‘Change is the only constant in life’ – Heraclitus’ famous quote seems especially appropriate for anyone trying assess the likely impact of the general election on tax policy in the UK.
In terms of certainty, we know the election will take place on 12 December, and whoever forms a government, a budget will follow very shortly afterwards.
Taking Labour, what do we know about their tax plans and what, if any, planning points do they raise?
John McDonnell, shadow chancellor, announced that Labour would apply ‘a fair taxation system, make sure we can fund our public services, make sure everyone actually pays their taxes as well so we do tackle tax evasion and avoidance’.
While that sounds like a perfectly reasonable aim (although if you think you’ve heard something like that before you’re right – there has been much focus on everyone paying their ‘fair share’ of tax for some time) the devil is, as ever, in the detail, so what do the details we know so far tell us?
Starting on personal tax, we know that in their 2017 manifesto Labour set out plans to increase the number of people paying the 45% income tax rate, which would apply to all income over £80,000 (the 45% rate currently applies only to income over £150,000). We also know that a new 50% rate would apply to income over £123,000, whereas at present 45% is the top rate of income tax.
Capital Gains Tax
That manifesto also promised to reverse the recent reductions to capital gains tax (‘CGT’), so that the current 10% rate would revert to 18% and the 20% rate to 28%. That in itself might not seem especially dramatic, however that is not the only likely CGT change.
The ‘Land for the Many’ review commissioned by the Labour party includes proposals to increase CGT rates on sales of any property that is not a main residence to income tax rates. It seems this would extend to non-residents with UK property interests.
Further changes to property taxation could be expected under a Labour government. The ‘Land for the Many’ report means that we could expect to see council tax replaced by a ‘progressive property tax’ which would be set nationally and paid by property owners. That is of course a marked difference to the present council tax system which tends to be paid by occupiers. Part of the progressive property tax would be regular revaluation of property, so that increases in value would lead to increases in the amount of tax due – which is rather akin to a wealth tax. It is not clear what deductions or offsets would be available.
Compulsory Purchase and Sale
One top of this, there is a suggestion that unoccupied and other land could be taken over, and purchased or sold with compensation levels to be determined by the government. All of which might prompt land and property owners to contemplate transferring their wealth sooner rather than later.
In which case the proposed abolition of inheritance tax (‘IHT’) seems at first blush appealing – until one realises it would be replaced by the seemingly harsher lifetime gift tax. Under this any gifts over £125,000 would trigger income tax for the recipient (whereas the present IHT system has a £325,000 nil rate band and the potentially exempt transfer rules means lifetime gifts are not subject to IHT provided the donor survives seven years from the gift). It is not clear what assets might benefit from favourable or potentially exempt treatment under the new proposed lifetime gift tax.
Of course detailed advice should be taken before any tax planning is put in place, but at a general level one can consider receiving income under the present rates, and realising gains whether by asset or share sale or otherwise, also at present rates. Of course, any such decision must be taken alongside investment advice and the tax tail should certainly not wag the larger investment dog! For those considering making lifetime gifts under the current IHT rules, it would be prudent for that planning to be completed sooner rather than later.
Non domicile status
After the still fairly recent changes to the taxation of non-domiciliaries in 2017, we can expect radical change under a Labour government. John McDonnell announced in September, just before the Labour Party conference, that Labour would abolish non-dom status in its first budget.
Of course, there are many many questions around transition periods and how rapidly such a change would affect existing non-doms, but it is safe to conclude that non-doms can expect their tax status to change in the event of a Labour victory on 12 December.
It would seem sensible, at the very least, for remittance basis tax payers to realise offshore income and gains, if this makes sense from an investment and economic point of view, before 12 December. To the extent remittance basis taxpayers are contemplating making gifts of offshore assets, again it would make sense to accelerate that planning.
In the 2017 Manifesto Labour set out that it would increase corporation tax rates to 2010 levels, meaning that they would go up from the current 19% rate to 26%, it is likely this would be over a three year period. There would be a small profits rate of 21% for business with annual profits of less than £300,000.
Excessive pay levy
In a move confirmed this week, companies where any employee earns more than £500,000 will be subject to tax so that the entire salary would trigger a 5% tax for the employer. In this case therefore the total tax burden would include both increased corporation tax and the new ‘excessive pay levy’. The same levy would apply at 2.5% for employees earning between £330,000 and £500,000.
Alongside this John McDonnell said a Labour government would ensure one third of the board of certain companies comprised employees.
Inclusive ownership fund
This can be viewed as part of a package of measures seeking to change corporate governance and encourage employee participation. A key aspect of this appears to revolve around the ‘inclusive ownership fund’ which would mean any companies with more than 250 employees would have to transfer up to 10% of the shares into a pot for the employees.
While share ownership plans can be an effective and highly motivating incentive structure, with value growth for both the employer and employee, it is far from clear that this would be the result of the ‘inclusive ownership fund’. For example, dividends above £500 would appear to not be received by the apparent employee shareholders, but rather be paid to the Treasury.
This again appears to be more of a corporation tax increase than really encouraging employee ownership
Financial Transactions Tax
The 2017 Labour manifesto trailed a proposal to extend stamp duty reserve tax to a range of financial transactions, and this idea was based on a report by Intelligence Capital, a financial advisory firm. There followed a supplementary report in September 2019 which recommended extending the range of transactions to which the tax would apply. The tax would be paid by UK residents who are purchasers of e.g. foreign exchange. The rates vary between 0.01% and 0.04% according to the transaction in question.
Again, we do not know exactly how this would be implemented but it seems clear that UK residents (and of course those effecting financial transactions in the City of London) would have to factor the cost of the proposed FTT into a broad range of financial transactions.