Labour Government: What tax changes to expect

As Labour secured a substantial majority in last week’s general election, our Price Bailey tax team start to consider what is known or suspected of their fiscal policy and what taxpayers might look to do in the short term. We aim to update this article accordingly once we receive further detail.

Pensions

It seems likely that some more changes to pensions will come, in reaction to the changes made in the Spring Budget 2023. In that Budget, the lifetime allowance (a charge on the total value of pension savings when benefits are taken) was abolished.  It is highly possible that the lifetime allowance charge or something similar will be reintroduced, or a cap introduced on the IHT protection that pensions currently enjoy.

We would expect individuals with good amounts of pension savings to seriously consider the 25% tax free withdrawal from available pensions, whilst the tax-free lump sum remains available. In so doing, this could limit the ability to make future pension contributions and so impacted individuals will need to consider their options from a number of angles, including their investment strategy and taxes.

IHT estate

Many will be alert to IFS recommendations to cap Business Property Relief (BPR) at £500,000 per person, and to withdraw the relief on AIM listed shares or other structured IHT financial products. Such a concern may bring forward plans to gift assets onto trusts, where BPR is currently unlimited and a deferral from capital gains tax (known as hold-over relief) on the introduction of the asset is available.

In the farming sector the extra protection of BPR in addition to Agricultural Property Relief (APR) is often very valuable and we may see those impacted looking at much earlier succession of family farms than has been seen in the past.  There are often capital gains tax and SDLT implications when looking at succession in farming businesses and advice is recommended as early as possible.

Acceleration of sales

The 24% CGT rate for residential property is as low as it has been in recent times, and we could see an uptick in sales given this fact and the number of fixed rate mortgages falling due for renewal with far higher rates this summer. Taxpayers must continue to be alert to the 60-day reporting and payment requirements.

With the proposed abolition of FHLs and the precarious nature of the 10% rate of Business Asset Disposal Relief (BADR) it’s possible we will also see taxpayers either cease their ‘Airbnb’ style activities on holiday homes and / or selling up completely. In both cases there may be an opportunity for the 10% tax rate on gains of up to £1m per person.

We are anticipating more company sales. Whilst not as popular pre-election as expected, owners will be looking at conventional sales in a resurgent M&A market combined with the 20% CGT rate which Labour has been intentionally avoiding comment on. This uncertainty might also lead to softer transactions such as Management Buyouts and Employee Ownership Trusts. Being able to set terms of transactions in a way that secures the tax is due in the current period and not subject to future rates is likely to be high on agendas here, especially where earn-outs are required.

The current rates may also be attractive for those wishing to gift property or companies. In the former a claim to hold-over relief is rarely available and so banking a low rate of tax on gift may be advantageous. Such transactions are easy to complete quickly between family members.

Non- UK domiciled individuals

We are quite likely to see our non-UK domiciled clients continue to search for certainty with Conservative plans in this space unlikely to make it to law, and Labour confirming they will tighten certain aspects of the proposed changes.

Independent school fees

We know many clients have undertaken prepayment planning to seek to avoid VAT and they may not have asked for advice in so doing. We expect to assist clients where planning is challenged and whether they have to settle VAT-only invoices, which may be a matter of contract law as much as tax law. Should you wish to read more on Labour’s plans for VAT on independent schools please refer to our recent article.

We also expect to see increased activity by taxpayers with trusts or who are planning to use trusts for school fees for grandchildren. Existing trusts may require further settlements to cover extra future costs and new trusts need to ensure their administrative and compliance requirements are met.  Those unable to make further settlements onto trust without inheritance tax charge may need to consider further planning, such as the use of a family investment company.

Private equity

We will almost certainly see a raid on carried interest, most likely through an increase in the tax rate (currently 28%), along with a need to pre-empt these changes by potentially affected individuals. Material changes may lead to planning for non-residence in another jurisdiction. Conversely smaller changes or escapes for senior fund managers who tend to have sufficient skin in the game would soften appetites to stay.

Key Takeaways

Given Labour’s commitment to not increase the rates of VAT, Income Tax and NIC and to cap Corporation Tax at 25%, any changes to increase the tax take are likely to come from wealth or to be very targeted in the short term.

We know from so much commentary on the effects of fiscal drag on the allowances in the system that tax take can increase materially without rate increases. We may see other tinkering in the detail to improve that effect.

There may be council tax and business rate reform too which could impact a much wider populous.

Should you have any questions regarding details within this article or wish to seek further advice, please use the form below to contact one of our Price Bailey experts.