Since the result of the general election on Thursday 4th of July 2024 our clients, partners and connections have come to us with one simple question: What tax changes will come under Labour?
Press speculation and word on the street is that Labour are likely to first target these changes:
We’re hoping to share our opinion on what is likely to happen based on our knowledge, facts and experience by answering a series of questions we believe you might want to ask.
I don’t think so.
A part of their manifesto was to bring in a tax lock for working people. They have pledged that there will be no increase in Income Tax, National Insurance or VAT.
That presents the problem of how they will raise the £8.5bn a year extra that they need to pour into frontline services. And whilst the tax rates won’t increase, I suspect that Personal Allowances won’t either, meaning that just because salaries and pensions increase more people get pushed into higher tax brackets which results in fiscal drag and an overall tax-take increase.
I expect some radical changes in other areas where previously Non-Vatable Items will fall into the VAT net and other taxes such as Capital Gains Tax and Inheritance Tax will be reformed. Their taxation of UK private and company pensions will be an interesting one also. From a macro perspective I can only see that reliefs and allowances will be reduced, changed, or abolished. The potential cash cows that they have are
I would expect so.
A rate hike is the obvious one to look at – however they could also start to include assets that were previously Capital Gains Tax (CGT) exempt to be chargeable.
They have pledged that a person’s principal private residence would remain exempt. It was interesting in the manifesto that no promises were made on CGT and when directly questioned Starmer refused to rule out raising CGT rates.
Private equity fund managers may be specifically targeted with the taxation of carried interest (a share of profits from a private equity, venture capital). Carried Interest was charged at CGT rates, and legislation to tax it at income tax rates wouldn’t surprise me.
With Starmer also wanting investment into UK companies, an undue CGT on investment in foreign companies may well be on the horizon.
This is the biggie for me…IHT revenues in the UK stood at £2.38bn in the 2010/2011 tax year. This revenue take rose to £7.5bn by 2023/2024.
Labour have pledged to end the use of offshore trusts to avoid inheritance tax. I would not be surprised to see reforms to the Exemptions and Reliefs here meaning Business Property Relief and Agricultural property relief being less generous.
A radical reform could mean that the automatic inheritance of the nil rate bands between spouses could become less generous or even phased out especially as the “baby boomer” generation are now in their late seventies and hold the majority of the accumulated private wealth in the UK.
I would also expect a cap on the amounts that can be gifted which are currently PET’s (Potentially Exempt Transfers). Currently an uncapped amount can be gifted and 0% tax paid if the donor survives for 7 years.
Either the amount can be capped or the timescale lengthened or a combination of both.
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This measure intends to raise £5.5bn extra tax per annum. It is controversial and radical.
Non-dom status is awarded to people who are from abroad and decide to live in the UK. Income earned from non UK activities is currently non taxable in the UK except where that income is remitted to the UK. These people are typically High Net Worth (HNW) and make extensive use of offshore trusts to reduce taxes.
Labour will tax offshore trusts firstly and re-write the rules for non-doms.
This is a double-edged sword as if Labour gets this wrong then there may well be a UK abandonment having an impact on the intended tax take (if they all leave then there will be no-one to tax), as well as business and property investment that non-doms bring to the UK.
Property purchase by overseas nationals (including British expats) currently incur a Stamp Duty surcharge of 2%. This will increase to 3%.
Labour previously announced they would re-introduce the Lifetime Allowance Charge, and then announced they wouldn’t. The crux of it is that pension tax relief costs the country a lot of money.
In a research briefing produced for the House of Commons in March 2023 it was calculated that pension tax relief granted in the 20/21 tax year amounted to £67.3 billion whilst in the same year tax collected from pension payments amounted to £18.3 billion – meaning an adjusted net cost of £48.2 billion when adding in lost NI contributions.
Source: https://researchbriefings.files.parliament.uk/documents/CBP-7505/CBP-7505.pdf
To balance the books and reduce the net cost the government can either:
I would not be surprised to see a combination of all three measures introduced.
The Institute for Fiscal Studies commented that reintroducing pensions back into the Inheritance Tax Regime would be appropriate. Pensions are arguably the most complex systems to get right, but such are the incentives to save into pensions the taxation of these vehicles when monies are withdrawn is also crucial.
I expect changes to the top rates of tax relief applied, I also expect changes to the “Tax Free Cash” regime and changes to the tax regime on death.
It would simply mean that anything above an amount of £1,073,100 would be taxable at either 55% or 25% as and when benefits were activated.
It is important to remember that Starmer is a person who now leads Britain but urged the electorate (twice) to put Jeremy Corbyn into power as he admired how radical his thoughts were. He won’t be frightened to be radical as he has won a big majority. The manifesto was entitled “Our plan to change Britain”. Its primary focus to draw votes was to create a tax lock for workers – a pledge to not raise income Tax, VAT, or National Insurance rates. If he keeps that pledge he needs to dive into other areas to increase tax revenues (IHT-CGT- Taking away exemptions) as we have explored in this article.
If you have any further questions or would like our experts to assist you in navigating these evolving times we’re always happy to hear from you.
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