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TaxGem: What taxes might be impacted under a Labour government?

By Steph Gemson, Director, TaxGem

With the new Prime Minister in situ at Downing Street, businesses across the UK are keen to know what this will mean for them. And of course, as accountancy and tax professionals, we are here to advice our clients with whatever the future holds under a Labour government.

Some of this commentary will obviously be speculative. However, we saw many potential tax changes missed from Labour’s pre-election manifesto. Was this on purpose? We will never know. However, what we can do is consider what the changes could be and the realities of those being implemented.

Steph Gemson

The new PM, Sir Kier Starmer, has made it clear that his plan for short-term economic growth is to stick to strict fiscal rules and avoid stirring economic unrest. We therefore believe there will only be one budget statement per year. The new Chancellor of the Exchequer, Rachel Reeves, has indicated that a Budget would only be held with the accompanying Office for Budget Responsibility forecasts, which requires ten weeks’ notice. Therefore, a budget before October is unlikely.

So, what taxes might be impacted?

VAT on private school fees

The new PM has made his plan to add VAT on private school fees widely known, which could add approximately 20% to the price of private education. I am erring on the side of caution with this as there is always the possibility that each of the services could be separated out with different VAT treatments instead of the entire cost, forming part of a higher single, standard supply.

Business rates for private schools

Labour’s manifesto includes getting rid of private schools’ 80% relief from business rates which could lead to a further increase in private school fees if these rising costs are passed on to parents. Some private schools may offer an option for pre-payment before it comes into place, or perhaps Grandparents could help with pre-payment as a tax efficient transfer of wealth to the next generation.

Income Tax and National Insurance

Under the Tories, income tax thresholds were frozen until 2028, and Labour promised not to raise income tax or national insurance, although this was featured in the manifesto. On the Labour website, they state that “Labour will not raise taxes on working people.” We can only watch and wait.

Capital Gains Tax

Capital Gains Tax (CGT) is an area of huge contradiction and speculation. In the summer of 2023, Labour declared that they did not intend to implement a wealth tax. However, this contradicts rumours that have circulated in the past.  For example, back in 2019, there were strong indications that Labour wanted to raise CGT, and these rumours have certainly resurfaced in recent months that this may actually be on the cards.

Pension review

For state pensions, Labour will maintain the state pension triple lock; however, it is no secret that Labour is committed to a pension review for private pensions. Some believe that this could be a positive thing as their manifesto declared that they would “deliver better returns for savers” and “improve security in retirement.”

However, this may not be such happy news from a tax perspective, as it is possible to make tax relief on pensions less favourable. Chancellor Rachel Reeves had previously stated that there should be changes to tax relief on pension contributions, providing a flat rate of relief for everyone. This would be incredibly challenging on the benefit of providing income to a pension for higher and additional rate taxpayers. However, it is understood that there has been a change of heart on this.

Inheritance Tax

In the UK, we already pay one of the highest rates of inheritance tax, 40% above the nil rate band. It is currently set at £325k per person, with an additional £175k main residence relief for those who leave their home to direct descendants when they die.

There have been rumours of an Inheritance Tax raid where these bands could change, thus making more people eligible for the 40% tax on their death estate.

Non-Dom Tax

Labour has been very clear of their intention to get rid of the non-dom tax status, which encourages wealthy foreign individuals to become UK residents but to keep overseas asserts and income outside of the charges on UK taxes, unless remitted in the UK.

In the Spring 2024 Budget, the Conservatives implemented rules to replace the concept of domicile and its UK tax benefits with new rules, which last just four years instead of 15. There is also a transitional rule for existing tax residents who have already been in the UK for more than four years, providing a temporary 50% reduction in the foreign income subject to UK tax for 2025/6. However, Labour has said that they intend to “close down this loophole”.

Conclusion

As we said at the beginning, much of this is speculative, so we are preparing ourselves to help our clients when we hear what the Chancellor has to say in a potential Autumn Budget.

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