As of 4 July, we have a new Labour government. On the 29 July the chancellor Rachel Reeves made her first major announcements including a statement that there is a 22bn “black hole” in public finances. What could this mean for future tax policy and what changes may be on the horizon and when?
What Tax Pledges have Labour already made?
The party manifesto contained the key areas Labour are likely to focus on in any initial Budget, some of which the Chancellor provided further detail about in her speech on 29 July.
- Charging VAT on private school fees. On 29 July Labour confirmed their manifesto pledge to introduce VAT on private school fees as of 1 January 2025. There is also an anti-forestalling measure, so any fees pertaining to the term starting on or after 1 January 2025 will be subject to VAT from 29 July i.e. the 20% rate of VAT will apply to pre-payment of fees from now.
- Closing ‘loopholes’ in the windfall tax on oil and gas companies. Labour is proposing to raise just over £6 billion across the next parliament through increasing and extending the Energy Profits Levy– a ‘windfall’ tax on the profits of oil and gas companies
- Taxing carried interest as income. Currently, carried interest is subject to capital gains tax (CGT) at a maximum rate of 28%. The rate that might apply in future is yet to be confirmed and on 29 July, the Chancellor announced a “call for evidence” detailing plans to engage with expert stakeholders on the action which will be taken. Official numbers suggest that there are only around 3,000 people receiving carried interest each year.
- SDLT. Increasing the rate of stamp duty land tax (SDLT) on purchases of residential property in England and Northern Ireland by non-UK residents by one percent.
- Non Dom Regime. The Conservative government already proposed abolishing the UK’s tax regime for Non Domiciled individuals from April 2025. Labour stated that they support many aspects of the original proposals, but they would make some changes should they form the next government and on 29 July the Chancellor confirmed that those changes would include removing the 50% reduction on foreign income arising in 2025/26 for those who lose access to the remittance basis; introducing a temporary repatriation facility for pre 6 April 2025 unremitted income and gains (more detail to be given in the Autumn statement) and a rebasing of foreign chargeable assets for CGT for former remittance basis users. The complexity involved in a wholesale change to the non dom rules should not be under-estimated and more consultation may be required (particularly in respect of any possible changes to UK Inheritance Tax for overseas trusts)
- Publishing a roadmap for business taxation within the first six months to give businesses more certainty about investment decisions. This would include looking at greater use of advance rulings and clearances for major investment projects.
- Furnished Holiday Lets (FHLs)-an announcement made in the Conservative’s last budget in March to abolish the FHL regime has been given more colour in the Chancellor’s latest announcements on 29 July confirming that from April 2025 the tax advantages received by FHL owners will be removed. Finance costs will be restricted in the same way as other let properties, capital allowances will be removed, trading business reliefs will no longer be available for capital gains on FHLs and FHL income will no longer count as relevant income for pension contributions. Anti-forestalling measures are also in place from 6 March 2024.
- Reducing the “tax gap.” A pledge to provide HMRC with 5,000 more staff to work on reducing the UK “tax gap” (estimated at £39.8bn for 2022/23), ring-fencing some of the additional funding to use on strategically important criminal cases and investing in digitisation to improve HMRC’s services. In addition, they plan to consult on regulating the tax advice market and making changes to tackle non compliance.
What else is on the horizon?
Personal Taxes
Income Tax & National Insurance (NIC)
Labour have committed not to increase NICs or the basic, or higher rates of income tax but they also made no proposals to increase tax bands either resulting in continued “fiscal drag” as more individuals are pulled into the next tax bracket as wages rise. The Government intends to keep tax bands frozen at their current thresholds until 2028.
Capital Gains Tax (CGT)
There is no mention of CGT in the Labour manifesto. They have previously indicated that increases in CGT rates are not high on their agenda, following comments from Rachel Reeves that ‘preferential tax treatment’ for wealth generators was an important element in growing an economy, and that a ‘wholesale equalisation’ of income tax and capital gains tax could hurt investment. However, in recent interviews she has not specifically ruled out a rise in CGT (or indeed a change to certain reliefs e.g. business asset disposal relief) and we know historically that CGT has been a key lever for Chancellors and indeed it is one of the few options left open to Labour as a revenue raiser.
Inheritance Tax (IHT)
Aside from the proposals on offshore trusts, there was no other reference to IHT in the Labour manifesto, and there is wide speculation that there could be significant reform. The Institute of Fiscal Studies (IFS) wrote in April 2024 that the government could make the IHT system fairer in three ways:
- Removal of Business Relief for AIM shares;
- Introducing a cap on Business and Agricultural property reliefs;
- Ending the tax free passing on of pension pots.
The starting point for any changes could be a consultation in the Autumn, especially given how emotive IHT can be.
Pensions
Labour had previously stated that they would re-introduce the lifetime allowance charge. During the election campaign that plan was dropped but that decision could make other changes to pensions tax reliefs more likely in future.
Business Taxes
Corporation Tax
Labour have committed to not raising the main rate of corporation tax (currently 25%) and to retaining key capital allowances, including full expensing and the annual investment allowance.
The party also committed to maintain the current structure of R&D tax credits and the patent box. It pledged to crack down on fraudulent and incorrect claims for R&D tax relief and will look at the regime across all business sectors beginning with life sciences.
Labour also pledged to reform the business rates system
VAT
They have also committed to keeping the current main rate of VAT (20%)
When can we expect any changes?
On 29 July, the Chancellor confirmed that the Budget will take place on 30 October 2024.
Labour has committed to holding a single budget each year in the final two weeks of November going forwards.
What should I be considering now?
Whilst immediate tax changes may be unlikely, tax changes under the new government do seem inevitable.
Whilst we know what the current rules are, it may be sensible to complete any transactions/plans you are currently undertaking (property/share sales, gifts etc) prior to the first Budget on 30 October and to potentially review any plans you had on the horizon to determine whether it may be worthwhile accelerating these. For example, now would be a good time to review your succession and wealth preservation plans.
It is never a good idea to trigger a voluntary tax liability based on speculative tax changes and to let the “tax tail wag the dog” but it would be sensible to review your circumstances and any concerns now and to consider any appropriate/sensible options available with your advisor. Please get in touch with your usual RG contact to discuss any questions you have on this matter.
Photo by Amy Hirschi on Unsplash