.
The ‘Temporary Repatriation Facility’ for the two years post 6 April 2025 ought to apply and may be extended or incentivised further to encourage UK taxpayers to remit their foreign monies to the UK. How and what exactly remain to be seen.
A possibility of UK investment income being exempt from UK tax for new arrivals for the first four years. The rationale here is to not disincentivise taxpayers from investing in the UK purely to benefit from the foreign income and gains exemption.
The position on the rebasing option for foreign assets to their market value as at 5 April 2019 is unknown.

Labour has also stated that "Labour will include all foreign assets held in a trust within UK inheritance tax, whenever they were settled, so that nobody living here permanently can avoid paying UK inheritance tax on their worldwide estates." There are other wider UK inheritance tax and trust issues to consider. These policies will have a significant impact on many taxpayers’ current and future tax positions. Professional advice is required here and we have started having these conversations with our clients as to how best to safeguard their assets.

UK property investments

As it stands, non-UK residents purchasing residential property in the UK are subject to a surcharge for Stamp Duty Land Tax (purchase tax) of 2%. Labour intends to increase this to 3%.

What’s next?

At the State Opening of Parliament, i.e. the formal start for the new parliament, which will take place on 17 July, the government’s agenda and budget proposals will be set out. We expect some form of an Autumn budget statement from September 2024.

The attractiveness of the changes for those moving to the UK is in question, albeit the new regime will simplify the existing complex domicile system. Newspaper articles intimate that many UK taxpayers (currently non-UK domiciled) will be looking for more appealing jurisdictions from a tax perspective. Israel’s 10-year tax exemptions are certainly attractive and enjoyed by many new Israeli residents.

Claire Shelemay BFP FCA is the founder and CEO of CrownStone Consulting Ltd ., a UK tax boutique in Tel Aviv.

Published by Globes, Israel business news - en.globes.co.il - on July 10, 2024.