The new UK Labour Government: A speculative rundown of expected changes

Written by Andrea Solana, CFP™

We do not expect to see any official changes announced until September/October at the earliest because it will take this long for the Office for Budget Responsibility (OBR) to thoroughly review and provide comment on any proposals. While the below is pure speculation until any official announcements are made, we outline what may be in store with respect to tax policy given Labour’s stated spending commitments, previous communications and noted areas of silence.

In prior statements, Labour has said that its Government will not increase income tax, national insurance or VAT. This leaves two notable areas, outside of the Non-Dom proposals, where Labour may take aim: capital gains tax and inheritance tax.

With respect to capital gains tax, there have been open calls to increase the current 20% rate to align with income tax rates (up to 45%). If the Government chose to make such a drastic change to rates, it would not only have a very large impact on the UK taxes paid on non-UK trust capital distributions but, it could indirectly impact entrepreneurial activity in the UK which could dampen economic growth. Growth will also be needed to help support stated spending commitments so this is an area that will need to strike the right balance. We believe that there is a high probability that an increase will happen, and will be part of the initial Budget announcements, but we believe that the rate increase will land somewhere between current rates and income tax rates (perhaps a return to a 28% rate or something similar).

Along these lines, it is also highly likely that we will see an announcement within the initial Budget announcements with respect to a change in how carried interest is taxed on a go forward basis.  Currently, carried interest is taxed at a capital gains tax rate of 28% versus income tax rates up to 45% and there is a high probability that we will see this changed later this year.

Inheritance tax is an area that has received increased airwaves in recent times. While an increase in the inheritance tax rate is probably unlikely, we could see some sort of change to existing reliefs on offer such as business property relief or agricultural property relief or even the IHT exemption on UK pensions. There could also be additional scrutiny around the role of lifetime gifting and how it intertwines with inheritance tax. Currently, in the UK, generally lifetime gifts of any amount are completely exempt from inheritance tax provided the donor lives the requisite 7 years following the gift being given. Tying lifetime gifting to the inheritance tax system, similar to what we see in the US (or the imposition of a gift tax separate from inheritance tax), could potentially be on the cards. We do not believe that immediate announcements will be made in this area, but instead will likely undergo a consultation, thereby likely allowing a time period for planning if needed.

Separate from the above, there are the looming proposed changes to the long-standing ‘Non-Dom’ regime impacting non-UK domiciled individuals from 6 April 2025.  These changes would erase the existing rules along with the remittance basis of taxation and replace it with a system entirely based on tax residence. The linked briefing note outlines a high level summary of the proposed changes and what we know to date about Labour’s intentions to carry out or amend those changes.

As always, we will continue to keep our ear to the ground and will share insights and things to be thinking proactively about as we move forward. It is likely sensible for those clients who are either already paying tax in the UK on an Arising Basis, holding UK onshore investment assets, or are UK resident beneficiaries of a ‘protected’ trust to take stock of their current unrealised capital gain position from a US and UK perspective and consider whether any changes should be made ahead of any Autumn Budget Statement since this is an area that could very likely change with immediate effect following any announcement. Those individuals who can still benefit from the current Non-Dom regime and/or do not have significant UK gains should be able to hold out for further detailed information prior to planning any actions with the knowledge that action steps will likely be needed prior to April 2025.

If you have any questions about the implications of these potential changes on you, please do not hesitate to contact your Wealth Manager.

 

Important Information

 

• Nothing in this document constitutes investment, legal or fiscal advice and should not be construed as such.
• This document is provided for information purposes only and is not intended to be relied upon as a forecast, research or investment advice.
• This document does not take into account the specific goals or requirements of any particular individual.
• MASECO gives no assurance or guarantee that the information is accurate or complete and it should not be relied upon as such.
• Information about tax changes is based on our understanding of the changes announced by the Chancellor.  However, MASECO is not a tax specialist and we recommend that anyone considering investing seeks their own tax advice.
• The extent of the benefit (if any) of the measures announced in the Budget and summarised herein will depend on the individual circumstances of each client and may be subject to change in the future.

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