The New Government and potential changes

On 5 July 2024, the Labour Party secured a historic landslide victory at the United Kingdom’s General Election. The Labour Party, under Sir Keir Starmer, won 412 seats which has provided them with a solid majority and mandate to make real changes in the House of Commons.

The General Election was announced by the incumbent Conservative Party, led by Rishi Sunak on 22 May 2024, to take place on 4 July 2024. Within this period, all political parties from across the UK were fiercely campaigning and introducing their manifestoes and pledges, which included a lot of differential approaches to tax reforms in the future.

Pearson Hards LLP has prepared the following information for our clients, specifically in relation to the likely tax changes to take place under the new Labour Government, as have been announced or largely speculated to be announced in the future.

Income Tax, National Insurance, Value-Added Tax and Corporation Tax

Labour has ruled out any changes to Income Tax, National Insurance, VAT and Corporation Tax. For many, this will be a welcomed statement by a new government signaling a commitment to helping working people within the UK. However, for many others this may be a sign that Labour will look to target capital gains and inheritance taxes through the introduction of new laws and reforms to existing regimes.

The taxes which Labour has confirmed there will be no material changes to account for approximately 75% of the annual tax take in the United Kingdom. This suggests that Labour will be cracking down on other tax areas in order to deliver the much-needed economic growth the UK needs.

We take a look below at some of these potential reforms. It is important to note that this is speculative and that the Chancellor, Rachel Reeves, has announced that Labour’s Budget is due to take place by the end of July 2024 and will provide some definitive answers to many of the tax reform speculations currently in the United Kingdom.

Inheritance Tax

During the campaign trail, Labour remained rather uncomfortably quiet about any potential changes or plans to reform the UK’s inheritance tax system. This will be some concern to our clients who interact with our Private Wealth team at Pearson Hards LLP in planning their estates.

Given that Labour seem to be focusing on a crackdown on tax avoidance by large businesses and wealthy individuals, it is more than likely that some changes may occur to the current IHT thresholds and gifting regimes.

The current threshold for IHT remains at £325,000, frozen until 2028-2029 under current governmental plans. However, this remains a tempting area for Labour to make reforms in order to bolster tax take given that they have boxed themselves in with their tax pledges in other areas. Currently, there are no taxes on gifts made as long as the person gifting them survives the transaction for a further seven years. This tapered relief is out-of-step with neighboring EU countries which have already began introducing a standard ‘gift tax’. It is very possible that the United Kingdom may follow suit under Labour.

Furthermore, Labour may look to target specific IHT relief such as the residence nil-band, an extra £175,000 which allows homeowners to pass up to £500,00 to their families (or up to £1,000,000 if they are a couple) provided their children inherit the main property. Further relief affected may also include the changing to exemptions for business assets and agricultural properties which are outside the scope of this note.

At the heart of the Labour Government’s plans are the closure of the non-domicile status tax loopholes which would also, if reformed or abolished, have a knock-on effect on IHT.

Many will remember the news back in 2022 that Rishi Sunak’s spouse, Akshata Murty, was subject to the non-domicile status. As a result of which she was not required to pay up to 39.35% in dividend tax for the £11.6m she received in the previous tax year.

Labour have stated that they wish to modernise this deeply historic system of non-dom, which has only ever seen one reform in 2015 since its inception, to adequately address individuals who genuinely come to the United Kingdom to live for a short period of time.  They state that they intend to use the monies generated from the reform to assist the NHS and school breakfast clubs.

Capital Gains Tax

Labour has again remained very quiet on any proposals to make changes to capital gains tax (CGT). CGT is a tax payable on most personal assets worth more than £6,000, such as second homes, shares and business assets. CGT is applied on the profits generated from the increase in value to those assets once sold.

Labour have already made one commitment to CGT changes which involves closing a loophole on the treatment of banker’s bonuses, so that it is treated as income tax rather than capital gains. Other than this, it has remained vague about any possible reforms.

Individuals looking to save more of their money, and avoid any detrimental changes to CGT, would be well-placed to utilize Individual Saving’s Accounts (ISAs) which allows for up to a maximum £20,000 in each financial year in savings across several different types of ISA, such as cash, stocks and shares, innovative finance and Lifetime ISAs.

However, ISAs may also be the subject to reform themselves as they are quite costly to the Government in terms of the tax relief, despite the fact that a very small percentage of UK citizens were able to maximize their ISAs each year since their introduction.

Pensions

Pensions do not attract CGT. Labour has also confirmed that pensions will continue to benefit from the ‘Triple Lock’, which guarantees that state pensions rise each April by the highest out of inflation, wages or 2.5%, whichever is highest. Labour has also further promised that the ability to take a 25% tax-free lump sum on retirement remains a permanent feature of the tax system which it has no plans to change.

Labour will need to also clarify and deal with the possibility of pensions rising with the Triple Lock to the extent that the state pension exceeds the £12,570 personal allowance, which may lead to pensioners being taxed on an income-basis if their state pension exceeds their personal allowance threshold.

Stamp Duty Land Tax

Labour has pledged to add an additional 1% surcharge of stamp duty land tax to properties bought by non-UK residents to raise tax.

Furthermore, Labour will look to reverse the decision of Jeremy Hunt in Autumn 2022’s budget to temporarily raise the threshold for SDLT for first-time buyers. Currently, the threshold is £425,000 for first-time buyers in relation to properties worth £625,000 or less. However, Labour has already pledged that they will lower the SDLT threshold back down to £300,000 in April 2025, meaning many new first-time buyers will experience higher amounts of SDLT payable under a Labour government.

VAT on Private School Fees

A much-debated manifesto pledge, the Labour Government have plans to introduce VAT onto private school fees. It is expected that this new measure will be introduced during their first budget. However, there are wide concerns as to the timing of implementation so that the parents of children in private education will not suffer from sudden mid-year fee hikes which may affect the continuance of that education.

The new Chancellor, Rachel Reeves, has suggested during the lead-up to the General Election that this change will not come into force until 2025 and that it will not apply retrospectively. This will ensure that any genuine pre-payments of school fees will not be affected by the introduction of this new measure.

However, the Labour Government have also made it clear that they will not rule out anti-forestalling legislation, which is a term used for legislation to deal with transactions which are carried out between the announcement and implementation of legal measures, some of which may be used to circumvent the new laws.

Therefore, caution should be taken if individuals are looking to reduce their VAT liability on private school fees before the implementation of the new measures proposed.

Business Rates

Under their manifesto, Labour have pledged to replace the current business rates system completely and introduce a new system which will incentivize investments, level the playing field between high-street and global conglomerate branches, tackle the issue of empty properties and support entrepreneurship.

Further details are to be announced in the coming weeks or at Labour’s Budget, due to take place by the end of July 2024.

If you have any comments or concerns about any of the issues arising from any of the above please do contact Isaac Leigh-Howarth (ilhowarth@pearsonhards.co.uk) or our Private Client department for any further information on info@pearsonhards.co.uk or telephone 0208 949 9500.