Speculation of what may be included in Rachel Reeve’s statement on 30 October can be a dangerous game, but are there clues in the statements made to date? Will labour increase taxes?
It has already been ‘promised’ there would be no increases to the rates of Income Tax, National Insurance, Corporation Tax, or VAT. Therefore, taxpayers and businesses alike can be sure their tax burden will not increase, right?
Well, promising not to increase the headline rates is one thing but adjusting income tax bands which dictate the rate applied is a different matter. However, my own view is that adjusting bands is unlikely as this would compound the affect of ‘fiscal drag’ and, as I expect any such amendments would be solely/predominantly aimed at higher earners, it would only (further) alienate that demographic and only add to the continued rhetoric by media that the tax burden on taxpayers is at its highest rate.
My money is on the current status quo in respect of these taxes to be maintained, but I would not be surprised if a review of the current system is announced – take note of Scotland’s Income Tax bands.
Since winning the election Labour has consistently emphasised its commitment to working people. Key phrases that have emerged included: ‘Making work pay’, ‘Rebuilding Britain for the workers’, ‘Economic stability for working families’. It is therefore a fair assumption that if much needed treasury income is not to come from ‘working people’ capital wealth must be in the crosshairs.
It is anticipated that Capital Gains Tax rates will align with Income Tax, which is not a novel idea considering this was the case until 2008 – a sidenote I find amusing is that it was first a Conservative Government that aligned Capital Gains Tax rates with Income Tax rates and Labour government that reduced them to the rates we are now accustomed to.
There is support among independent think tanks and research bodies for such an increase. However, it should be noted that HMRC’s own estimates of tax changes (per their bulletin in June – HMRC: Direct effects of illustrative tax changes bulletin (June 2024)) indicated that increases to Capital Gains Tax rates could have a negative affect on the tax take.
I make an alternative suggestion to adjust Capital Gains Tax to a single rate of 30%, which would be a return to the original rate of Capital Gains Tax when it was first introduced in 1965. Nevertheless, I would consider increases to Capital Gains Tax rates are quite probable.
I would also expect announcements of reviews of existing reliefs such as Business Asset Disposal Relief, Investors Relief, and possibly the relief given on sales to Employee Ownership Trusts.
Much is made of wealthy estates being able to ‘avoid’ Inheritance Tax and so Labour could look to close some of the ‘simple’ methods this can be achieved such as recognising AIM as a “recognised stock exchange”. However, there are many that warned of the possible ramifications of such a policy.
Alternative speculations have been to eradicate Business Property Relief and Agricultural Property Relief, but these could be viewed as ‘extreme’ policies and there have been alternative suggestions. For example, the Institute for Fiscal Policy suggested that an option would be to cap the relief to £500,000 per person with unused allowances transferring to a surviving spouse/civil partner.
In addition, there has been the speculation that Labour may cease inherited assets benefiting from an uplift in base cost for Capital Gains Tax purposes. However, I would question how appropriate this is if the asset inherited has been subjected to Inheritance Tax of 40%. If it were me, I would propose a half-way house solution of the base cost uplift is dependent on the asset being subjected to Inheritance Tax (even at a rate of 0%).
In summary, my own view is that we are unlikely to see changes to Inheritance Tax policy in the budget as I believe that any changes here should be subjected to a full review/consultation.
Circling back to Labour’s ‘working people’ rhetoric speculation has grown that the tax relief benefited by higher taxpayers could be restricted. It is not clear what this could look like, but it is suggested this would involve limiting the relief to the basic rate of Income Tax (20%). This would be an attractive policy for Labour as the IFS estimate it could raise tax revenues of £15 billion/year with the vast majority of which would come from those who are in the top fifth of earners.
However, the IFS raised concerns that such a policy could be damaging when combined with fiscal drag. They also stated that they view there to be “…no coherent logic to making relief on contributions flat-rate while continuing to tax pension income at the individual’s marginal rate.”.
Further speculation has suggested the possibility of removing the pre-75 death benefits tax exemption and bringing pension pots within scope of Inheritance Tax. (but this will need to be managed alongside the taxation of death benefits). On the face of it, relatively straightforward policies to introduce. However, my own view is these raise further questions on their appropriateness as well as interaction with other taxes e.g., if the pension fund is subject to Inheritance Tax how does this interact with the taxation of death benefits?
I would not wholly discount the possibility of any of the above being introduced, but my opinion is that it is clear fiscal policy in respect of pensions is complex and I would prefer that a detailed review is first undertaken. Maybe Labour will ‘launch’ their review of pensions on 30 October and announce the content and objectives of that review.
So, what can I expect you ask. Well, if I were a Magic 8 Ball my answer would be, ‘Reply hazy, try again’. Considering Labour’s Fiscal Rules and the unveiling of a significant black hole in the public finances I would lean towards an element of the speculated changes being introduced. However, I am not certain they will be at the extreme end of those speculated and (as summarized above) there are policies that should benefit from a comprehensive review.
My advice to taxpayers when asked will labour increase taxes is that they should be prepared for an increased tax burden on their capital and wealth. There will be tax planning options that they can consider to manage this exposure, but these may not deliver the same level of tax efficiency they current do.
Those that have serious concerns could consider what planning they could undertake now, but as we are already in October such planning could be limited and it may not be possible to undertake it before 30 October.
I am mindful that I have not touched on possible windfall taxes, levies, and duties and this is by design. My view is that there will be further introductions in this area, but I am not as familiar with them. I also consider that this Labour government could represent a seismic shift in the tax landscape for business owners and high net worth individuals. Therefore, my primary aim was to bring to the fore my own permutations of what this landscape may look like for those persons.