What might a Labour government mean for private client taxes?

With various rumours - some more outlandish than others - about what tax-rises Keir Starmer's new government might implement, here are my own thoughts.

I have no particular special insight here...I am just playing the prediction-game like anyone else. I fully expect to be proved wrong on at least some of the below.

And I should obviously add that the following represents a personal view and not that of Burges Salmon or of the Chartered Institute of Taxation.

What we can be fairly confident on

1. VAT and business rates on private school fees. Labour have been consistent on this, but gave indications before the Election that it would not be implemented until September 2025. One point that no-one has mentioned, however, is what rate of VAT might be imposed. There seems to be an assumption it will be 20%. But post-Brexit the UK is freer to impose lower rates for different types of supplies. And there might be an argument for imposing a lower "flat-rate". Flat-rate schemes for VAT allow suppliers to pay a lower rate but NOT reclaim their input-VAT. That might ease the admin burden for a lot of schools (particularly those who need to work out their capital spend on buildings over the last 10 years) and more generally could be a way to ease schools into the new regime - and potentially give a softer landing for parents faced with fee-hikes. But maybe - as this is one of the few policies where I should declare a personal interest - this is just wishful thinking on my part.
2. Private Equity - taxation of carried interest to income tax. Again Labour have been consistent on this. But Rachel Reeves also went on something of a charm-offensive before the Election and the debate about it over the last few weeks was strangely muted. Query whether that might mean that there is some compromise being discussed. Perhaps Labour might find some way to distinguish between that part of carried-interest which involves genuine risk-taking (and therefore should be taxed as capital gain) and that which represents reward for work (and therefore logically should be taxed as employment income). Or perhaps apply dividend rates of income tax rather than employment rates? Or still allow some base-cost shift before applying tax?
3. Non-doms. So much to say on this that it deserves a separate heading!

Non-doms

I would predict:

• this will happen
• the new rules will apply (even if the legislation isn't quite final) from 6 April 2025
• that does mean that existing rules apply to events between now and 5 April 2025
• Labour will broadly adopt the plans announced by Jeremy Hunt on 6 March save for the 50% income tax relief in 2025/26 and not grandfathering pre 6/4/25 trusts for IHT
• Some noises were made about the 4 year regime for new arrivers needing to incentivise UK investment as well as foreign investment - that could be positive
• Labour broadly agreed with the Temporary Repatriation Facility (12% rate for remittances of past foreign income and gains) - but suggested that there needed to be something to encourage people not to leave large pools of unremitted foreign income and gains after the end of the 2 year period. Expect some sticks as well as carrots including a possible long-stop date (at which all past foreign income and gains could be deemed to be remitted)
• Might the 4 years be extended? This seems to be an area where practitioners and academics agree. 4 years is arguably too short and the cliff-edge at the end of it is not helpful. This might be wishful thinking, but it is just about possible that Labour could tweak this (e.g. from years 4-7 non-doms pay some tax - perhaps flat-rate - to go on benefitting).
• IHT and trusts is the most contentious issue. Labour aren't going to allow new trusts to be created between now and 6 April 2025. I think it very unlikely that they will grandfather trusts before 6 April 2024. But they do seem to understand the complexity of the issue and are exploring solutions. Possibly an extension of the 12% facility to encourage trusts to be wound-up. Possibly some sort of credit for GROB (Gift with Reservation of Benefit) charges against 6% charges? The technical detail here will be important.

Capital Gains Tax generally

Beyond the above, CGT reform (increasing the rate; aligning it with income tax) is the most persistent rumour at the moment.

My own view is that CGT raises negligible amounts (in the low billions, compared to total government spending around one trillion), so a decision to increase it is political not economic.

Labour have also said that they have "no plans" to increase CGT - although note that isn't the same as the manifesto "commitment not to raise income tax, VAT or NICs".

And, while there is some logic to gains being taxed in the same ways as income (that, after all, was Nigel Lawson's solution in 1988), such a system inevitably requires some allowance for inflation and needs to deal with losses. If capital gains are charged at the same rate as income, then it becomes more difficult to justify why capital losses can't be set against income tax.

The current rates of CGT are a compromise - with the added benefit of a simple flat-rate.

However, there is government research from the 2010 coalition suggesting that the flat-rate of CGT which yields the most is around 28%. After that the Laffer-curve effect results in lower yields.

So, it is possible that CGT could go up - and a rate of 28-30% might be an easy-win. But with no current need to do so, my own guess would be that we could see such a change a year or two into a Labour government rather than immediately.

(If such a change were made I could see Business Asset Disposal Relief (formerly entrepreneurs' relief) being increased to say ￡5m as a sweetener).

Obviously in the meantime rumours will persist - and fostering those rumours might actually be a worthwhile tactic in its own right for a new government (in that rumours of CGT changes usually generate corporate and M&A activity).

Inheritance Tax

The next most rumoured changes are to inheritance tax. But - having now worked in this area for 30 years - I confess that I can't remember a Budget or Election over that period when there haven't been such rumours...quite often generated by lawyers wanting clients to scare clients into taking advice about how to avoid the supposedly forthcoming changes. (I hope I have tried not to engage in such rumours, but may not always have been perfect in this regard).

It is true that IHT is a mess - and is mainly paid by those in the middle - rather than those at the top and the bottom of the wealth-spectrum. Various sensible proposals for reform (including by the Office of Tax Simplification and the APPG) have been floated over the years.

But the politics of IHT reform is that any Chancellor wanting to make his (or now hopefully her) name, has quickly realised that IHT-reform wins you no friends and makes you lots of enemies: the losers shout very loudly and the winners keep very quiet. Piecemeal reform typically makes the system even worse, but wholesale reform is too difficult to contemplate.

So, although there are the usual rumours, my own view is that not much will happen - but I wouldn't be entirely upset to be wrong about this as (from a macro-perspective) IHT is desperately in need of improvement.

If a Chancellor was minded to make some changes, what might she do?

• Potentially Exempt Transfers (7 year rule). Arguably 7 years could be extended (say to 10) without too much difficulty. But the reward of doing this is minimal and the risk of annoying the public may outweigh it. Could there be a lifetime cap? Again, this idea is floated, but the original idea of PETs was to prevent people hoarding their wealth until their death - encouraging them instead to pass it down to younger generations who could use it more productively.
• Business Property Relief. Some academics have suggested capping this (say at ￡500,000) but why benefit small (and therefore typically less profitable) businesses while penalising (and possibly forcing the sale or break-up) of more successful larger businesses? Perhaps more likely would be a return to the pre-1992 BPR where relief was less than 100% (say 50%) but with 10 years to pay the tax. But I don't think this is very likely.
• AIM shares and other marketed BPR arrangements. The rationale for BPR (that 40% IHT on death can force the break-up of viable businesses to pay the tax) does not so clearly apply here. But the lobbying-groups for AIM are strong. And marked BPR arrangements would affect a lot of "middle-England" voters. Again, is the political risk worth the relatively small amounts at stake?
• Agricultural Property Relief. Arguably APR could be restricted to working farmers rather than landowners who buy-up agricultural land (and let it to tenants) simply to claim the relief. But the boundary between working-farmers and landowners is surprisingly difficult to define and easily capable of being manipulated (e.g. by turning tenancies into share farming or contracting arrangements). Again, why anger an important rural populace for very little tax?
• BPR - 51% test and group structures. Unlike other taxes, the test of whether a company is trading is curiously drafted and currently allows full relief even for companies and groups which have significant investment activities. More logically the test should be aligned with the 80% test that applies for other taxes (and taking the business of a group as a whole). It is difficult to argue against this - but the technical detail would be a hassle and might only be worthwhile as part of a wider package.
• 6% rate of IHT for trusts (every 10 years). There is some logic to why the rate is 6% (broadly that the 20% entry charge plus 33 years of 6% = 40%....33 years being approximately the length of a generation). But it would be easy enough to increase to 8% or 10%. Again, though, why go through the technical hassle for very little tax actually at stake.

CGT rebasing on death

One area where a government might make a relatively-easy reform is in relation to the CGT rebasing that occurs on death.

The logic for such rebasing is that IHT is charged on the same event. (Academics may dispute this).

But there is no logic to the current rule where CGT rebasing happens, even where no IHT is charged (gifts to spouse; business and agricultural assets).

The Office of Tax Simplification previously proposed that there should be no CGT rebasing where IHT relief applied.

Leaving aside the administrative question of how personal representatives and heirs would know a person's CGT base-cost, it is difficult to argue against the logic of this.

Whether it would be worth making this change for the amounts at stake is hard to judge, but a Chancellor looking for an easy-win (albeit not particularly lucrative) could look here, perhaps.

Pensions

Unlike IHT, tweaking pension rules is a perpetual favourite of Chancellors.

This is probably because (a) large numbers are in play and (b) the rules are so complex that many people are blind-sided about how their pockets are surreptitiously being picked.

Labour have said that they do not propose to reintroduce the lifetime allowance.

And I would be surprised if the 25% lump sum were touched. (It lacks logic, but is very popular).

The Inheritance Tax treatment of pensions might be one area where we could see changes. Currently pensions have shifted from being a vehicle to pay retirement income, to a vehicle which the well-advised treat as an inheritance-tax free pot.

Higher-rate income tax relief could be threatened - but for those at the very top the cap on the annual allowance currently means that only ￡10,000 can be put into a pension anyway. Changing the higher-rate relief below that would start to affect doctors pension arrangements and that has not gone well in the past.

Gift-Aid for Charitable Donations

Capping higher-rate relief for Gift Aid, or introducing a flat-rate (say 30%) for all charitable donations - has often been mooted.

But charities have usually campaigned hard against this for fear of scaring-off wealthy philanthropists.

My own view is that the charity-lobby would be likely to succeed again here. I would view changes as unlikely.

More outlandish rumours

The following rumours have reared their heads. I consider them all very unlikely:

1. Main residence relief (PPR). While it would be more logical to have a rollover relief when someone sells their home (so the capital gain is rolled into the next property, rather than being exempt), no Chancellor who wants to keep his job has ever dared touch this particular sacred-cow for fear of offending the home-owning classes. Whether a female Chancellor will dare to tread where none of her male counterparts ever have remains to be seen...but I would be very surprised.
2. Close investment holding company rules. More than three decades ago these rules existed so that income of investment companies (held by a small group of usually close family members) was taxed to income tax rather than corporation tax. There are some rumours that - to tackle Family Investment Companies - similar rules could be reintroduced. But the rules were complex and fell out of use for a good reason. FIC planning is not sufficiently aggressive that I think it is likely that a Chancellor would seek to reintroduce these.
3. Solidarity charge on investment income. Effectively a way of introducing National Insurance Contributions on investment income without actually calling it National Insurance (which the manifesto obviously pledges not to do). While such verbal trickery is not unprecedented (Insurance Premium Tax is effectively VAT by another name), this would be a major change and would draw howls of protest that the manifesto was being breached.
4. Wealth tax. This rumour continually rears its head. But the most comprehensive study of wealth taxes done by the Wealth Tax Commission effectively ruled out an annual wealth tax as impractical and unworkable. It suggested that a one-off wealth tax could just about be made to work - but it would have to be genuinely one-off and to pay for an extraordinary event (such as the Covid pandemic). Arguably the time for that has now passed and the other problems with such a tax are numerous (too numerous to list them here). Labour has, in any event, said they have no such plans.

So what can Labour do?

If you're still reading by this point, you might be forgiven for asking the question - so what can Labour do - given the need to raise taxes? Here we get more into the realms of economics rather than law, so I tread warily. But here are some thoughts:

• Do they actually need to raise taxes? That may seem a strange thing to say, but the same was said immediately after the pandemic. Yet governments since have seemed content to rely on a bigger debt pile (subject to what the OBR will allow) and inflating that debt away. Query whether Labour's main plan - at least in the short-term - is simply to wait and see if they can get away without tax rises.
• Competence-dividend. Arguably the biggest economic achievement of the Blair/Brown years was immediately to give power over interest-rates to the Bank of England. That demonstrated to the market that rate-setting would be free of political interference and (arguably) allowed interest rates to be permanently a couple of points lower than would otherwise have been the case. By demonstrating competence and removal of political interference, the economic growth over the following years achieved far more than tax-rises could. Again, query whether this is Labour's strategy. Sit back, look competent, and hopefully the market will respond to create...
• ...Growth. Potentially this is Labour's best (perhaps only?) hope.
• Fiscal drag. As I read it, Labour has promised not to raise income tax, national insurance or VAT. But it has not promised to uprate allowances and bands in line with inflation. Fiscal drag (leaving bands and allowances fixed) is arguably one of the biggest revenue-raisers without having to do anything more complex.

A final caveat

Being a lawyer, I obviously cannot resist caveating everything I've just said.

I've tried to stick, as far as I can, to what I think Labour WILL and WON'T do - rather than what they CAN or CAN'T do. But I may not always have succeeded in this.

Suggesting that politician CAN'T make a particular tax change is always dangerous. I would probably have said this about non-dom reform for many years. But governments since 2007 have proven that taxes CAN be reformed - even if difficult (and even if it can be argued, unwise).

So, although I have suggested various things that I think the new government is unlikely to do, I do not think that any of the above is impossible...it would just require a lot of political willpower.