UK Election 4th July 2024

With a General Election scheduled on Thursday 4th July, there has been plenty of press commentary on the approach each party has taken in its manifesto – and input/challenges from the other parties! Where significant tax policy changes have been fairly minimal from the major parties, focus has understandably been on what hasn’t been mentioned rather than what has.

Larkstoke does not have a crystal ball and clearly there are risks to making decisions based on speculation. That said it may be worth considering the potential impact on capital gains tax where the Labour manifesto and press speculation suggest we will see changes.

Background

Labour have included in their manifesto a commitment to closing the carried interest tax ‘loophole’, a term we find slightly odd given that the tax legislation is written and enacted by Parliament. This change is stated to raise ￡565 million.

Labour have committed to not changing income tax, national insurance and VAT. Silence on capital gains may mean more changes are possible. The wider protection for ‘working people’ will not be of great comfort as they have been defined as people with no meaningful savings.

If we hypothesise that there will be changes (and we repeat, we do not have a crystal ball), when could capital gains change?

Labour have said that? “Every fiscal event making significant changes to taxation or spending will be subject to an independent OBR forecast.”? The OBR say that “The Chancellor of the Exchequer decides the dates of our forecasts when he decides the date of the Autumn Budget (usually in late November or early December) or the Spring Statement (usually in mid-March). Under normal circumstances, the Chancellor is required to give us 10 weeks’ notice when requesting a forecast. The Treasury informs the Treasury Select Committee and Parliament of the date at the same time, or as soon as possible afterwards if Parliament is in recess”.

If we assume that a significant change will only be introduced in a formal budget and after an OBR forecast, that puts a change no earlier than September. However, does “normal circumstances” allow for a shorter turn around if needed?

Tax is usually set for a whole tax year and in advance. 2024-25 has already been set by Conservative government. Highest Capital Gains Tax rates are 20% (most assets)/24% (residential property)/28% (carried interest). Are these rates set in stone for all of 2024-2025 tax year? Retrospective legislation is very rare. If introduced, it might be justified by the argument that it clarifies existing law.

If changes are to counter tax avoidance they might apply from the date announced even if the legislation follows later. In 2004 Dawn Primarolo, then the Paymaster General under the previous Labour government, made a written Commons statement that if specific anti-avoidance rules just introduced were circumvented then any future legislative blocks would be backdated. A statement by Labour that they would increase tax on carried interest if elected would not seem to be justification for introducing anything which applies before they are elected.

When the current carried interest capital gains rules were first introduced, these were effective from 8 July 2015. That date being when the change was announced in the Summer Budget. It applied to existing arrangements although carried interest arising on disposals made before that date was protected and the previous rules applied.

It is likely that any changes will only be effective from Budget Day. A separate stand-alone change for carried interest is possible (for example, by a statement that the change will be made in the Budget although it will be effective from the earlier date of the statement), although that is unlikely.

For general capital gains, a rate rise may see an investor take the higher tax into account on any investment decision and they may decide to retain assets to avoid paying higher tax rates. Equally, the Government might try to influence behaviour by “encouraging” sales of assets. If the Budget raises the rate from a future date there may be an incentive to realise assets before the new increase in rates. In the past we have witnessed investors switching share classes in the hope of rebasing assets and locking in the current tax rate before a change occurs, however specific advice should be sought as such action may not achieve the expected result.

Possible defences

On carried interest, it is difficult to see how the timing of it arising can be advanced. If there is any current carry, perhaps from recent disposals by the fund, ensuring that this realisation pushes through to the carry vehicle could be advisable.

It is possible to elect to pay tax on carried interest as it accrues. The election has to be made by 31 January after the tax year end. If rates are increased this option could allow some protection by allowing a backward look, likely to 5 April 2024. This would probably be a dry tax charge as the tax would be payable no later than 31 January 2025.?There are very detailed rules around this option, care is also needed to understand how relief might be obtained if the carry that does arise is lower.

On other assets, consideration could be given to realising gains and deferring the realisation of losses.?There is a funding cost here and for an asset with a planned long term holding period it may not be attractive.?For stocks and shares any sale will be matched with a later purchase made within 30 days of the sale. In that case the expected gain will not be made.

Again, this is not advice – but by sharing our current thinking we hope to raise matters that should be on the radar for investors and managers alike.

Please do get in touch if you would like to discuss further.

Author: Neil Oliver (CTA)