UK's new gov't shakes up taxation

London  credit: Shutterstock
London credit: Shutterstock

What Israelis need to know about the Labour government's first budget.

The UK Labour Party indeed made its presence felt in the House of Commons with Chancellor Rachel Reeves delivering her first budget statement, entitled "Fixing the Foundations to Deliver Change." As suggested by the title, she highlighted that significant changes needed to be made to the tax landscape to address the UK’s fiscal challenges (hinting that these were caused by the 14 years in government of the Conservative Party).

Labour’s approach marks a major shift in economic policy. Let’s look at the various tax changes which may be of interest to Israelis with assets or business interests in the UK, or Israelis planning to move to the UK. It will be particularly of interest to:

  • Israelis leaving the UK;
  • Israelis who moved to the UK less than 4 years ago;
  • Israelis preparing to move to the UK; and
  • Israelis investing into the UK.

We will also discuss if the UK continues to be a top destination of choice for Israeli companies.

Farewell non-domicile tax regime

After much speculation, the Chancellor did indeed uphold her campaign pledge of abolishing the non-domicile regime, together with some interesting tweaks. Many Israelis who moved to the UK so far have enjoyed the benefits of the non-domicile status.

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 past ten tax years. Whilst this is not as beneficial as the original non-domicile status, Israelis moving to the UK can certainly benefit from the four-year tax exemption and plan accordingly. Labour described it as "a new internationally competitive residence-based regime." Many wealthy UK taxpayers may disagree and look to other jurisdictions with more favourable tax treatments. Israel’s ten-year tax exemptions are certainly attractive and enjoyed by many new Israeli residents.

It’s also worth noting that, under the new rules, newcomers will have to report the foreign income and gains, albeit they are not subject to UK tax. This is similar to the new rules coming into effect in Israel from January 2026 for new ‘olim’ (immigrants) in relation to their ten year tax benefits. New olim in Israel will also be requested to report on their foreign income and gains, although the tax exemption on them will remain. This change was due to pressure from the Organisation for Economic Co-operation and Development (OECD) to bring Israel in line with OECD international policy. As the UK is going down the same route, it will be telling if other jurisdictions adjust their reporting requirements.

There are some special rules applying to people who are non-UK domiciled and moved to the UK more than four years ago. These tweaks are designed to reduce the sting of the abolition of the non-domicile regime and encourage taxpayers to bring some of their offshore monies into the UK.

  • The proposed "Temporary Repatriation Facility" was confirmed, and in fact extended for three 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% (15% for the third year). This will help to reduce the sting of the abolition of the non-domicile regime and encourage taxpayers to bring some of their offshore monies into the UK.
  • An option to rebase the value of capital assets to their market value as at 5 April 2017 (instead of the historical base cost). The objective here is to reduce future capital gains; although it was initially suggested that assets could be rebased as at 5 April 2019.

Inheritance tax

Inheritance tax itself is a controversial tax, and it was feared that moving inheritance tax to a residence-based system would detrimentally impact on taxpayers leaving the UK. Those who have lived in the UK for at least ten years remain connected to the UK even after they leave the UK for up to ten years - this means that they are exposed to UK inheritance tax for up to ten years after leaving the UK. This was slightly tweaked whereby the exposure will depend on how long a person has lived in the UK, and can be as little as three years.

There are other wider UK inheritance tax and trust issues to consider. The Chancellor’s speech took a veiled swipe at the opposition party by pledging to close the "Tory loophole" - hinting at the use of trusts to protect assets from inheritance tax. New offshore trusts will be less attractive and existing offshore trusts will be subject to transitional rules. This will have a significant impact on UK taxpayers with trusts, and professional advice is needed here.

UK property investments

The surcharge for additional residential property transactions on or after 31 October 2024 (i.e., immediately in effect from the budget announcement) will be increased from 3% to 5%. Glossed over in the announcement itself, the threshold for paying Stamp Duty Land Tax (equivalent to purchase tax in Israel), is also being reduced to £190,000. This means that more people will be paying stamp duty, and targets residential property landlords and purchasers of holiday homes or second homes.

Capital gains tax

Unsurprisingly, the capital gains tax rates (on disposal of UK assets other than residential property) were increased. The increase were lower than expected (10% to 18%; 20% to 24% for higher rate taxpayers) but the changes were implemented immediately.

UK-Israel business

Businesses breathed a sigh of relief that corporation tax rates were unaffected (remaining at 25%, the lowest in the G7) although a new "Corporate Tax Roadmap" was mentioned which will be published down the line. The budget states that the UK is committed to maintaining "the UK’s generous R&D tax reliefs and world-leading capital allowance offer." The UK wishes to encourage more capital investment by business owners confident and certain of the reliefs they can obtain.

It’s worth noting that changes were made to reduce the level of Business Property Relief (formerly known as Entrepreneur’s Relief). Additionally, the rate of relief for UK inheritance tax was reduced to 50% for certain quoted shares -for example AIM shares.

The Chancellor announced an increase in employers’ national insurance contributions to 15%, increasing the cost of each employee to a business.

All that said, the government is on a mission to support UK economic and fiscal stability and to deliver sustained growth in the long term.

What’s next?

Those in the scope of UK tax will digest the new changes and adapt accordingly. As always, there is some planning and preparation needed, but it is most likely to be business as usual.

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 November 4, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

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