Labour Manifesto - The Key Takeaways

Understanding Labour’s Proposed Tax Changes and The Implications

As the UK gears up for the next General Election, Labour's manifesto has outlined significant changes that could affect various financial and tax policies, including offshore trusts, non-dom status, and capital gains tax (CGT). Here, we delve into these proposals and explore what they mean for investors, businesses, and the general public.

Abolishing Non-Dom Status - The IHT Impacts

Labour intends to apply inheritance tax (IHT) to all offshore trusts and abolish non-dom status. This policy is expected to generate an additional ￡600 million by 2025-26, targeting wealth stored in offshore trusts and aiming to bring greater equity to the tax system. For individuals currently benefiting from non-dom status, this change will mean a significant shift in their tax liabilities, potentially increasing the amount they owe.

I have an earlier article from a couple of weeks ago that goes in to more detail on this but ultimately the proposal will see non-dom UK residents be exposed to inheritance tax on their worldwide assets in death, it does however mark a significant shift for those UK domicile individuals who have left the UK for greater than 10 years as they may now avoid the IHT liability on their worldly assets.

Capital Gains Tax - Notably Omitted

While Labour has explicitly ruled out increases to income tax, National Insurance, VAT, and corporation tax, there is a notable absence of any mention of CGT in their manifesto. This omission has raised concerns among investors and entrepreneurs, as there is speculation that CGT rates could be aligned with income tax rates. Currently, the highest CGT rate is 20%, but if it were to align with the top income tax rate, it could rise to 45%. This potential change would significantly impact those disposing of valuable assets, such as property or shares, and might discourage investment and entrepreneurship.

This could be seen as a serious slap in the face to those investors and entrepreneurs who realise gains from the sale of residential property, investments, and other chargeable assets. Having already seen their annual exempt allowance slashed by the current Tory government to just ￡3,000 a year. The decision to leave any mention of CGT out of the manifesto leaves a lot down to interpretation and trying to predict what Labour may do. It has likely been left out though to stop wary investors voting the other way.

Pensions, The Triple Lock & Lifetime Allowance

On the matter of pensions, Labour has pledged to maintain the State Pension triple lock, ensuring that pensions rise in line with the highest of earnings growth, inflation, or 2.5%. This commitment is reassuring for pensioners. However, Labour also plans to conduct a comprehensive review of the pension system. The absence of any promise to reinstate the Lifetime Allowance, which restricts the amount that can be saved in pensions without facing extra tax charges, is a relief for many savers, particularly in the public sector.

What this means is that the current full state pension of ￡11,502 a year will be fast approaching the current personal allowance (the threshold of income that can be earned tax-free each year) which is frozen at ￡12,570 until 2028, something Labour has confirmed it will be sticking with.

This may see pensioners getting taxed on their state pension income in the not so distant future as the forecast shows a full state pension will surpass the personal allowance by 2027.

UK PLC and Investment Within

Labour has pledged to increase investment from pension funds in UK markets. The reforms will ensure that workplace pension schemes leverage consolidation and scale, enhancing returns for UK savers and promoting productive investment in UK businesses. Additionally, Labour promises to position the UK as a leader in green finance. UK-regulated financial institutions, including banks, asset managers, pension funds, insurers, and FTSE 100 companies, will be required to develop transition plans aligned with the Paris Agreement's 1.5°C goal.

The problem with this inward focus of investing into UK PLC is when you evaluate historical performance of the UK market vs say US equity markets, the US has vastly outperformed and one downside to having a heavy UK investment bias may be a dampening of performance.

The UK market has been unloved for years, compounded post Brexit so from a PE perspective it could be argued its cheap but is there a reason for that and would investors and pension savers be happier with a more globally diverse investment strategy.

Private School Gets Expensive

Labour's plan to apply VAT and business rates to private schools is expected to raise ￡1.5 billion. This could lead to a substantial increase in school fees, impacting many middle-class families who opt for private education. The financial burden may push some families to reconsider private schooling, leading to broader implications for the educational sector.

An additional 20% on top of already growing private school fees may be the straw that broke the camels back for many families who would instead elect to send children into the state school system. Would this mean a private education becomes available to only the wealthiest families and, higher net worth expat parents looking to send their children home to the prestige of a British private education?

Going Green

In the realm of green finance, Labour is positioning the UK as a leader. They plan to mandate UK-regulated financial institutions to develop credible transition plans aligned with the goals of the Paris Agreement. This move aims to bolster the UK's commitment to combating climate change and promoting sustainable investments. Investors and businesses may need to adjust their strategies to comply with these new regulations, focusing more on environmentally friendly practices.

Cracking Down on Tax Loopholes

Additionally, Labour aims to crack down on tax avoidance and close loopholes associated with non-dom tax status, which they expect will raise ￡5.2 billion. This initiative underscores Labour’s commitment to ensuring that all individuals and businesses contribute their fair share to the public coffers, reducing the tax gap and promoting fairness within the system.

The problem with this can be when legitimate tax reliefs get banded with "Loopholes" when the Government is on a fund raise and the tightening around tax breaks overlaps these beneficial solutions and reliefs and waters them down or removes them entirely.

These proposed changes highlight Labour’s intent to address tax avoidance and promote fairness in the tax system. However, the potential increase in CGT and the application of VAT to private schools could have broader economic impacts. Financial experts caution about the lack of specificity in certain areas and the potential for increased tax burdens on investors and small business owners. On a positive note, the focus on green finance and productive investment from pension funds is seen as a significant step towards sustainable economic growth.

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