There was widespread speculation prior to the General Election that Labour would move quickly to implement a raft of tax changes. It has now become clear that they intend to wait until the autumn Budget to make announcements. Over the course of three articles, we will look at the most likely and consequential changes to the tax regime may be.
In this first article, we will delve into capital gains tax (CGT) and private equity tax changes. This will be following by inheritance tax and the non-dom regime, and finally pensions, ISAs and VAT on private school fees.
Capital gains tax changes
Despite Labour's claims to have "no plans" to raise CGT, we may see rates being raised following the Treasury review of spending under the previous Government.
One possibility is that there will be a raise in CGT rates to match those of income tax, as then-Chancellor Nigel Lawson did in 1988. This sounds simple, but would almost certainly involve reintroducing indexation allowance, which lowers the chargeable gain by adjusting for inflation. This was deemed an unnecessary complication when CGT rates were lowered. We may therefore instead see a more modest rise in CGT rates to avoid this additional complexity.
CGT changes may focus instead on the interaction with inheritance tax (IHT) upon death. When a person dies, assets which they held are uplifted to market (probate) value in the hands of those who inherit them. This avoids a double charge to tax – once on death to IHT, and then to CGT on a subsequent disposal.
However, there are instances where IHT is not charged on death. Trading businesses (including shares in trading companies) and agricultural land may attract business property relief (BPR) and agricultural relief (APR) respectively, leading to no IHT being paid. It has been suggested that the uplift to market value for CGT purposes be disapplied where BPR or APR applies.
Conceivably, this could be extended to assets passing to a surviving spouse, as this is also exempt from IHT.
Private equity tax
The tax privileges enjoyed by private equity executives receiving carried interest have been steadily eroded over the past decade. Currently, they can pay CGT on receipt of carried interest payments (albeit at a special rate of 28%, rather than 20%), where investments have been held for over 36 months.
Labour argue that carried interest is akin to a bonus , and plan to close the "loophole" of treating it as a capital gain. This will most likely be by charging carried interest payments to income tax instead, which would invariably be at 45%. If they recharacterise carried interest payments as salary, National Insurance would be payable as well.
Stay tuned for our second article in the coming days, but in the meantime please get in touch if you wish to speak to us about the possible tax changes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.