Labour has made it clear in their manifesto that they would not be raising National Insurance or the basic, higher or additional rates of Income Tax if they were elected.
Employers and individuals will be reassured that they will not see rates of National Insurance rise in this parliament. Individuals will also be pleased income tax rates will not increase. Taxes might be raised by changing thresholds, for example by extending the band at which the 8% rate of employees National Insurance is paid to above £50,270, or by reducing the basic rate tax band. However, thresholds are more likely to remain unchanged, pushing more people into higher rates of income tax as a result of inflation/fiscal drag.
Income Tax and National Insurance make up nearly 50% of tax receipts, leaving the new government with limited room for manoeuvre, particularly given the commitment not to increase VAT rates. Those paying unprotected taxes, such as Corporation Tax, Capital Gains Tax and Inheritance Tax, will have more cause for concern if the new government's growth or plans to reduce tax avoidance do not deliver.
Although absent from their manifesto, leaks in recent weeks have confirmed that the Labour Party has been drawing up options for raising money by making changes to Capital Gains Tax (CGT) and Inheritance Tax (IHT).
According to the leak, increasing the rate of CGT could raise an extra £8 billion to help the government to balance the books. For those contemplating asset sales in the near future, it would be wise to give some consideration to whether or not to trigger any disposal early, in order to lock in the current lower tax rates.
Any increase in the headline rate of CGT would be unwelcome but what would really hit people hard is introducing restrictions on the most valuable IHT reliefs – Business Relief (BR) and Agricultural Property Relief (APR). Currently these reliefs mean qualifying assets can be passed down the generations without the 40% IHT charge.
It is understood that Labour is considering limiting these reliefs to £500,000 each – a move that would rake in an extra £2.3 billion by 2029/30. Such a move would hit farming families and family owner managed businesses hardest – sectors that are the lifeblood of the UK economy and key for ensuring future growth.
Under the current rules, children inheriting a family manufacturing business worth £5 million would pay no IHT, but under the potential changes this would increase to a whopping £1.8 million. Such a change would make it extremely difficult for families to pass businesses down the generations and could force families to sell in order to pay tax bills.
Lastly, there has also been speculation that Labour has been debating about changing the way lifetime gifts are taxed. Under the current rules provided the person making the gift survives by seven years, no IHT is payable. Any change could see the UK adopt a European model, whereby each individual has a personal lifetime allowance and any gifts they receive above this threshold could give rise to an immediate tax liability.
It is of course impossible to predict the future but what is key is that families review their current exposure to CGT and IHT, what their long term plans are and if taking action sooner could lock in any current, more favourable tax allowances or reliefs.
For many years the UK has had CGT reliefs for entrepreneurs which broadly applied a lower rate of CGT on gains on disposals of businesses; the old Retirement Relief, became Business Asset Taper Relief (BATR), and then Entrepreneurs’ Relief, and now Business Asset Disposal Relief (BADR). The policy objective of these reliefs has been to provide an incentive for our UK small and medium sized business owners to risk their capital to fuel the UK economy driving growth and innovation, and being a significant UK employer.
There is no certainty that CGT rates will rise, and it is quite likely that the Labour Party in government will continue to incentivise entrepreneurs to contribute to economic growth, even if some of the conditions are restricted.
The first we are likely to find out about any change to BADR is at an autumn Fiscal Statement and any changes could take effect from that date. However, for a Chancellor who has promised stability, we could perhaps hope that the earliest that any changes take effect would be 6 April 2025.
With a first Fiscal Statement not expected before September, business owners who are thinking about an exit or succession planning in the short to medium term, may want to explore how they can accelerate those plans to lock in the current rates of tax on the gains their hard work has generated so far.
It is anticipated that the government will now begin the process of removing the VAT exemption from independent schools. Since there is no draft legislation, we are unable to foresee what the government are prepared to change. However, there are a number of considerations for independent schools planning ahead.
Important note: Some schools are being paid significant fees in advance and this could in the short-term adversely affect the VAT recoverable on costs, including building works.
No, unless there is a requirement to do so (some schools are already registered on a compulsory basis). Registering for VAT now will increase administration and it will also result in VAT falling due on some peripheral income streams and services received from overseas. Any benefits in terms of input tax recovery are likely to be minimal.
Independent schools that are not yet required to be registered will exceed the VAT threshold (£90,000) relatively soon after the new legislation becomes effective. Penalties are applied for late registration, so it is important applications are sent to HMRC promptly, as we can expect delays in HMRC processing applications.
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It is well-known that the Conservative proposals in the March 2024 Budget to abolish the existing regime for taxing non-UK domiciled individuals (non-doms) were largely based on original Labour policy. We therefore expect Labour to implement the proposals largely as announced by the Conservatives, subject to certain changes they have already highlighted:
Additional changes could include an extension to the FIG regime to additionally exempt UK investment income and an extension to the temporary repatriation relief beyond 5 April 2027.
There is unlikely to be an emergency Budget in the immediate aftermath of the election, so we might not see draft legislation on the changes until October or November 2024. If these are to take effect from 6 April 2025 as originally proposed, this leaves only a small window within which to plan.
We do not advocate implementing any planning until the detail of the proposed changes is known. However, we do recommend that clients consider the implications of the changes based on what details we currently know in order to be ready to proceed with that planning assuming no further changes when the legislation is published.
Labour have promised in their election manifesto to close the carried interest 'loophole'. The new Chancellor has previously indicated that receipts of carried interest should be subject to income tax, if fund managers have not put their own capital at risk alongside their investors’. However, it is understood that the policy will be put to consultation prior to any enactment by the new government.
This will have a major impact on Investment Managers (Private Equity and Venture Capital Houses) and their executives, with the potential impact of significantly increasing the rate of tax carried interest (where it was capital gain in origin) is subject to.
The carried interest tax rules were implemented in 2015 and have been well understood by advisors and individuals since then, with many of the previous planning opportunities in respect of carry shut down. Investment management firms and executives will be concerned by the potential changes to carried interest and will be keen to hear further details from the new government. However, those individuals/firms who are relatively mobile might now look to different jurisdictions to reside in rather than risk potential additional tax charges on their carried interest.
Individuals with unrealised carried interest holdings, should review their affairs and speak to their advisors if there are any options available to them to help manage any future increases in carried interest taxation.
Property featured as a significant part of the Labour manifesto, mainly with their policies regarding rental reform, leasehold reform and housing market support. There was, however, very little said about property taxes in the run up to the election.
There were a couple of Stamp Duty Land Tax (SDLT) announcements made by Labour prior to the election, these were:
We anticipate the lack of announcements is likely to indicate tax is on the rise for property owners, which will further burden landlords who have already taken the brunt of tax increases in recent years.
Capital Gains Tax (CGT) on residential property at the highest rate of 24% and on land/commercial property at 20% seems to be too low, and according to a leak, an increase is anticipated but the level at which it will increase is unknown. While we don’t expect the rate to align with Income Tax rates, there is plenty of headroom for an increase. There was a suggestion that an increase could raise an extra £8 billion which will go some way towards helping the government to balance the books.
The anticipated CGT rate increase has already triggered property owners to review their property ownership and objectives. This is on top of the Spring Budget 2024 announcement where we saw the abolition of the furnished holiday letting regime from April 2025, which will increase gains for those impacted from a rate of 10% to whatever the new CGT rate will be.
Those already close to making a decision to sell may well want to lock in the gain at the existing rate rather the anticipated higher rate. Sales on the open market or even to connected people can achieve this. This extra volume of transactions will generate extra revenue for the treasury in both CGT and SDLT even if it takes some time for rates to increase.
With CGT rates very likely to increase, a review of your property objectives and timing of disposals should be carefully considered to ensure you deliberately take advantage of what now seems an attractive current regime.
Labour has indicated that a consultation will be launched on the current three tier employment status system, which differentiates between employees, workers and the self-employed.
This is particularly relevant for Professional Practices because under the current salaried members rules, members of an LLP are treated as an employee for tax purposes, if certain conditions are met. If they fail one of the salaried member tests, they will be treated as self-employed. The self-employed have different rights and taxation system.
The aim of Labour's consultation is to create a two tier system where you are treated as either a worker or self-employed. All workers will have the same employment rights.
A consultation would be an opportunity for the new government to revisit the salaried members legislation and make changes. However, until a consultation is released and we see what Labour’s proposals are, we do not know what may be instore for the future of the salaried members legislation. The depth and breadth of the Professional Practices sector will be all over the consultation when it is released and responses will be made.
With an ageing population and fewer people working there are some key decisions for the next government to consider, particularly on pensions. The last few days in the run-up to the election was more about what wasn’t being said than what was, as speculation grew around tax raids on pensions, pensioners needing to pay more tax and the possibility of increases in Inheritance Tax.
The triple lock ensures that the state pension increases by the highest of average earnings, inflation, or 2.5%. The government must assess its sustainability and potential impact on public finances, which places an increasing burden on an already overstretched and overtaxed working population.
More retirees and fewer workers equates to a ticking timebomb for any government in terms of safeguarding a minimum standard of living in retirement and honouring a commitment to working people for having made historic contributions into the state system. The state pension age is set to rise from 66 to 67 between 2026 and 2028 and finalising the timing of the increase to 68 (and beyond) is a sensitive issue that needs to be tackled head-on and not kicked down the road.
Anyone who witnessed the interview with Liz Kendall, the Shadow Secretary of State for Work and Pensions, who repeatedly refused to answer a question around whether Labour had plans to remove tax-free cash from pensions will have alarm bells ringing loudly. Something to keep a close eye on.
Innovation is a healthy theme that runs throughout the latest Industrial Strategy published by the Labour Party. Now they are the party in government they have the mandate to put this into effect.
The Labour government’s defining mission is to restore growth and the industrial strategy is at the heart of this. The government sees that as being a partnership between the public and private sectors.
It is encouraging therefore that the Labour government has stated that it aims for Research and Development (R&D) spend from public and private sources to be 3% of GDP. While there is no timeframe stated, this is a development of the aim of the previous government of 2.4% of GDP by 2027.
The Organisation of Economic Cooperation and Development (OECD) has observed that the UK has one of the highest ratios of government R&D investment to GDP compared with other nations.
However, that used data from 2020; since then, the experience of organisations claiming UK R&D tax credits has changed.
Firstly, the benefit of the relief for most claimant small to medium sized enterprises (SMEs) has reduced from 25% of qualifying costs to 15%, a reduction of 40%. In contrast, larger organisations have experienced an increase in the benefit from an effective rate of 10.5% to 15% of qualifying costs, a rise of 42%. Does this mean that the government is seeking to target R&D tax credits at larger organisations, not the SMEs?
The Labour Industrial Strategy advocates embracing and providing more support for start up and scale up communities. Does this signal we can expect changes to improve the position of SMEs?
Secondly, recently HMRC has changed its approach and is now far more aggressive in challenging claims. This change has been triggered by fraud and a suspicion by HMRC of greater error in R&D tax credits claims. HMRC believe that up to 50% of claims have fraud or error. Unfortunately, that statistic assumes claims that are valid but are withdrawn by an organisation for economic reasons (i.e. they don’t have time and resources to defend a claim) are chalked up as ‘error’. Unfortunately, this view of ‘error’ influences policy regarding R&D tax credits.
It is important to remove fraud and error from R&D tax credit claims, but the experience of many organisations of this changed approach has largely been negative. Unless changes are made to HMRC’s approach and the benefit of the R&D tax credit schemes increased, we will see fewer organisations making claims for R&D tax credits.
On a world stage, in 2024 the UK is lagging behind other countries. France for example, only 20 miles from the UK, has an R&D tax credit scheme that is more beneficial than the UK.
The Labour government has stated that core to its strategy is for it to be ‘mission-based’ and this requires policy consistency and stability to enable businesses to make long-term decisions and investments.
If a Labour government is really serious about R&D spend hitting the 3% target, for public and private sectors to be working together in partnership and for the UK’s R&D tax credit system to be the envy of the world, there are three things it needs to do.
The new Labour government has made a broad commitment in its manifesto to “stop the chaos” and provide certainty for organisations in relation to taxation. In particular, capping of Corporation Tax rates at 25% and the retention of full expensing and annual investment allowance regimes will provide welcome relief to organisations who have been challenged by the complexity and constant changes in the UK tax environment.
Furthermore, the promise of a “roadmap for business taxation for the next parliament” should also assist in making the UK a more attractive proposition for inbound investment. This roadmap will extend to a review and replacement of the current business rates system in England, which they believe disincentivises investment and creates further uncertainty for UK retailers.
The Labour government has stated that core to its strategy is for it to be ‘mission-based’. This requires policy consistency and stability to enable organisations to make long-term decisions and investments. We would also consider that at the centre of any mission based tax strategy should be a commitment to tax simplification, which is not only in the best interests of taxpayers, but will also support the treasury in its goal of incentivising growth and investment and enable HMRC to efficiently collect tax when due.
The delivery of £1.5 million new houses over the next Parliament is a key commitment of Labour’s new government. Key to this will be ensuring that the buildings created are appropriate for the future net zero carbon world, hopefully this government will look at fiscal incentives, as well as regulations to support this.
Coupled with undertaking planning system reforms, fast-tracking brownfield sites, increasing social housing and reforming business rates, the Labour government have set themselves some very ambitious targets to transform our space. These issues have been inherent in our system for a long while, Labour will need to demonstrate a clear drive and consistency in approach to show clear progress in this area. Fingers crossed for one long-term in post Housing Minister in this Parliament.
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