Chancellor announces call for evidence on carried interest tax and provides further detail on non-dom reform

During its general election campaign, the Labour Party had pledged to abolish the carried interest tax "loophole".  However, it did not provide any further policy detail, leading to much speculation as to what it would actually entail. 

The government has now launched a call for evidence on the tax treatment of carried interest.  The call for evidence does not provide any specific policy detail but instead seeks answers to the following three questions:

1. How can the tax treatment of carried interest most appropriately reflect its economic characteristics?
2. What are the different structures and market practices with respect to carried interest?
3. Are there lessons that can be learned from approaches taken in other countries?

The call for evidence makes clear that the government is seeking to take "decisive action" in relation to the tax treatment of carried interest, but also to "protect the UK's position as a world-leading asset management hub".

The call for evidence closes on 30 August and the government has said that "stakeholders should expect a further announcement at the Budget on 30 October."

Travers Smith, together with the industry associations on which we sit, will be responding to this call for evidence in the coming weeks.

In the Spring Budget, the last government announced the abolition, from 6 April 2025, of the current tax regime for Non-Doms and its replacement with a residence-based regime.  It was expected that Labour would retain most of the key elements of those planned reforms, but that there would be some significant changes. The government has today, in a policy paper, provided important further detail, including the following key points:

• The main plank of the new rules remains unchanged.  This is that, broadly, the current Non-Dom rules will be abolished from 6 April 2025 and replaced by a regime under which individuals who become UK resident after ten tax years of non-UK residence can choose not to pay tax on foreign income and gains ("FIG") arising in the first four tax years after becoming UK resident. After that time, they will be taxed in the same way as other UK tax residents. 
  
  
• Consistent with her pre-election statements, the Chancellor has said dropped the transitional rule that was to be introduced under which individuals who are no longer within the remittance regime but are not eligible for the new FIG rules would only be subject to tax on 50% of their foreign income arising in 2025-26. 
  
  
• The previous government had said sought to encourage non-residents to repatriate existing FIG held offshore by subjecting it to 12% tax (rather than the full rates) if remitted into the UK in 2025-26 or 2026-27.  The Chancellor has confirmed that there will be a temporary repatriation facility, but it seems that the tax rate and period for which the facility applies may differ from the original proposals, with the government saying that they "will be set to make use as attractive as possible".  In addition, the policy paper confirms that the government is exploring ways to expand the scope of the facility, including to stockpiled income and gains within overseas structures.
  
  
• The previous government had said that there would be a capital gains rebasing for UK resident individuals who have claimed the remittance basis and are neither UK domiciled nor UK deemed domiciled by 5 April 2025.  If, after that date, they dispose of a personally held foreign asset that they held at 5 April 2019, they were to be able to elect to rebase it to its value as at 5 April 2019.  It is slightly unclear the extent to which there will be any amendments to this proposal, but the policy paper says that "the appropriate rebasing date" is being considered, so it seems clear that the 5 April 2019 is not set in stone.
  
  
• Foreign assets held in so-called 'excluded property trusts' will be brought fully within the scope of UK inheritance tax ("IHT"). The previous government had proposed to maintain the current IHT-protection for trusts established pre-April 2025. This announcement (although included in the Labour manifesto) is likely to have significant implications for many current and former Non-Doms.  The policy paper indicates that there may be some protection to allow trusts that have already been established and structured (to reflect the current rules) to be appropriately adjusted."