Labour’s Tax Pledge: Stability Amid Uncertain Reforms

9th July 2024, 3:00 pm

The Labour manifesto says this.

“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”

There is little discussion of tax reform in the Labour party manifesto. The only item which might be regarded as reform is stability in the rate of corporate tax, when arguably what is needed is a reduction to boost confidence and investment in the UK.

However, the manifesto promises do not mean that personal taxes will not be raised. Quite the contrary. Surely Labour’s spending plans means it will opt for raising taxes.

The manifesto announced tax plans to raise around £8.5bn in taxes – mainly through increased tax compliance and closure of so-called non-dom loopholes – but that pales into insignificance compared with the almost £1tn collected by HMRC each year. Therefore, tax rises will surely be more substantial over the course of the parliament.

  • One expects that wealth taxes will be firmly in their sights, and I would include possible reform of CGT and Inheritance Tax in that discussion.
  • The manifesto is silent on capital gains tax, and we might expect an increase to the headline rates of 20% (28% for residential property) perhaps to align them with income tax rates. People should be planning for this now in my opinion. However, HMRC statistics demonstrate that CGT rates can significantly alter taxpayer behaviour, and they estimate that a five-percentage point increase would raise just £85m over three years. A more significant increase may actually cost the Treasury. If despite this, headline rates are increased, we should perhaps expect a return of something like taper relief or indexation relief to reduce the effective rate on long term gains and encourage (or rather not dissuade from) long term investment.
  • Much has been said about the desire to close so called non-dom loopholes and Labour will continue with the Foreign Income & Gains (FIG) regime from 2025/26 but they are likely to remove the transitional measure (the so called ‘non-dom discount’) of the 50% reduction in tax on foreign income in 2025/26. Will this also extend to removing the reduced 12% rate on bringing previously unremitted offshore income and gains to the UK in 2025/26 and 2026/27? Probably not in my view, as this could raise significant additional revenue, unless of course the package of measures causes, as is widely anticipated, an exodus of non-doms from the UK.
  • It is the likely wider imposition of inheritance tax on UK resident non-doms that may cause a costly exodus of non-doms from the UK and it was recently reported that 30% of non-doms may leave the UK. It will also most likely discourage others from coming to the UK. Our inheritance tax regime is uncompetitive, and the measures will seek to impose the tax on assets and wealth outside the UK.

Labour has said:

We will end the use of offshore trusts to avoid inheritance tax so that everyone who makes their home here in the UK pays their taxes here.“.

  • How they will do that remains to be seen, it is more difficult that it might seem, but surely the question the government should be asking is whether scrapping the current favourable inheritance tax treatment results in more or less tax being paid? The pragmatic approach, one that likely to raise or protect tax revenues, would be to impose the FIG rules for income tax and capital gains tax and retain the special inheritance tax regime for non-doms in respect of their non-UK assets. Otherwise, we will encourage those people who bring wealth, investment and a lack of reliance on the state, to leave which will surely be to everyone’s detriment apart from satisfying the ideology that it is wrong in principle for some people to be able to live a substantial part of their life in the UK only for their offshore estates to be outside inheritance tax, regardless of the cost/benefit.
  • One way of potentially reducing the non-dom exodus could be to reform inheritance tax such that the base is widened by the restriction of reliefs, but the rate is reduced. If the rate was lower than 40% it may be more palatable to everyone (inheritance tax seems to be a universally disliked tax even though it only affects less than 5% of estates), reduce the desire or need for planning and be more internationally competitive.
  • Will there be a ‘double death tax’ in the form of CGT and IHT? Labour could remove the exemption from CGT on death which means that an estate beneficiary does not have to pay tax on gains that accrued before they inherited the asset. The Office for Tax Simplification has previously recommended the abolition of the capital gains uplift on death either in respect of assets which qualified for relief from IHT, or more widely on all the assets of the estate. Both approaches would create significant administrative challenges, not least for the beneficiary in determining the CGT base cost of an asset they did not personally acquire, and which may have been acquired many years or generations before. The latter would create a genuine double taxation on the disposal of assets by estate beneficiaries.

Pensions could be in Labour’s sights and think back to 1997 and Gordon Brown’s £5bn annual tax raid on company pension schemes which was kept under wraps in the run op to the election. There are several possible avenues of attack:

  • They could introduce a flat rate of tax relief on pension contributions, thereby ending the advantage that higher and additional rate taxpayers enjoy. They respectively get relief at 40 and 45% compared to 20% for basic rate taxpayers.
  • Despite the uproar when the Lifetime Allowance for pensions was abolished by the Conservatives last year, Labour recently backtracked completely and announced that it will drop plans to reintroduce the LTA. One must ask why they have done this. Perhaps more significant reform is in the pipeline? Could measures be introduced to impose IHT on undrawn pension funds? Could undrawn pension funds of a certain size be liable to income tax and CGT on investment income and gains? Both measures would discourage the warehousing of wealth in pensions funds which currently enjoy a tax exemption on income and gains and are outside of one’s estate for IHT.
  • We could see a reduction in the contribution limit for ISAs – currently £20K. But surely they will overstep the mark if they consider unravelling these tax wrappers completely?

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