Election Countdown: Labour’s tax plans

Britain has endured a prolonged period of political uncertainty. Over the past 13 years, the UK has seen five prime ministers, seven chancellors of the exchequer, four general elections, and a vote to leave the European Union.

This trend is set to continue in 2024, with most political pundits predicting a general election in either May or October next year. Incumbent Rishi Sunak may wait until October to give time for inflation to fall further and real incomes to recover, however, in doing so, he risks fighting an election in the aftermath of local-government elections which are likely to be challenging for the Conservatives.

Irrespective of the date, this election will be dominated by the economy. Labour has spent the past year courting big business and presenting itself as a safe pair of hands in the aftermath of Liz Truss’ disastrous mini-budget. Sir Keir Starmer, and his shadow chancellor Rachel Reeves, have set out an ambitious economic agenda, including significant green subsidises and house-building deregulation.

With the Labour party maintaining a consistent double-digit lead in the polls, we have started to discuss with our clients what tax policy might look like under a Starmer/Reeves government. While much can change between now and the general election, if you have any questions about the potential impact of these policies, then please reach out to our wealth structuring team for a confidential conversation.

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INCOME & GAINS

Labour intends to remove the tax benefits for ‘non-doms,’ which Keir Starmer described at the party conference as ‘a legal loophole that allows some of the richest people in the world to avoid paying tax in Britain.’ However, Labour’s economic team would replace this with, ‘a modern scheme for people who are genuinely living in the UK for short periods to allow us to continue to attract top international talent,’ albeit no details have yet been provided on how this would work in practice.

We have been actively discussing this topic with our network of advisers, including ex-HMRC Inspectors, political commentators, and senior members of the tax teams at big four accountancy firms and magic circle law firms. In short, the consensus seems to be that a further reduced version of the current deemed domicile rules for those who have been UK tax resident for 15 out of prior 20 tax years would be the most likely outcome, with a 5-year UK tax residence period being anecdotally suggested as the period of being ‘non-dom’ before being deemed UK domiciled.

In terms of broader income tax changes, there was an interesting use of language at the Labour party conference indicating that taxes would not increase for ‘working people’ – this seemed to us to be more a comment that income tax and social security are not likely to increase, rather than a comment on which socio-economic group may not face tax increases under a Labour government.

In recent months, the Labour party have ruled out raising income tax rates. At the party conference, shadow chancellor Rachel Reeves noted that preferential tax treatment of wealth generators was a crucial element in growing the economy, and that wholesale equalisation of income tax and capital gains tax could hurt investment in the UK.

In contrast, the treatment of executives in private equity continues to be targeted, with further tax clampdowns on carried interest/performance fees. Carried interest, subject to meeting certain conditions and not falling within the ‘income based carried interest’ rules, is currently subject to capital gains tax at an enhanced rate of 28%.  Labour has said it would amend this so that carried interest would be subject to income tax (top rate of 45%).

Meanwhile, ahead of the recent Conservative party conference, 33 Tory MPs, including Liz Truss, signed a pledge not to ‘vote for or support any new taxes that increase the overall tax burden’. The ‘Conservative Growth Group,’ a pressure group of low tax-favouring Conservative MPs, is now c.60 strong, with members of the group making several calls for growth-stimulating tax cuts during the recent party conference. While the Truss government was short-lived, many of her economic policies remain popular within the Conservative party. We expect that Rishi Sunak will be under pressure from his own party to reduce the tax burden which sits at a post-World War II high.

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INHERITANCE & PROPERTY

Labour have ruled out introducing a new wealth tax. Contrary to recent commentary from the Conservatives, who are reportedly considering a reduction and eventual abolishment of inheritance tax, we expect no material changes to inheritance tax rates from the Labour party. That being said, a scrapping of various Inheritance Tax reliefs and exemptions remains on the cards.

Labour have proposed to further raise SDLT rates (a tax on the acquisition of UK real estate) for overseas buyers, though no specific figure was mentioned. The current surcharge is 2% on the purchase of residential property in England and Northern Ireland by a non-UK resident purchaser. Labour has also been critical of the increase of the SDLT nil rate threshold from £125,000 to £250,000.

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SCHOOL FEES

The tax announcement at the Labour party conference which received the most press attention was a pledge to add VAT to private school fees and make schools pay business rates. This has been a consistent policy for several years and Sir Keir Starmer has recently stated that it will be introduced in the first Budget of a new Labour government – an intention that was fully championed by Rachel Reeves in her conference speech. Assuming a general election takes place in October 2024, absent a Labour emergency budget, we would expect that the first school year affected by the change would be 2025/26 at the earliest.