Simon Allister, Head of Wealth Planning, discusses the key changes that a Labour Government will bring and the considerations for wealth structuring.
The Labour government's recent electoral victory signals the beginning of a transformative period for the UK's fiscal and legislative landscape. As Labour prepares to implement its manifesto pledges, significant changes to the tax system and public funding are expected. Ahead of entering this new political era, here’s an overview of what we can expect.
In the UK, legislative changes are typically announced during either the Spring Budget or the Autumn Statement. The next significant fiscal event is the Autumn Statement. For the Chancellor, Rachel Reeves, to deliver the Autumn Statement, she must request a forecast from the Office for Budget Responsibility (OBR) and give them a 10-week notice period. Given these procedural requirements, the earliest likely date for the Autumn Statement is mid-September, although it could also take place in October. The specific date should be confirmed over the coming days before the Commons' summer recess.
Labour's manifesto emphasises reducing national debt as a proportion to GDP together with ensuring that the UK’s day-to-day costs are met by revenues. Although details remain sparse, there is a consensus that tax increases are inevitable.
Currently, the UK has five separate rates of CGT, creating a complex system. The Labour government may simplify this by reducing the number of rates, potentially leading to an overall increase in CGT rates for investors. Currently, gains within the basic rate threshold are taxed at 10% or 18% depending on the assets being disposed of and those within the higher rates are taxed at 20%, 24% or 28% again, depending on the assets being sold.
A more extreme scenario might involve aligning CGT with income tax rates, although this would likely require an indexation allowance adding a significant degree of additional complexity.
In the Autumn Statement of 2022, it was announced that the Personal Allowance and tax thresholds would remain frozen until 6th April 2028. This freeze is expected to continue under the Labour government. Additionally, there has been historical differentiation between tax rates on dividend income and other income sources, with dividend income being taxed at lower rates. Although the manifesto discounted raising income tax, some industry experts believe that Labour may increase tax rates on dividends to bring them in line with the rates applied to earned income, interest income and other sources of income.
Significant changes to pension taxation were introduced in April 2023, including the abolition of the Lifetime Allowance (LTA) tax charge and the introduction of new allowances: the Lump Sum Allowance (LSA), the Lump Sum & Death Benefit Allowance (LS&DBA) and the Overseas Transfer Allowance (OTA). These changes primarily benefit individuals with large pension funds. However, Labour may perceive the current tax treatment of pensions as overly generous, particularly for wealthy individuals. As a result, it is possible that Labour will seek to legislate against this perceived generosity. Speculated potential changes include restricting tax relief on personal pension contributions to the basic rate (20%), introducing a "death tax charge" on pension death benefits and bringing pension funds within the scope of UK inheritance tax (IHT).
Labour’s pledge to introduce VAT on private school fees has garnered significant attention. This move would end the current VAT exemption for private schools, which significantly reduces costs for those opting for private education. Ola Adeosun, Head of Regional Wealth Planning, recently touched on this matter in further detail here.
Labour’s manifesto includes a pledge to abolish the remittance basis of taxation, replacing it with a “more modern scheme” tailored for individuals that are “genuinely in the country for a short period”. Additionally, Labour intends to “end the use of offshore trusts to avoid inheritance tax”, a continuation on the sizeable reforms announced in the March Budget. However, it is expected that Labour will further tighten these regulations, it is more a question of timing.
In summary, Labour's victory signals a new political era marked by significant fiscal and legislative reforms. As the government moves to implement its policies, careful consideration and strategic planning will be essential to navigate this evolving landscape. The upcoming Autumn Statement will likely provide more clarity on the specific measures to be introduced, setting the stage for Labour’s ambitious agenda. It makes sense for individuals to consider their own position within the context of these reforms now, to avoid any unwanted surprises.
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