A Labour government: what might be in store for personal taxation?

The next UK election is scheduled to be held no later than 28 January 2025 - less than 500 days away. However, most pundits believe that it will be held towards the end of 2024; no party wishes to be campaigning over the Christmas and New Year period.

What can we expect, in terms of personal taxation, if the Labour party is elected?

What Labour has said they won't do

The Labour party has ruled out a number of measures.  However, it is noticeable that these denials frequently refer to "current plans" which of course leaves the door open for a change of direction in the future.

In a series of interviews with the Telegraph and Financial Times over the summer, Rachel Reeves (the Shadow Chancellor) indicated the following:

1. No wealth taxes

The Shadow Chancellor has made some strong statements that there will be no wealth taxes.  The policy was first proposed by the former Labour leader Ed Miliband before the 2015 election but was widely criticised for being administratively unworkable and unfairly penalising those who had benefited from the UK's housing boom over the last 30 years.  Even across the Labour voting base, the policy was divisive and has not been seen as a vote-winner.

2. No increase to the top (45%) rate of income tax

During the 2020 leadership contest Sir Keir Starmer pledged to increase the top rate of income tax. Both Sir Keir and the Shadow Chancellor have both said that this proposal has now been shelved.  A cynic, however, might note that there has been no mention of whether the threshold could be lowered. In 2019, the Labour party had advocated for reducing the threshold to £80,000 (it is currently £125,140).  

Previously Labour has opposed the 1.25% increase in dividend rates bought in as a health and social care levy.  Will that opposition translate into reversal?  Unlikely, if political history is anything to go by!

3. No equalisation of capital gains tax (CGT) rates with income tax rates

There has been a lot of speculation regarding this possibility in recent years following its appearance in the last Labour manifesto.  Whilst in the US in May, Rachel Reeves spoke to the Financial Times and said she had "no plans" to equalise rates.  Again, a cynic would note this doesn't rule out rate increases to more closely align the two taxes.

Nonetheless, many professional advisers remain nervous that CGT could be an area for potential reform.  The Office of Tax Simplification (OTS) (now abolished) produced a paper in 2020 which made other suggestions, including removing the CGT uplift on death either in respect of assets which benefit from favourable inheritance tax (IHT) treatment, or to all the assets in the estate.  This would most likely follow the Australian model wherein no CGT arises on death, but the beneficiary receives the asset at its original base cost.  Effectively, the gains accrued during the deceased's life are "heldover" and fall to be taxed whenever their beneficiary eventually disposes of the asset.  The OTS recommended that if the uplift is removed, all assets are rebased to, say, 2000 to overcome the administrative difficulties of identifying the original base cost.

4. No reversal of the pensions lifetime allowance (LTA)?

The pensions LTA represented the amount of pension-pot (£1,073,100) which could be built up without incurring a tax charge at certain "check points".  In the Spring Budget in March, the lifetime allowance for pensions was scrapped, ostensibly to incentive senior NHS workers to remain in work.  Almost immediately, Labour announced that, if it came to power, it would reinstate the LTA. 

This is potentially an example of how the winds of change can blow quickly.  In her May Financial Times interview, Rachel Reeves reportedly said that she had no plans "to cut tax breaks on pension contributions for higher earners".  It is unclear whether this was a reference to Labour having made peace with the scrapped LTA, or potentially it was a reference to the annual allowance which was increased under the Spring Budget from £40,000 to £60,000.  However, in a speech to the Peterson Institute for International Economics, Rachel Reeves did identify the £2trn of UK pension savings as a potential source for investment in UK listed businesses, so perhaps we will see some pension reforms under a Labour government.

5. No reduction in corporation tax rates

Although not strictly a personal taxation point, it does impact the way in which individuals decide to structure their wealth.

After many years at 19%, corporation tax rose to 25% in April 2023.  The last Labour manifesto advocated for a 26% rate.  The Labour Party Conference 2022 indicated that Labour favours targeted investment allowances over lower corporation tax rates.  Politically, making big companies "pay their share" has proved to be a popular message.  It therefore seems likely that Labour will hold corporation tax rates at this level.

What Labour has indicated it will or might do

1. Limiting agricultural property relief (APR) and business property relief (BPR) which apply to IHT

This was big news this morning (28 September).  Rachel Reeves announced that Labour will be looking to close tax "loopholes" and, as reported in the Times, one area being considered is "scrapping" BPR and APR, two IHT reliefs.  The details are not currently well fleshed out and it feels like a knee-jerk reaction to the rumours swirling this week that the Conservatives are looking to abolish IHT.  

It seems fairly unlikely that the reliefs would be scrapped in full.  They serve genuine and legitimate public policy objectives of ensuring that family businesses and farms do not need to be sold in order to meet the IHT bill.  It feels more likely that the scope of these reliefs will be reduced to bring them closer to the policy objectives.  For example, currently BPR applies to AIM-listed shares; this is clearly not in line with the overall policy objective of preserving family businesses and has been criticised for many years.  It is thought that perhaps 1/3 of the AIM market (equivalent to £30bn) is invested for the IHT benefits and so removing BPR relief from these assets would have a radical impact on this market.

To a lesser extent, agricultural land, or more often woodlands, have become an area of increased investment-interest as an IHT-free asset.  Under Labour we might expect this is removed.  One such guise may be the removal of APR to tenanted land, or reduction of the rate of APR to 50%.  Currently, land owned by a landlord and occupied by another for the purposes of agriculture for seven years qualifies for 100% APR if let on a farm business tenancy.  This would have quite the impact on the agricultural sector - the recent Rock Report reported that 64% of the total farmable area in the UK is let.  We would likely see this reduce dramatically if APR were removed or reduced for let farms.  This would only serve to further increase in-hand farming (ie farming by landlords, often using contract farming) which would reduce options for existing tenant farmers.

In summary then, wholesale removal or APR and BPR would cause uproar from business owners and farmers and would seriously damage the UK economy.  However, we can perhaps expect to see a tightening of APR and BPR so that they only apply to genuine enterprises and that assets held solely for investment-purposes within these classes cannot benefit from these reliefs.

2. Removing, or limiting, the remittance basis

The remittance basis allows UK-resident, but non-domiciled, individuals to defer UK tax on any non-UK income or non-UK gains until they "remit" these to the UK.   So long as the non-UK income and non-UK gains remain outside the UK, they are not subject to UK tax; if remitted, UK tax is paid.  Taxpayers have to elect into the regime.

For, broadly, the first seven years of UK residence, the remittance basis is free.  After this time, a charge becomes payable in order to access this tax treatment.  The charge is initially £30,000 per year, but increases to £60,000 as the number of years of tax residence increases.  Once the individual has been resident for, broadly speaking, 15 tax years, the remittance basis can no longer be claimed and such individuals are taxed like all other UK residents - on their worldwide income and gains.

Following the media storm involving Akshata Murthy, Rishi Sunak's wife, Labour indicated that it would bring in "a modern scheme for people who are genuinely living in the UK for short periods to allow us to continue to attract top international talent".  This may simply involve curtailing the remittance basis so that it is only available for a shorter period of residence (as mentioned above, currently it can be accessed for up to 15 years, albeit for a fee in the later years).  Alternatively or additionally, the concept of domicile could be removed altogether as being too subjective.  

Interestingly, HMRC's statistics from the summer show that in 2022 there were only 37,000 remittance basis users, and only 2,100 paid the charge.  The impact of changes in this area are therefore likely to affect only a very modest portion of the population.  

Economists are also split on whether the proposals will increase tax revenue.  Undoubtedly, non-domiciled tax payers are heavy-hitters: based on HMRC's 2022 statistics, each one paid, on average, £123,000 of UK tax.  There are serious concerns that changes to the regime will deter such individuals from coming to the UK which may, in fact, damage the tax revenues.  This seems to cut directly across the Shadow Chancellor's pledges to increase international business investment in the UK.  Therefore the populist vote-winning aspects of this policy will need to be counter-balanced against the potential economic impact.

3. Taxing carried interest to income tax, not capital gains tax

Again, another reform with a narrow impact in terms of number of taxpayers.  Carried interest is a private equity concept and relates to the fund manager's share of the profits, once a specified "hurdle" (ie financial performance threshold) has been met.  Carried interest is currently taxed to capital gains tax (at 28%).  Labour has said it would amend this so that carried interest would be subject to income tax (top rate of 45%).

4. Charging VAT on school fees 

This one was most recently mentioned in July by Rachel Reeves.  The Institute for Fiscal Studies recently produced a study on the effects of this and concluded that this might result in an additional £1.3bn-£1.5bn of revenue, allowing for an extra 2% increase in state school spending.  The likelihood of this policy being enacted looks high.

As of this morning (28 September) the Guardian was reporting that Labour will not also seek to remove schools' charitable status.  This would mean that schools would still benefit from certain tax perks eg from business rates and on income arising from endowments.

5. Reversing stamp duty land tax (SDLT) cuts?

In 2022, the nil rate thresholds for SDLT were increased from £125,000 to £250,000.  Labour criticised this change saying that it benefited buyers of second homes or buy-to-let property.  A reversal may therefore be on the cards.

5. Tightening up on tax evasion / avoidance and increasing transparency

Labour's Tax Transparency and Enforcement Programme includes a number of measures which erode the privacy of wealthy individuals and businesses.  These include policies requiring the public filing of large company tax returns at Companies House and the public filing of tax returns of wealthy individuals earning (a concept which is presumably wider than just salaries) more than £1m.  

Further transparency measures are also proposed in relation to companies and trusts.  In respect of the latter, Labour pledges to create a public register showing the assets and beneficiaries (presumably achieved by making HMRC's Trust Registration Service public in whole or in party).  

Existing anti-abuse legislation will also be enhanced.

A common theme across all measures is unveiling any offshore nexus in ownership or assets to public scrutiny.  

In all cases, it remains to be seen if such measures would be compatible with Human Rights legislation and, in particular, an individual's right to privacy.

General themes

In her interviews, Rachel Reeves has repeatedly asserted "we've got the highest tax burden today since the Second World War.  And I don't wake up every morning thinking how we can introduce new taxes.  And I don't believe the way to greater prosperity is through higher taxes.  We've got to grow our way to higher prosperity."  

This is a message, unsurprisingly, echoed by Sir Keir Starmer who earlier this summer confirmed that he is "not looking to the lever of taxation" and that "in principle, I want lower taxation".  As ever though, this was caveated as being subject to changes in the economy between now and Labour potentially coming to power.  

Undoubtedly every politician would like lower taxation, but the books must balance. Rachel Reeves has underlined how she intends to have a fully-funded spending plan, noting that the Truss / Kwarteng unfunded tax cuts caused economic turmoil.  Therefore, it remains to be seen how this circle is squared!  Tellingly, in an interview with Sky News earlier this month, Sir Keir Starmer refused to guarantee that the tax burden would not increase under Labour.  

What's next?

The Labour party conference is scheduled for October and should provide greater clarity on Labour's policies.  Currently, Labour's strategy seems to be to present itself as a moderate on matters of taxation.  They are keen to note that the burden of taxation is the highest it has been since World War II and that Labour will not be responsible for increasing it further.  It remains to be seen of course whether this statement of intent holds true given the very difficult economic climate, particularly if we see a second term for Labour in power.  

In addition, it is quite possible that the tax burden does remain the same under Labour, but that the burden of it is shifted to target those whom Labour consider "wealthy" rather than the "working people".