Labour tax plans – are you prepared for any potential changes?

Date: July 5, 2024

Following the recent landslide election, Labour tax plans will be fully explained over the forthcoming weeks and months. With the first budget of the new government not taking place until at least mid-September 2024, there is a limited window to plan.

One of the key election pledges was not to raise taxes on working people, with a commitment not to raise income tax, National Insurance or VAT, alongside corporation tax rates.

The Labour party’s election manifesto proposes a circa £8.6 billion tax raise through targeted increases. These includes private schools, non-doms, tackling tax avoidance and oil and gas companies. It does not rule out other areas as well, such as capital gains tax and inheritance tax.

Below we look at their manifesto pledges and policies in more detail to understand what this could mean for individuals and businesses with proposed labour tax plans.

Labour manifesto tax pledges

As a summary, key Labour manifesto tax pledges include the following:

Capital Gains Tax – changes to the taxation of carried interest withing the private equity sector.
Inheritance tax – to bring the assets within offshore trusts into the scope for inheritance tax. Also to bring non-doms into the scope of Inheritance tax.
Income tax – keeping thresholds frozen until 2028 (at the earliest) and to overhaul the non-dom system.
Tax on private school fees – to impose VAT (and business rates) on independent schools.
Windfall taxes – increasing and extending the reach on the oil and gas industry for Energy profit levies.
Net Zero – to reintroduce the ban on the sale of petrol/diesel cars by 2030.

Outline of Labour tax policies in more detail

Labour inheritance tax plans

Labour’s manifesto cites an end to the use of offshore trusts to avoid inheritance tax. Whilst there may be many legitimate reasons for the use of an offshore trust structure, previous reports concluded that protecting assets from tax was one of the main reasons for the use of offshore trusts. Anyone using offshore trust structures, should contact us for advice on how to hold assets as tax efficiently as possible, without falling foul of the law.

Inheritance tax is an area where there is much speculation that further changes could be made. The IFS has made recommendations to cap Business Property Relief (BPR) at £500,000 per person. It also recommended to withdraw the relief on AIM listed shares or other structured IHT financial products.

Concerns that these measures may be introduced could lead to those effected considering to gift assets onto trusts, where BPR is currently unlimited and hold-over relief is available. These potential changes particularly make agricultural property relief and BPR less generous and would especially impact the agricultural sector.

Labour and Capital Gains Tax

There has been lots of discussion regarding potential changes to capital gains tax.

The now-abolished, Office of Tax Simplification, an independent office of HM Treasury has, in 2020 and 2021 made recommendations to increase capital gains tax. These recommendations included:

Positioning capital gains tax with income tax
significantly reducing the annual level of Capital Gains Tax exemption (which has been implemented by the previous government) and
Reducing the scope for employees to benefit from Capital Gains via shares received from their company

One of the most straightforward actions to take would be to align the CGT rates with income tax rates. This is a proposal Ms. Reeves herself advocated for in a pamphlet released in 2018.

This adjustment could potentially raise between £8-£16 bn for the Treasury. This was previously implemented by Conservative Chancellor Nigel Lawson, in his March 1988 Budget.

Further information on potential plans for capital gains tax can be found here.

The tax treatment of furnished holiday lets

Whilst not a manifesto pledge, the government has confirmed that it will move forward with the previous governments proposals to change the tax regime on furnished holiday lets. This was originally a labour policy from 2009. More information on this can be found here.

When implemented, given the current 10% rate of Business Asset Disposal Relief (and for as long as this remains) many property investors may cease their holiday letting operations and potential dispose of their assets. Under existing legislation, there a 10% tax rate on gains of up to £1 m per person can, in many circumstances be realised.

VAT on Independent/private school fees

It has been the intention of the Labour party to apply VAT on private schools for some time. In fact, it was in both their 2019 and 2024 election Manifestos. With a Labour government now in power, this is likely to take place soon.

Many have been paying school fees in advance, to get around this change. However, anti-forestation rules have been introduced. This means that any payments made from 29 July 2024 for terms starting in January 2025 or later will be liable for VAT.

Whilst it will not affect any future VAT changes, for some, a trust structure may be more tax efficient. More information on Labours proposals for VAT on school fees and how trusts can help with tax planning can be found here.

Pension changes

Changes to pensions are possible. The lifetime allowance which was abolished in 2023 could potentially be reversed and reintroduced in some form by the new government.

There are also discussions in the media regarding potential changes to the 25% tax free withdrawal rate from pensions. If a lifetime allowance rate is not reintroduced, this could be either reduced or capped.

Private equity and capital gains charges

Labour has stated it will close the loophole on carried interest. Thus, it will prevent performance-related remuneration which is received by investment managers from being taxed as capital gains.

The ultimate tax rate is not yet clear and Labour previously indicated that they would consult on these changes.

Several EU countries have carried interest regimes (including France and Germany). They are taxed at rates between 25% – 30% when relevant conditions are satisfied. Taxing carried interest as income would make the UK less attractive for investment managers unless any new rates remain competitive.

Labour tax plans to close the gap on tax avoidance

Labour has set a target to raise an extra £5 billion each year from closing non-dom loopholes and cracking down on tax avoidance.

It is understood the difference between the amount of tax owed and what the government collected rose to £36 Bn in 2021/22. This is a reported increase of £5 Bn from the previous year.

National Audit Office has reported that there is £6 billion a year that could be recovered through a concerted effort against tax avoidance.

Labour has proposed to invest an additional £855 million in HMRC each year to boost tax income. Under Labour’s plan to close the tax gap, its proposal is threefold:

To increase compliance activities by HMRC (including recruiting and training an extra 5,000 staff)
Invest in transformation to the information technology systems within the tax system
Undertake legal changes which will ensure there’s a genuine deterrent to tax evasion.

Labour has also stated that it will consider widening the scope of schemes that are reportable under the disclosure of tax avoidance schemes (DOTAS) rules. It is also looking to strengthen the ability of HMRC to make taxpayers under investigation pay tax which HMRC considers to be owed.

Labour tax plans for non-doms

Labour stated in its manifesto that it will close the loopholes allowing some non-dom people who live in the UK to avoid paying tax. This had been a Labour policy for some time.

The previous government proposed a fundamental reform of the UK’s non-dom rules, with effect from 6 April 2025. However, Labour plans to take these measures further.

Their intentions include making transitional reliefs less generous. This includes removing any rights for existing non-doms to only be subject to income tax on 50 per cent of their foreign income received in the first year of the new regime.

Labour have promised incentives to encourage UK investment within a new four-year non-dom residency regime. It is not yet clear how this would take shape.

There has also been consideration by Labour to allow non-doms to bring their untaxed foreign income into the UK after the two years. This is proposed to be at a low rate of 12%. It is not yet clear how long this rate would apply for.

The most significant announcement has been that trusts created by non-doms will no longer be able to shelter non-UK assets from inheritance tax. This will also apply to exiting trusts.

The Labour Windfall tax proposals

Labour have stated that they will bring an increase to the Windfall tax levy. This will be on the Energy Profits Levy which is charged on profits of oil and gas producers. Accordingly, Labour has pledged to:

Extend the levy until the end of the parliament,
Add three percentage points to the levy, and
Eliminate the oil and gas company investment allowances.

Stamp Duty Land Tax

Labour has stated that it will raise the stamp duty surcharge on overseas buyers, by an extra 1% to 3%.

There has been no commitment to extend the increased SDLT threshold for first-time buyers. This is due to lapse at the end of March 2025. Currently the threshold is £425,000 and is due to revert to £300,000.

Summary of the proposed Labour tax changes

There was an election pledge by Labour’s not to increase the rates of income tax, VAT, or National Insurance, together with a pledge to cap Corporation Tax at 25%. Accordingly, if these pledges are kept, tax increase will have to come from other, targeted changes.

There are clear areas of change, including tax on private school fees, a tax avoidance clampdown and changing the non-dom regime. It remains to be seen what other areas of tax will see significant changes. However, these are likely to include capital gains tax and inheritance tax. There is also likely to be an overhaul of the business rates regime and potentially, a review of council tax.

What is clear is that both businesses and individuals will require a clear steer of any changes to remain tax efficient. Reviewing your position now, rather than adopting a wait and see approach is strongly recommended.

Contact Alexander & Co for expert tax advice

Should you wish to discuss how alexander & Co can assist you as a client please contact us. At Alexander & Co, we pride ourselves on our personal approach. We build long standing relationships with our clients. This allows us to gain an in-depth understanding of their business and subsequently better assist them.

People are the core of our business. We care about and are invested in all the people we work with and the work that we do. Our firm can be relied upon to be genuine in our approach and our dealings with others. We are tenacious in our delivery of work and solutions.

To speak to a corporate or personal tax advisor, contact our team today. You can email info@alexander.co.uk. Alternatively you can complete our online enquiry form on this page and we will then be in touch.