10 Jul 2024

The Labour Government and tax: where next? Our analysis

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In our recent article, we summarised the tax plans outlined in the Labour Party’s election manifesto. This article takes a more detailed look at what tax measures we may see in the first fiscal event of the new Labour Government i.e. a Budget or Statement expected no earlier than 13 September.

The manifesto remains our main source, though we’ve also taken account of some recent statements from Chancellor Rachel Reeves and other Labour politicians.

In implementing the manifesto, much depends on the composition of the Parliamentary Labour Party, including pressure from MPs less supportive of the leadership.

‘Labour will not increase taxes on working people’

On page 21 of the manifesto, under Economic Stability, we get the first proper mention of tax:

The Conservatives have raised the tax burden to a 70-year high. We will ensure taxes on working people are kept as low as possible. Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.’

This is arguably more interesting for what it doesn’t say.  There is no mention of capital gains tax (CGT), inheritance tax (IHT), council tax, business rates (or its proposal replacement – see below).

It is not entirely clear what ‘taxes on working people’ means. Taken literally, this could exclude pensioners. It may mean low-paid , and those subsisting on the State Pension as opposed to elderly high net worth individuals. It may be that Labour regard CGT and IHT as less relevant to ‘working people’, and so ripe for increases should the need to find more revenue become apparent.

In interviews during the electioneering period, senior Labour politicians said that their current plans show “no need” to raise CGT.

One possibility is that Labour may be looking to align CGT rates with income tax rates. In the Labour manifesto for the previous election, there was a proposal to align CGT rates with income tax rates but also to bring back indexation allowance to moderate the effects of inflation. Because there is no specific intention stated to increase CGT rates, this aspect isn’t actually covered, so we will have to wait and see if any increase in CGT rates will be accompanied by reintroducing indexation allowance.

On the one hand, it seems unfair that someone who pays £100k for an asset in 1960 and sells it in 2024 for £1m should pay the same CGT as someone who buys an asset for £100,000 in 2023 and sells it for £1m in 2024. On the other hand, they both end up with £1m which, if they’d worked away in an office or factory, would have been subject to income tax at 45% – so maybe full alignment is also seen as fair.

A possible compromise which would seem to chime with the general thrust of the manifesto would be to charge short-term gains at a higher rate, leaving existing rates in place for long-term gains, maybe along the lines of the ‘taper relief’ which existed for the first decade of the last Labour Government between 1998 and 2008.

‘We will abolish non-dom status’

The manifesto proposes to abolish non-domicile status ‘once and for all’ and replace it ‘with a modern scheme for people genuinely in the country for a short period’.

Reform of the non-dom rules was of course also proposed by the Conservative Government in its 2024 Spring Budget (as covered in our April webinar), although excluded from the Finance Bill because of the election.

The Conservatives proposed grace periods of four years for income tax and CGT and 10 years for IHT. The Labour manifesto states no detail and in particular how long the ‘short period’ would be. One assumes that it will be no longer and possibly shorter than the periods proposed by the Conservatives.

Labour also propose to end the use of offshore trusts to avoid IHT. At present an individual who sets up an offshore trust before he becomes UK-domiciled or deemed domiciled has permanent exemption from IHT on non-UK assets in the trust. The Government’s proposals for non-doms proposed to retain that status for existing offshore trusts. Labour had already said after the 2024 Spring Budget that they would not maintain this.

‘Carried interest tax loophole’

Labour also says that for private equity it will change the tax treatment of carried interest so that it is no longer taxed as capital gain. This is a long-standing concern for Labour and was included in their last manifesto. It is this practice that led to comments about fund managers paying less tax than their cleaners. There is already anti-avoidance legislation targeted at abuses of carried interest treatment, but in the main it is still possible for carried interest to be treated as gain.

It is assumed that Labour would change the rules to tax carried interest as income, although this is not explicitly stated in the manifesto. It is unclear how widely private equity carried interest will be defined. Of course, if Labour aligns CGT and income tax rates (without reintroducing indexation allowance), specific changes for private equity may not be needed. The fact that the carried interest proposal is included in the manifesto may mean that there are no immediate plans to align income tax and CGT rates.

The fund management industry has commented that this could lead to an exodus of fund managers from the UK. However, the manifesto does point out that ‘financial services are one of Britain’s greatest success stories’ and Labour wants to create the conditions to support innovation and growth in the sector through various measures.

Reducing tax avoidance

There is a commitment to ‘modernise HMRC and change the law to tackle tax avoidance’. The manifesto says:

‘We will increase registration and reporting requirements, strengthen HMRC’s powers, invest in new technology and build capacity within HMRC. This, combined with a renewed focus on tax avoidance by large businesses and the wealthy, will begin to close the tax gap and ensure everyone pays their fair share.’

Business tax

This gets a dedicated subsection in the manifesto under Kickstarting Economic Growth. Labour claims that under the Conservative Government there have been numerous changes to business tax that make long-term planning difficult. It says that it will take a long-term approach, committing itself to one major fiscal event a year and publishing a roadmap for business taxation over the life of the next parliament. This would certainly be welcome.

It states it will cap corporation tax at the current level of 25%, which it says is the lowest in the G7, and will act if other countries make changes which makes this rate less competitive. It also says that it will ‘retain a permanent full expensing system for capital investment and the annual investment allowance for small business’, and will ‘give firms greater clarity on what qualifies for allowances to improve business investment decisions’.

In our earlier article on Labour’s tax proposals, we commented that based on the CIOT report of the Labour Party Conference 2022, Labour favours investment allowances over a low tax rate. Rachel Reeves in a keynote speech said that businesses were telling her that corporation tax rates going down doesn’t solve their problems – what they need is properly targeted investment allowances. Although there is no specific commitment on capital allowances or investment tax reliefs, the statement in the manifesto seems to be consistent with this approach.

Our earlier article also commented that Labour seemed not to favour low corporation tax rates. There was a feeling that corporation tax cuts benefitted online giants (e.g. Amazon) and large multinationals rather than the average Brit and that they were poorly targeted. However, the manifesto seems to rule out increases to corporation tax rates.

The manifesto proposes to replace the business rates system (in England), which it sees as creating uncertainty and placing an undue burden on the high streets. It proposes a new system that will raise the same revenue but will level the playing field between the high street and online giants.

Property tax

The manifesto says that Labour’s plans for increased building will be funded by increasing the rate of the stamp duty land tax (SDLT) surcharge paid by non-UK residents by 1%. The surcharge is currently 2% payable by non-UK residents, and certain UK companies owned by non-UK residents on buying UK residential property.

Energy

One of the manifesto’s missions is ‘to make Britain a clean energy superpower’. This includes creating a new publicly owned company, Great British Energy. Funding for this will come by ‘closing loopholes’ in the windfall tax on oil and gas companies; extending the duration of the Energy Profits Levy until the end of the current parliament; increasing the Levy rate by 3%; and removing over-generous investment allowances.

VAT and private schools

The manifesto proposes to ‘end the VAT exemption and business rates relief for private schools to invest in our state schools’. This had already been announced and widely publicised.

Rachel Reeves has said that “these changes would be in our first Budget, but they would come in after that, not retrospectively.” According to The Times, experts believe that the changes won’t commence until the next full school year following that Budget i.e. from September 2025.

The effect of this change is difficult to predict: much depends on the extent to which children are taken out of private education and moved to the state sector.

What’s not in the manifesto?

There is no mention of a wealth tax or land value tax. As mentioned in our earlier article, these ideas are popular with some sections of the Labour party. It is possible that the replacement of business rates proposed could embrace these concepts in some form or other.

The prospect of ‘mansion tax’ was raised by the Liberal Democrats in 2009, adopted by Labour under Jeremy Corbyn in 2015 and was even contemplated in 2020 by Boris Johnson. Perhaps the fact that all the main parties have toyed with the idea before discarding it suggests that it the idea could be off the table, at least for the medium term.

A document published by the Labour Party in 2017 titled Labour’s Tax Transparency and Enforcement Programme (LTTEF) included proposals to crack down on tax evasion and tax avoidance. Although the detail was a little vague, it included proposals to strengthen the General Anti-Abuse Rule (GAAR); look at Advanced Thin Capitalisation Agreements (which it thought too generous to multinationals); introduce full country-by-country reporting across tax jurisdictions; set up registers of company ownership beyond the current 25% and for trusts; and a proposal for public filing of tax returns for large companies and wealthy individuals earning more than £1 million.

Although there is a general commitment to crack down on avoidance, these specific ideas are not mentioned. The manifesto’s paragraph on cracking down on tax avoidance does specifically refer to avoidance by large businesses and the wealthy, and so it could be that some of these measures resurface.

Final observations

The manifesto does comment that the tax burden under the Conservative Government was as high as it had ever been. However, it does not comment on the fiscal drag of freezing of allowances and tax bands.

The freezing of tax allowances is a sort of tax increase. If someone earning £20k gets an inflation increase of 5% to £21k, if his personal allowance stays frozen at £12,000 his tax bill increases from £1,600 to £1,800. That is an increase of 12.5% i.e. more than inflation. The £200 tax increase is the same for everyone getting the full personal allowance – that is for those with incomes up to about £100,000. This hits a worker on £20,000 a year proportionately far harder than his manager on £120,000. The same point applies to the freezing of the basic rate and higher rate tax bands.

We would have thought Labour would dislike this regressive form of taxation. It may be that in its desire not to be seen as putting taxes up, Labour plan to retain this stealth tax increase. We wonder whether any government, if taxes have to be increased, would have the courage to do this in an open and transparent way by adding a penny in the pound to income tax rather than the opaque and regressive freezing of tax bands?

The Chancellor’s first Budget or Statement will bring certainty over which Labour manifesto proposals will eventually become government legislation, and when. Our specialists will be analysing what this means for you, your family and your business. In the meantime, to discuss how Labour’s proposals may affect you, please feel free to get in touch with your usual contact at BKL.