The polls were reasonably accurate this time around, and the result of last Thursday’s general election was as many expected.
As a firm, we have been having many conversations with clients and contacts leading up to the election about the impact of a new Labour government. Now, post-election, those potential planning opportunities become more focused.
We pride ourselves on providing proactive, practical tax advice, especially during times of change—be it political, economic, or changes to clients’ personal, family, and business situations.
A change in government obviously brings significant potential for tax change, particularly when there is a large gap difference in ideology and approach. What changes are we expecting under the new Labour government? What should be considered now before the expected changes are implemented?
Our insights are detailed below. Much of this is speculative and cannot be guaranteed, but it gives you an idea of what we are thinking and expecting, enabling you to make decisions and seek advice from us.
Rachel Reeves (the new Chancellor and first female Chancellor no less) previously in the campaign explained that a new Labour government would not carry out an Emergency Budget, given the proposals needed to be reviewed and commented on by the Office for Budget Responsibility (OBR) – very sensible, we don’t need another Liza Truss mini-Budget moment! This review will take c10 weeks, and then parliamentary recess in September points to an October Budget. This is when we expect many changes to be announced and implemented.
Income Tax & National Insurance Contributions (NICs)
The Labour manifesto committed to not raising income tax and NICs on “working people.” This hints at a possible increase in employers’ NIC and potentially NICs being chargeable on other forms of income, such as investment income.
Coupled with this is the possibility that the State Pension age cap on NICs ceases.
I also wouldn’t be surprised to see income tax rates on dividends increasing.
Such changes would likely take place from 6 April 2025. The NIC regime needs a total rethink in general, but I think 6 April 2025 will come too soon for this to be considered and managed.
Some tweaking to marginal bands, such as the high-income child benefit charge and loss of personal allowance, will also likely be examined.
Capital Gains Tax (CGT)
We strongly expect CGT rates to be raised to match income tax rates, together with a likely return of the indexation allowance (abolished in 2008 for individuals), which allowed for a deduction/relief for inflationary increases for the period the asset had been owned.
Business Asset Disposal Relief might be retained, but the lifetime limit could be lowered again from the current £1 million per person. Those considering selling assets and realising gains in the near term should look at implementing disposals before the next Budget to ensure they benefit from the current regime.
Additionally, we expect the capital gains base cost uplift on inherited assets to be removed where the asset has received relief or exemption on the deceased’s death (e.g. spousal exemption, Business Property Relief, Agricultural Property Relief). Those considering disposing of such inherited assets should seek advice.
These changes would likely take place from Budget Day.
Corporation Tax
The Labour manifesto committed to keeping the main rate of corporation tax at 25% for this parliament (unless geopolitical or global changes render the UK uncompetitive). It also honoured the “full expensing” capital allowances regime announced by the outgoing Conservative government.
We hope for more considered thinking around Research & Development relief, as the current system is broken. However, it is complex, and changes may not be feasible by 6 April 2025.
Inheritance Tax (IHT)
Significant changes to IHT are expected. Although Labour has not formally indicated anything, it is very likely that they will significantly curtail or abolish Business Property Relief (BPR), possibly capping it at £500,000 per person. If retained in some form (i.e. if capped), we strongly expect the assets able to qualify for the relief to be curtailed (e.g. AIM listed shares losing qualifying status).
We think Agricultural Property Relief might be removed for landlords and retained only for those owning and farming the land themselves.
These changes would be huge, and the loss of BPR would be catastrophic for some. Clients relying on the current benefits of BPR and APR should consider their positions.
Additionally, the “residence nil-rate band” may be abolished, reducing the available nil-rate band to the standard £325,000 per individual (£650,000 per married couple in most scenarios).
These changes would likely take effect from 6 April 2025.
VAT
Labour’s manifesto committed to not raising VAT rates. However, private education fees might be subjected to VAT, likely implemented from Budget Day. Families impacted should consider whether income tax planning, using gifts from grandparents (potentially as part of their IHT planning), could mitigate the overall tax cost.
Pensions
After some toing and froing, Rachel Reeves confirmed that a Labour government would not reverse the abolition of the lifetime allowance announced by the previous Conservative government.
However, we expect the IHT exemption for most pension funds to be removed, making pension funds chargeable to IHT. Additionally, the 25% tax-free lump sum might be curtailed or abolished, with changes likely from Budget Day.
Other Considerations
The announced abolition of the Furnished Holiday Let (FHL) regime was mishandled. We still lack certainty about some anti-avoidance measures that were set to take place from that Budget Day. The abolition will likely still be implemented largely from 6 April 2025, but capital gains BADR may cease from Budget Day.
The operation of HM Revenue & Customs (HMRC) is currently as bad as we as a firm have ever seen it. It is not fit for purpose as it stands. We expect more investment, restructuring, and recruitment, leading to improved service levels.
Making Tax Digital for income tax and corporation tax needs reconsideration due to mismanagement. Implementation dates may slip again, but with a more considered approach.
Labour’s manifesto committed to replacing the Business Rates system, which is much needed. It would be logical to consider this in conjunction with stamp duty land tax reform.
These points are food for thought for many of our clients and others. Please contact us if you want to discuss any of the above and seek advice.
Written by Steve Maggs, Tax Partner