This article is written by:

Tony Wickenden

Managing Director, Technical Connection

What does Labour’s victory mean for tax and financial planning?

 In the wake of the, largely expected, comprehensive Labour victory what, if any, tax changes could emerge and what could they mean for tax and financial planning strategies?

This article aims to provide answers to those two questions by looking at:

• The current and future tax landscape: The continuing freeze on many personal tax thresholds and exemptions and Labour's known taxation commitments  

• Speculated tax changes: An exploration of those areas of taxation not specifically stated to be protected from change  

• Considerations for financial planners given inherent uncertainty over taxation  

So, what does the taxation context look like now and what could it look like under a Labour Government?

We know that the freeze on the many personal tax thresholds and exemptions will remain with us until the end of tax year 2027/28.

What else have labour committed to?

• Removing non-dom status as a determinant of exposure to tax on foreign income and gains and to IHT on non-UK situs assets: Not implementing the proposed transitional provisions and removing the ability to use.  Abolishing non-dom tax status and tax benefits (e.g. IHT avoidance through excluded property offshore trusts to avoid IHT). 

• Charging Adding VAT and business rates on private schools 

• Closing the private equity ‘carried interest’ route that facilitates the taxation of return as a capital gain rather than as income

• Increasing stamp duty on residential property purchases by non-UK residents 

We also know that Labour has ‘ruled out' increases in tax for ‘working people’ (i.e. headline rates of Income Tax, NICs and VAT) and to maintaining a cap on Corporation Tax at 25%. 

This represents a real ‘tax straitjacket’ if you are looking to raise additional funds from taxation. According to the Institute for Fiscal Studies ‘Tax Lab’, Income Tax (28%) National Insurance (18%) and VAT (17%) together account for 63% of the total tax yield.  

Add in Corporation Tax, producing 11% of the total tax yield and you are up to 74%. So, the taxes that produce three quarters of the total tax yield won’t be increased – according to the Labour promise.

Whilst their manifesto was substantially silent on the taxation of wealth (CGT and IHT) and investment taxes, having ruled out rises to the rates of Income Tax, VAT, National Insurance and Corporation taxes, there has been speculation around potential changes (essentially, tax increases) in some of the following areas:

• Higher tax on capital gains 

• Business assets disposal relief  

• Higher tax on investment income - especially dividends

• Pensions tax relief 

• Pensions tax free allowances 

• Inheritance Tax

Why the speculation on these taxes?

The speculation around taxation is founded in the general recognition that (despite Labour reassurance’) without material increase in economic growth (which would in turn result in more tax revenue), increased borrowing or cuts in areas of unprotected spending and given the Labour Party’s proposed expenditure plans, tax increases (in areas of other than Income Tax, NIC, Vat and Corporation Tax) will almost certainly be necessary.  

Even if growth does emerge from Labour policies e.g. in relation to planning and infrastructure, any resulting growth (and the additional tax revenue that comes with it) is unlikely to emerge in the short term.

This potential ‘time lag’ for growth to emerge is especially relevant given the commitment to continue to adhere to the fiscal rule that sees government debt falling as a proportion of GDP (Gross Domestic Product) by the end of each five-year OBR forecasting period.  

The challenge, especially in relation to CGT and IHT, is that they only represent 1.7% and 0.7% of the total tax yield and are prone to behavioural change that can reduce additional yield if changes are made. Although, despite this one could take the view that, while increases to these taxes would not represent a fiscal ‘silver bullet’, ‘every little helps’.

Self-evidently, we don’t yet have any detail of what (if any) changes might be introduced.  We’ll have to wait for the first budget to find that out. So, when could that be?

What could be revealed in Labour’s first budget and when can we expect it? 

If Rachel Reeves gives the OBR (Office for Budget responsibility) notice on 5 July, then Friday 13 September would be the earliest day on which she could present a budget.  

Ignoring the superstitious date, traditionally budgets are Wednesday events, so a more realistic earliest date is 18 September. However, while one can never be certain about these things, it’s looking increasingly likely that the budget will be in October or even a little later. But of course.…you never know.

By then, the government will need to have decided whether it is going for a full three-year spending review (2025-28), as scheduled by Jeremy Hunt, or opting for a one-year interim review. It is possible that Rachel Reeves will combine the spending review and budget in one statement, given their interdependencies.  

What does this likely budget date mean for financial advisers? 

Despite, or maybe even because of, the uncertainty advisers will be expected to have a balanced but informed view of what tax could look like when designing or reviewing financial plans or when just responding to questions. Especially when there is heightened uncertainty and anxiety, informed behavioural coaching will be at a premium and a major contributor to the delivery of advice alpha.

Let’s look at some of the areas you could be asked about by clients:

CGT and investment income (especially dividend) taxation  

Commentators have pointed to further changes to CGT as a potential source of additional government revenue. In considering this the point made above in relation to the amount of additional tax revenue that could be generated from CGT change should be kept in mind.  

The latest figures for the 2021/22 tax year show that 394,000 taxpayers paid a total amount of £16.7bn in CGT. And, even among those who do pay CGT, 45% of the total tax collected comes from a very small group of taxpayers – less than 4,000 individuals – who made gains of £5m or more.  

All of that said and based on the principle that ‘every little helps’, it’s arguable that changes to CGT could be introduced and still be justified as not affecting the income of ‘working people’ - even though of course ‘working people’ (however they are defined) could also have dividends and capital gains.  

As we know, reductions to CGT and dividend allowances over the past couple of years mean that people holding wealth outside of a tax wrapper are already exposed to a higher tax burden on both dividend income and capital gains. 

The speculated fear in relation to capital gains is that the rate of tax applied to gains is increased from its current 10/20/24/28%.  

With this in mind, but only where a disposal in 2024/25 is already planned and strictly subject to commercial/economic considerations some may consider bringing the disposal forward to access the rates of tax available now.  

In relation to investment income taxation, if dividends are more harshly treated and especially if capital gains are also more harshly treated too, then as well as considering the obvious tax wrappers of pensions and ISAs there could be a stronger tax-based case for considering the tax deferment and tax management benefits of investment bonds. 

Business Assets Disposal Relief

One of the major contributors to the government yield from capital gains tax is that driven by sales of business assets. Currently, subject to satisfying the necessary conditions for Business Assets Disposal Relief (BADR), up to £1m of gains from the disposal of an interest in a qualifying business would be taxed at the lower rate of 10%. 

While this could be in the firing line this is not thought to be a major target given the generally accepted importance of encouraging small business.  

Having said that, as for investments generally, if a sale is going to take place anyway and the process is already underway then it may pay (following discussion with professional advisers and of course subject to commercial considerations) to ensure that the sale is executed sooner rather than later.  

Bringing forward such a sale of a private trading business will however in most cases be materially harder than disposing of an “arms-length” investment. 

Pensions   

Labour’s manifesto commits them to ‘undertake a review of the pension landscape’ which suggests that there will be no immediate changes to the annual allowance or the availability of tax relief.  

However, and for the reasons above, it may be prudent to bring forward any contributions that are planned for 2024/25 where this is practical. They are also silent on the much-anticipated reintroduction of the LTA (Lifetime Allowance) but have confirmed that the 25% PCLS  ( pension commencement lump sum) not something they’re considering.  

It's worth noting that PCLS is already capped at the LSA (Lump Sum Allowance), and getting rid of it entirely would be difficult, as it has been built into the pension promise for such a long time.

Even when Labour originally brought in the LTA in 2006, tax free PCLS cash was capped at £375,000 for most, unless you were already entitled to more. Therefore, retrospective cancellation of benefits seems something unlikely to happen. Furthermore, it wouldn’t raise that much either in the short term and would remove capital available for spending, which isn’t good for the economy. 

Inheritance Tax (IHT)  

As noted in the introductory paragraphs, there is nothing in the Labour Party manifesto in relation to IHT. IHT is also not a material contributor to the overall tax yield. Despite these important points - there is, perhaps understandably, some concern that some changes may be considered.

Given the complete silence on IHT from the Labour Party though it is impossible to predict whether any change could take place, when it could take place and what any change could look like. 

This means that speculation has been relatively wide-ranging with some referring to suggestions made by the Institute for Fiscal Studies (IFS) that included suggestions for the capping of Business Relief and Agricultural Relief, removing IHT freedom of pension death benefits, removing the residence nil rate band and increasing the nil rate band. But the IFS is a think tank and there is no indication that these ideas are embraced by the Labour party.  

At this point one can only advise that IHT planning should always be kept under review and that there a wide range of ‘tried and tested’ solutions (including investments that qualify for business relief) that exist for effective planning to reduce and provide for the liability.  

Where necessary, and especially where there are available funds to invest, these solutions can be implemented while retaining control and/or access for the client. This is especially so for Business Relief qualifying investments.

As for all other financial planning referred to in this note if the client is absolutely committed to carrying out IHT planning and is entirely happy with the consequences of the planning for both them and the beneficiary, then there is no reason to not carry out that planning as soon as is practically possible. 

A new wealth tax

Given the stated constraints in relation to increases to the taxes in ‘working people’ and the potential limited yields from increasing the main two current taxes on wealth (CGT and IHT) what are the chances of seeing a new ‘Wealth Tax’?

In the wake of the surge in government borrowing to deal with the COVID-19 pandemic, there was a flurry of interest in how a one-off wealth tax could be used to reduce government debt.  

The highest profile of the wealth tax promoters was the self-styled Wealth Tax Commission (WTC). The WTC was independent of government and political parties and produced a detailed report and evidence papers towards the end of 2020.  

Its main conclusion was that a Wealth Tax based on 5% of wealth over £500,000, with payment spread over five years, would yield £260bn, broadly in line with the then estimated cost of the pandemic (it is now put at £373bn by the Treasury). The then Chancellor made clear that he was against a wealth tax.  

Beyond conference fringe meetings, Labour has shown no interest in a wealth tax.  

Rachel Reeves told the Daily Telegraph in August 2023 that ‘any form of wealth tax’ was off the table. Although a wealth tax polls well in surveys, that is largely proof that high taxes paid by other (rich) people are popular. However, once the suggestion is made that wealth includes the family home and the value of pensions, the appeal wanes significantly.  

Wealth taxes (as stand-alone taxes) are not over prevalent around Europe. Though Spain (with a wealth tax and solidarity tax), Switzerland and Norway all have wealth taxes and in some other countries e.g. France and Belgium have an additional tax on certain assets such as securities or property.  

Altogether, European wealth taxes generally brought in around 0.2% of GDP in revenues, a study from the Cato Institute noted. Whilst a separate Wealth Tax can’t be ruled out it seems to not be something that is within immediate contemplation. If there are to be any changes to the taxation of wealth, changes to CGT and IHT as a 'proxy' for a wealth tax seem to be more likely.  

In conclusion

For all the taxes and related planning discussed above we are reminded that change (to client aspirations, personal circumstances and legislation) is pretty much constant and so the financial plan needs to be regularly reviewed to see, in the light of developments, whether any refinement is necessary.  

The value of a proactive, informed financial planner cannot be overstated, especially during times of potential change and uncertainty. And therein lies the value of advice and a relationship with a financial planner.   

This article is provided for general consideration only. No action must be taken or refrained from based on this content alone. Accordingly, neither Technical Connection Limited nor any of its officers or employees can accept any responsibility for any loss occasioned as a result of any such action or inaction.

or protection in trust to create legacies and meet any unreduced liability to IHT once you’ve concluded all the other planning referred to minimise tax through lifetime planning.  

Opinions expressed represent the views of the author at the time of publication, are subject to change, and should not be interpreted as investment or tax advice.

Important notice: This article is for investment professionals only. This article is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. No reliance should be made on this content to inform any investment of tax planning decision.

This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. The explanation of all of the tax rules set out have been written in accordance with our understanding of the law and interpretation of it at the time of publication.

Whilst care has been taken in compiling this content, no representation or warranty, express or implied, is made by Downing LLP as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.