CHANGE IS INEVITABLE - SPICE TAXATION ON LIKELY TAX POLICIES OF THE NEW LABOUR GOVERNMENT

With the newly elected Labour government taking over the reins, Martin Rimmer from Spice Taxation gives us an overview of the state of UK tax policies, and what may likely change. (this article was last updated on 10th July 2024)

By Martin Rimmer, Managing Director of Spice Taxation Pte Ltd

The recent UK General Election unceremoniously dispensed with 14 years of Conservative Government and returned a landslide win for Sir Keir Starmer’s Labour Party. Labour won an astonishing 412 seats (out of 650), which is a massive 291 more than the Conservatives – polling a total of 9,731,363 votes. Such was the scale of the rebellion against the governing Tory party and the split of the centrist/centre-right vote between a resurgent Liberal Democrat Party and huge popular enthusiasm for Reform UK, that Labour achieved this feat with roughly 500,000 fewer votes than when they polled in 2019 under Jeremy Corbyn, in which they won only 202 seats.

I am no political analyst. However, much as was the case in 2019 when promises of ‘delivering Brexit’ and ‘levelling up’ allowed the Tories to pierce the ‘Red Wall’ and romp to a 163-seat win over Labour, I can’t escape the feeling that the new Government’s majority is a mandate which has been merely lent by the British Public for a time. In 2019, the Tories persuaded typical Labour voters, particularly in the north, to trust them. This time, out of a deep sense of betrayal, those voters returned home and the mainstream centrist/centre-right constituency, which had coalesced around the Tories in 2019, fell apart. It was a form of planned electoral suicide, knowing full well that a huge Labour majority would result. Trust rendered, provisionally perhaps.

As a result, Labour now enjoys the power to govern more forcefully than any Government in recent memory. The Centre/Right is now split between the Tories, Reform UK and the Liberal Democrats. But, given the surprising drop in the popular vote which accompanied the landslide, any serious failure to deliver on the major promises in their 136-page manifesto could reveal serious fragility in their majority in 2029. On the other hand, if Labour succeeds in bringing the transformational change that it believes it can deliver across all areas of governance, it could establish the party in Government for a generation.

So, the time for talking is over and the time for governing has begun. And we should expect this rejuvenated Labour Government to ‘come out of the traps’ at a gallop. Tax policy is going to be at the heart of their decision-making. The new Chancellor, Rachel Reeves, is the first female Chancellor of the Exchequer, and has been a Member of Parliament since 2010. She was described by Sir Keir Starmer in 2023 as “the most influential person on the British left today”. She supports an economic policy which focuses on ‘infrastructure, education and labour supply by rejecting tax cuts and deregulation’ – a policy type that she has coined as ‘securonomics’. In 2021, she supported a 2p cut in the Basic Rate of Income Tax and opposed a 1.2% planned rise in National Insurance. Good signs, perhaps.

So, what has the Labour Party said about various taxes and current issues? When might we expect change?

One Fiscal Event a Year

Rachel Reeves has made it clear that she will break from the routine of a Spring Budget and an Autumn Statement, opting instead for one annual Budget – probably in the Autumn. She has ruled out holding an Emergency Budget, and has committed to only fully costed Budgets supported by the rigorous analysis of the Office for Budget Responsibility. The OBR requires a 10-week preparation period before a Budget. Given the very brief period between the State Opening of Parliament on 17th July and the start of the Summer Recess on 31st July, I can’t imagine that we will have a Budget much before mid-October.

March 2024 Budget Proposals

You may remember that the Conservative’s last Budget announced a plan to abolish ‘non-domiciled status’ for UK tax purposes with effect from 6th April 2025 and to replace the current regime with a residence-based system, for Income Tax, Capital Gains Tax and Inheritance Tax purposes.

Labour has since given its broad approval to the proposals. My sense is that they are likely to proceed with them more or less in their current form, albeit they have already said that they will:

• Not proceed with some of the ‘transitional reliefs’ proposed by the Conservatives for those already resident in the UK, and

• Not proceed with a protection from Inheritance Tax that the Conservatives had built in for pre-existing trusts known as ‘excluded property trusts’.

Beyond this, Labour has made no further comment at this stage. I expect them to press ahead with this at a pace and I would hope to see some renewed momentum soon. They can’t be blind to the serious uncertainty the proposals have created. I am sure that they must also be mindful of the need to attract wealthy individuals into the UK, to prevent their exodus from the UK, and to restore certainty. I expect some reliefs which will encourage inward investment in the context of these changes.

I also think that Labour would be missing an important trick if it didn’t also use this as an opportunity to encourage the British diaspora to return to the UK. Arguably, there is much more to be gained by welcoming British expatriates and other foreign investors home with a broad package of tax incentives, than by penalising foreigners just because they have chosen to make their longer-term homes in the UK.

Income Tax

Labour has committed to not raising Income Tax rates during the next Parliament. Personal tax allowances will remain frozen at least for the moment, and they have been silent on the level of the Personal Allowance and Income Tax Thresholds. This may be telling.

Capital Gains Tax

Labour has been silent about Capital Gains Tax (CGT), leading many to believe that they will align the CGT rates to Income Tax rates. They have already announced that certain Private Equity performance rewards will switch from Capital Gains Tax to Income Tax. Capital Gains Tax is one of only a small number of Personal Tax levers that they have left themselves to pull.

Inheritance Tax

Equally, Labour has been surprisingly silent on the question of Inheritance Tax. I expect them to remove or limit some of the more common reliefs. They might even go as far as to abolish the exemption from Inheritance Tax of unused pensions at death. Otherwise, I do not expect them to increase the rate of Inheritance Tax, although we might see an extension of the Nil Rate Band to compensate for the above.

National Insurance

Labour has also pledged not to increase the rate of National Insurance during the next Parliament.

Corporation Tax

Labour has promised to cap Corporation Tax at 25%, the present top rate. This implies to me that they might increase the starting rate of 19%, and perhaps introduce a flat 25% rate for investment holding companies.

Labour has said that it will increase the surcharge paid by Non-Resident purchasers of Residential Property in England and Northern Ireland by 1% to 3% per band. Expect to see this in an Autumn Budget.

Value Added Tax and Pensions

Labour has pledged not to increase the Standard Rate of VAT, which is currently set at 20%. They will proceed to bring Private School fees into VAT at this rate, which I expect to see in an Autumn Budget. Labour mentioned that it will undertake a review of the pensions landscape (whatever that means). It has, however, confirmed that it will not re-introduce the Lifetime Allowance Charge that the Conservatives abolished in the 2023 Budget. They will preserve the Triple Lock for the State Retirement Pension.

Other Tax Measures

Labour plans to renew focus on combatting aggressive tax avoidance, particularly by large businesses and will allocate GBP 855m to HM Revenue & Customs for this. It intends to replace Business Rates with a ‘new fairer system’, and it plans to introduce a Windfall Tax on Oil and Gas Giants. It is also widely speculated that Labour may introduce some form of Wealth Taxation at some point during the Parliament. Their Manifesto was understandably silent on this highly controversial point though.

In Conclusion

I see very little to make me think that Labour will be a low-tax party. The burden only looks as though it will rise. However, with the trust of 10 million voters to vindicate and a raft of important policies to implement in a transformational way, there is a real fiscal tightrope to be walked over the next 5 years.

I can’t help but be reminded of how Jean Baptiste Colbert once famously said that “the art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing”.

We should know a little more about how the Government intends to set about this task with the King’s Speech at the Opening of Parliament on 17th July, and in what is almost certain to be an Autumn Budget.

Spice Taxation is a Singapore-based independent UK taxation practice for Private Clients, specialising in the needs of British expatriates, those with financial and personal ties to the UK, and those seeking to relocate to or invest in the UK.

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