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Six Ways Labour May Change The Tax Regime

Six Ways Labour May Change The Tax Regime
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The party is widely expected to win the next election – but what impact would their policies have on private equity and high-net-worth individuals?

A general election brings with it the prospect of a new government and a fresh tax regime. With the date now announced, economists and advisors everywhere are busy trying to anticipate what changes lie in store.

Neither of the main political parties has yet published its manifesto and even those policies that have been announced are often distinctly lacking in detail. Therefore, interviews with party spokespeople are being scrutinised for further clues and, with Labour well ahead in the polls, particular attention is being paid to any comments from the Shadow Chancellor, Rachel Reeves.

So far, she has perhaps been more forthcoming about what would stay the same under a Labour government rather than the details of any changes they propose. In the recent Mais Lecture in the City of London, she pledged to keep corporation tax at its present rate of 25% throughout the next parliament and to continue to hold an annual autumn budget. She also promised to publish a roadmap for business taxation covering the whole of the next parliament within its first six months.

However based on what we already know, here are six areas where Labour has indicated that it would change the tax regime:

  1. Private schools

Labour announced in 2022 that it planned to charge private schools 20% VAT and end their entitlement to business rate relief, but it seems to have backed down on plans to end their charitable status, a measure announced at the same time.

The party claims the changes would raise about £1.7bn which would be used to improve state education, although the Institute for Fiscal Studies (IFS) says the true figure would be £1.5bn. Opponents claim the move would be counterproductive as it would inevitably result in a rise in fees, pushing more pupils into the state sector and putting more pressure on public finances.

Currently around 6.5% of pupils are educated in private schools, according to government figures. Of the 2,500 or so private schools in England and Wales, around half are registered as charities which means that, although they must demonstrate ‘public benefit’, they do not have to pay VAT on donations or annual profits.

  1. Private Equity

For over 30 years, Investment Managers’ returns on private equity funds have been treated as capital gains, which is taxed at a rate of 28%, rather than trading income, which is taxed at 45%. The carried interest regime, as it is known, has long been controversial and Labour promised to end the ‘loophole’ as far back as 2021.

Rachel Reeves says the move would raise more than £400m, though figures within the City claim it could inflict ‘Brexit-level damage’ on London’s position as a financial services centre, especially with other European cities such as Paris trying to woo UK firms. In France, Italy and Germany carried interest is taxed at between 26% and 34% so increasing the rate to 45% would make the UK less competitive.

According to law firm Macfarlanes, carried interest benefits only 2,550 people, but it is a valuable source of fees for professional services firms. The British Private Equity & Venture Capital Association (BVCA) claims the industry supports 2.2 million UK jobs, in addition to the 140,000 in the industry itself.

Although the Shadow Chancellor insists she intends to increase tax on carried interest to the full 45%, we know that Labour is also intent on wooing the City and behind the scenes, some of her colleagues are pressing for a compromise. Increasing the tax by a few percentage points could keep both sides happy.

  1. Non-doms

In this year’s Spring Budget, the Chancellor announced radical changes to limit the tax benefits for non-doms – UK residents whose permanent home is considered to be overseas. The changes, which would come into force on 6 April 2025, are complex and in some cases, the full details have not yet been published. For example, the proposals to charge UK inheritance tax on worldwide assets after ten years of UK residence will be subject to a consultation. However, since the Budget Labour has announced plans for further changes to the regime which creates further uncertainty.

Currently, non-doms pay tax on a remittance basis, which means they are taxed on income and gains they make in the UK but not on foreign income and gains unless these are ‘remitted’ to the UK. Individuals can enjoy non-dom status for the first 15 years of living in the UK.

Under the changes announced in the Budget, the current remittance-based regime will be replaced with a new residence-based test. A key point is that new arrivals to the UK will not be not be taxed on foreign income and gains for the first four years and can bring it into the UK without paying tax. However, they lose their entitlement to personal allowances and annual exemptions for capital gains.

Existing non-doms who have lived here for less than four years can choose to opt into this ‘four-year FIG regime’ for the remainder of their four-year period. Once the four years is up, individuals will be taxed on worldwide income and gains in the same way as other UK residents.

For current non-doms who do not qualify for the four-year FIG regime, there is a transition period so for the tax year ending April 2026, they will pay tax on only 50% of foreign income.

Labour has indicated that it agrees with some of the key features of the new rules – replacing the current remittance regime with a residence-based test, the four-year period and the consultation on inheritance tax changes. However, it is also proposing other changes which it claims will raise £1bn in the first year and £2.6bn during the full course of the next Parliament. In particular, it wants to remove the transition period for existing non-doms and include all foreign assets held in a trust within the scope of UK inheritance tax.

It is also considering ways to incentivise investment by those on the four-year FIG regime to enjoy tax-free income on UK investments and encourage people to bring more of their overseas income to Britain.

  1. Higher stamp duty for overseas buyers

Foreign buyers currently pay 17% stamp duty on the purchase of UK homes, 2% more than a UK resident buying the same property. The surcharge was introduced in April 2021 and applies to those buying residential properties in England and Northern Ireland (Scotland and Wales set their own levels). Labour has indicated that it would increase stamp duty still further. Although no specific figure has been mentioned, the indications are it may be closer to 20%.

Non-UK residents bought 24 per cent of homes across Greater London in 2023, according to Hamptons estate agency, rising to 45 per cent in the prime central London market. Some commentators claim that it is unlikely to have much effect on activity, especially at the top end of the market. They say most buyers could afford the extra cost though in practice, they could put pressure on vendors to reduce the price. 

  1. Windfall tax on energy

The windfall tax or Energy Profits Levy (EPL) was introduced by Rishi Sunak) in May 2022 when he was chancellor and raised £2.6bn in its first year. In this year’s Spring Budget, Chancellor Jeremy Hunt extended it to March 2029 on the grounds that the continuing war in Ukraine would extend the energy companies’ windfall profits.

Labour – which first proposed taxing windfall profits as far back as 1992 – says it would introduce a ‘proper’ windfall tax by increasing the marginal tax rate on North Sea oil and gas production from 75% to 78% and closing ‘loopholes’. Industry insiders believe this means it would scrap the investment allowance that enables producers to claim back 91p for every £1 invested in UK operations.

The industry body Offshore Energies UK says the loss of such tax relief would deter investments in oil and gas infrastructure, put thousands of jobs at risk and cost £26bn in lost ‘economic value’.

  1. Tech companies

Labour has pledged to make ‘tech giants pay their fair share’ of tax, though last year the party scrapped plans for a new levy on digital services that would force US-based firms to pay more tax in Britain.

However, we know that the Shadow Chancellor is keen to reform business rates, which are based on the value of the premises, and shift the burden away from high street shops and towards companies such as Amazon, which use out-of-town warehouses and pay a much lower rate. It is understood that the party is currently drawing up proposals on how a new scheme could work.

Both parties’ proposals are likely to evolve and change as their election campaigns get underway –initially with the publication of party manifestos and later as politicians flesh out the details.  Regardless of who wins the election, there are likely to be changes on the horizon and our experts at Traditum will be keeping abreast of the shifting landscape.

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