With the general election now a distant memory, a new Labour government installed, and a budget in the autumn, many are concerned about how the Starmer government will reform tax.
During the pre-election run-up, Labour committed to not increasing VAT, income tax, or national insurance and said the same for corporation tax. However, that doesn’t mean that individuals won’t pay more tax through fiscal drag as pay rises take them into higher tax bands that haven’t risen in line with inflation.
However, the media widely leaked that Labour would move to apply VAT to private education despite the potential for increasing the burden on the state sector as parents remove children from private schools. Labour also said it would remove the preferential tax status that non-domiciled taxpayers (taxpayers claiming to have a permanent home outside of the UK) benefit from.
But in other areas, the party was generally silent. So what else could Labour bring in – what do taxpayers need to start planning for?
London-based chartered accountants and tax specialists Saffery commented: “Labour made no promises on capital gains tax (CGT) in its manifesto,” although during the election campaign, it did guarantee that those selling their primary home would not pay CGT.
Labour’s refusal to rule out raising CGT has made it easy for Saffery and others to speculate that it will be increased.
Inheritance tax (IHT) is another potential target for a cash-hungry government. While there was conjecture that the last Conservative government would cut or abolish IHT, it never happened.
Labour has gone on record saying that it would stop using offshore trusts to avoid IHT. But that’s niche and only applies to the seriously wealthy. The risk of significant reform with changes to agricultural and business property relief is of greater concern, making them less generous to those passing on a business.
This is something that City lawyers Farrer & Co. highlighted. It noted that “an increase in the headline rate is possible – although perhaps less likely” and that “there is likely to be a consultation announced on changes to inheritance tax as part of the budget.”
The firm anticipates potential changes in the taxation of gifts made by individuals, with gifts being subject to tax at the time of gifting, rather than when the donor passes away within seven years of making the gift.
And on pensions, investment manager Rathbones thinks that Labour could make tax relief on pensions less generous. It said: “Having originally planned to reinstate the lifetime allowance, Labour has since U-turned” and that it might restrict how much tax-free cash can be withdrawn from a pension.
Those in the energy sector are concerned about Labour’s plan to extend the Energy Profits Levy, increase it by three percentage points, and remove oil and gas company investment allowances. This could lead to reduced investments in the sector, making the UK more reliant on other sources for energy and potentially causing price rises.
Labour also plans to increase tax revenue by focusing on reducing tax avoidance. This includes more HMRC compliance activities, hiring 5000 additional staff, implementing more technology, making legal changes to deter tax evasion, and tightening tax avoidance schemes.
Lastly, it’s worth remembering that Labour is expected to publish a roadmap for business taxes, that, as Farrar explains, sets out “key policy details for the expected five years until the next election with the proposed aim of helping ‘businesses to plan investments with confidence’.” Until that happens, everything is pure conjecture.