Last week, we considered the range of tax proposals hinted at and pledged over the past few months by senior members of the Conservative party. As election day draws closer, the Conservatives are still refusing to be drawn by interviewers on which of those policies will actually make it into their manifesto. This week, we turn to the Labour party, whose proposals are, perhaps unsurprisingly, significantly more wide-ranging than those of the current government.
Labour pledged ahead of the 2017 election to reverse the reductions in CGT rates brought in by the Conservatives, by raising the basic and higher rates of CGT from 10%/20% to 18% and 28% respectively. That would simply take us back to the position pre-April 2016 and as such does not amount to much of a reform. But that would be only the start. More significant would be the proposals advanced in 'Land for the Many', a report commissioned by Labour which provides information for the party's policy development process. These proposals include an increase in CGT on sales of second homes and investment properties, such that the CGT rate is aligned with income tax. When read together with Labour's recently confirmed plan to raise the top rate of income tax to 50%, owners of second homes would see a dramatic increase in their tax liabilities should they sell their properties at a gain (the current rate of CGT for residential property is only 28%). If the report's proposals were followed, the new top rate would also apply to sales of property owned by non-domiciled and non-resident individuals whether the properties sold were second homes or not.
The hits to homeowners would not stop there. The report proposes more fundamental reform in the form of a progressive property tax (which some might think is just another way of saying 'wealth tax'). This would replace council tax, which the authors argue is regressive and unpopular. These proposals, once again, would subject the owners of second homes, as well as homeowners domiciled outside of the UK, to 'significantly higher' rates than everyone else.
Foreign owners of UK property should expect uncomfortable times ahead if the above proposals are implemented. John McDonnell, the Shadow Chancellor, made Labour's attitude to the internationally mobile very clear at the start of the party conference when he announced that a Labour government would clamp down on the 'spurious scam' of making use of one's non-domiciled status for tax planning purposes. His remarks were most likely aimed at the remittance basis of taxation, meaning future non-domiciled UK residents may face being taxed on their worldwide income and gains on an arising basis without having any recourse to the current concessions. The Shadow Chancellor did allow that the remittance basis could still apply to those only temporarily in the UK but gave no indication as to when the 'temporary' label would cease to apply.
It is not only foreign wealth which could lie in Labour's crosshairs. The report's proposed replacement to inheritance tax, the lifetime gift tax, would completely upend current estate planning practices. Under this regime, gifts would be taxed in the hands of recipients at the recipients' income tax rates, with only a £125,000 lifetime tax-free allowance to cushion the blow. While the full details of how this tax would work are yet to be set out, the obvious and inescapable consequence is that large intergenerational transfers of wealth would become extremely tax inefficient.
The Shadow Chancellor has confirmed on the election trail his intention to bring in a 50% rate of income tax for those earning over £125,000 with the current additional rate of 45% kicking in from a new lower level of £80,000. In addition to higher taxes on higher earners, the companies who pay them could themselves suffer an 'excessive pay levy' if Labour's 2017 manifesto policy makes a comeback. A charge of 2.5% would be levied on companies with staff earning over £330,000, increasing to 5% where earnings exceed £500,000.
Further shake-ups, such as the removal of the VAT exemption on school fees, an increase in corporation tax to 26% and a new offshore company property tax have also been mooted both at the Labour conference and in the report, but we will have to wait until the manifesto is published to see which of these proposals makes the cut.
Labour is at least clear in its plans. Higher taxation to fund higher spending. It is fair to say that an outright Labour majority is not currently viewed as the most likely outcome of this election. But it is possible that either the Liberal Democrats or the Scottish National Party could hold the balance of power in a hung parliament, thereby raising the possibility some of the above proposals could become law. At this pre-manifesto stage, the Liberal Democrats' policies in particular adopt a strikingly similar tone to the changes suggested by Labour. We will take a look at these potential kingmakers' policies next week.
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