'Change begins now'. Such were Sir Keir Starmer's words early this morning, when Labour's widely anticipated landslide victory in the General Election was assured. But how soon can we expect to see Labour's promised changes to UK taxation come into effect?
Rachel Reeves announced during the election campaign that, if brought to power, she would not hold a Budget until September, once the Office for Budgetary Responsibility has been able to prepare its report on the proposed fiscal changes, a process which takes 10 weeks. So, for those anxious to understand the future UK tax landscape under a Labour government, whose concerns will likely not have been alleviated by the scant detail provided in their General Election manifesto, the wait for any certainty will continue for at least a couple of months.
While we wait, we consider below some of the headline tax policies which Labour have announced (or hinted at) over the months running up to the General Election. During the campaign, thinktanks such as the Institute for Fiscal Studies remarked on how neither the Conservatives nor Labour were prepared to level with the electorate about some of the real economic challenges facing the UK. As upbeat political sloganeering now inevitably gives way to economic pragmatism, we look at some of the fiscal levers Labour might choose to pull to take on the challenges which await them.
Non-doms – uncertainty and opportunity
Since the Conservative Spring Budget in March, UK tax resident non-domiciliaries have experienced a period of uncertainty regarding the future regime under which they will be taxed in the UK. In a political manoeuvre calculated to deprive Labour of the revenue they would need for one of their own headline spending pledges, Jeremy Hunt announced at the Budget that he would abolish the remittance basis of taxation from 6 April 2025.
The Conservatives presented the outline of a new regime to replace the remittance basis (the Foreign Income and Gains Regime) in their Budget policy documents and Labour in turn indicated their broad approval of it. Labour did go on to say, however, that they would close what they considered to be certain 'loopholes' in the Conservatives' plan, in particular stating that they would subject any trusts settled by individuals who become long-term UK residents to UK inheritance tax.
But clearly, in the run-up to a General Election campaign and having identified non-doms as a key source of revenue, Labour would hardly do anything but express broad support for a policy which, on the face of it at least, would subject many non-UK domiciliaries to much higher levels of tax. Labour were not in a position politically to point out the clear problems with the FIG Regime – most obviously the fact that it would not generate any revenue – and instead found themselves cornered by the Tories' surprise announcement into merely listing the ways in which they would go even further, so as not to be outflanked.
The dust has now settled on the campaign trail and the time for empty political posturing has (thankfully) ended. Labour will now get down to the business of governing and will need to decide, soberly, how to tackle the matter of the taxation of non-doms.
Labour's position on the matter has been consistent, if vague, since April 2022, when the question hit the headlines once more. Rachel Reeves, in her then role as shadow Chancellor, declared that Labour would replace the non-dom regime with a 'modern scheme for people who are genuinely living in the UK for short periods'. These words reappeared nearly verbatim (but without further elaboration) over two years later in the Labour manifesto. By not specifying the details of their replacement regime, Labour have sensibly given themselves a wide degree of latitude about what to do next. With that latitude, they can now develop and implement a coherent, competitive tax regime for new arrivals to the UK which attracts wealth and investment, and in doing so directly and indirectly drives up government revenue. Whatever new regime they choose need not be burdened by the political baggage and perceived unfairness of the current non-dom regime, but will they take the opportunity before them?
An obvious exemplar for such a regime is that of Italy – a time-limited scheme which allows wealthy arrivals to benefit from limited taxation on their non-Italian wealth, at a price. It is clear from the Italian example and those of a number of other European countries with flat tax regimes, as well as from our own discussions with clients, that internationally mobile wealthy individuals are willing to part with significant sums to enjoy, even for a short period, a favourable tax environment that both simplifies their otherwise complex tax and reporting obligations and allows them to invest freely in their new country of residence. At a time of severely strained public finances, the UK should look to the examples of Italy and elsewhere to understand how it can raise revenue with a new, fairer regime, which acknowledges any perceived historic unfairness without driving wealth out of the UK.
Capital gains tax – rate rises on the horizon?
During the campaign, Rachel Reeves repeatedly stated she had 'no plans' to increase the rates of capital gains tax ('CGT'). Yet with Labour having promised in its manifesto not to increase 'National Insurance Contributions, the basic, higher or additional rates of Income Tax, or VAT', some commentators have argued that the party harboured a secret plan to do just that. The Conservatives had no public policy to increase capital gains tax in their 2010 manifesto, but increased the rate by 10% with immediate effect, 46 days after being elected.
Our view remains that if Labour did plan to increase CGT rates, it would not be in their interests to trail their intention to do so in the press beforehand, but rather they would implement the rate change with effect from the time of the announcement. To this end, they may not wait until 6 April 2025 to bring such a change into effect (if that is indeed what they plan to do). We comment further on potential CGT rate rises and planning options in our article here.
The effect on government revenue of simply pushing up the headline rates of CGT will be difficult to forecast. CGT is, in many cases, effectively an elective tax – the decision to dispose of an investment normally being within the gift of the owner. This is not true, of course, for certain kinds of disposals which are less typically driven by tax considerations – for example of second properties or businesses. Moreover, CGT is an almost vanishingly small fraction (around 4%) of total government revenue. An increase in rates of a tax which can in many cases be optionally deferred will not move the dial much; but the new Chancellor may well take the view that every little helps.
Those who remember the halcyon days of indexation may well hope for its return should CGT rates increase, particularly given inflation has had a greater influence over asset prices in recent years than in the preceding decade or so. For now, we do not know whether Rachel Reeves would entertain such a relief were she to raise CGT rates, but if her intention is to raise revenue, then we think it is unlikely that we will see a comeback.
VAT on school fees
Parents of children receiving a private education will not have missed Labour's plan to impose VAT on school fees.
While the UK remained a member of the EU, such a policy would not, in fact, have been feasible. VAT on school fees is prohibited as a matter of EU law, under a category of 'Exemptions for certain activities in the public interest'.
Nevertheless, the imposition of VAT on school fees was a key Labour policy in the run-up to the General Election campaign and featured in their manifesto. We expect the policy to be implemented relatively swiftly, with an announcement likely due at the first Budget. As with CGT rate rises, the behavioural effects of the imposition of VAT on school fees are nearly impossible for economists to model with any degree of confidence. Only time will tell how much of the burden of the VAT is ultimately picked up by parents (rather than being absorbed or offset by schools) and to what degree there will be a shift of pupils from private schools into the already burdened state sector.
Carried interest
A final target of Labour's tax plans are private equity managers who receive carried interest. Very broadly, carried interest (or just 'carry') is a type of profit earned by private equity managers on the funds which they manage. Those returns are generally structured so as to benefit from CGT treatment, rather than being taxed at a higher rate as income (it should be noted that there is already a specific higher rate of CGT for carried interests, of 28%).
Labour's manifesto promised that they would 'close this loophole' and the expectation had until recently been that all carried interests could simply become subject to income tax at the usual rates. But in a recent interview with the Financial Times, Rachel Reeves indicated (somewhat cryptically) that it is appropriate for private equity managers who put their own capital at risk to benefit from CGT rates. Typically, private equity managers do invest their own capital in their funds – indeed the market would generally expect them to do so simply as a matter of credibility. The upshot of Reeves' comments to the FT is not clear, but tends to signal a softening in her approach. Nevertheless, the FT reported that when asked whether she expected most carried interest in the UK to be taxed as income under her approach, the Chancellor responded it would.
Given the UK's market-leading position in the private equity industry, it is essential that the Treasury now provide clarity soon on how carried interests will be taxed.
Next steps
The new UK tax landscape will take shape over the coming months. We assist individuals and their businesses with complex international affairs in navigating the changing landscape of UK taxation and planning for the future for themselves and their families. Please get in touch if you would like assistance.
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