What areas of tax may Labour look at following Starmer’s Speech?

What areas of tax may Labour look at following Starmer’s Speech? Insight from Nicholas Nesbitt

“Labour has set out its stall ahead of the autumn Budget, highlighting the need for increases in some taxes to plug the shortfall in public finances. There are a number of areas that the government could consider, some more likely than others in our opinion.” 

Capital Gains Tax:

“To some extent, the CGT regime has already been squeezed in recent years with reductions to the Annual Exempt Amount (AEA), increases in rates applied to residential property, and reductions in the amount of business sale proceeds that attract 10% CGT under Business Asset Disposal Relief.  

“Increasing the CGT rates now seems the most likely course of action. A probable worst-case scenario would be an alignment of CGT rates with Income Tax rates. An alternative would be to extend the regime of having different tax rates for different assets (residential property, investment, business assets etc.). 

“Ultimately, we expect that if rates are to increase, this may be coupled with an increase in the Business Asset Disposal Relief limit on selling businesses from £1m.

“From a financial planning perspective, it may make more sense to realise gains within investment portfolios now at the known rates, instead of deferring the problem with little likelihood of future reductions. This is reinforced by the fact that, due to the reduction in the CGT AEA, many investors are now paying CGT regularly on investment portfolios when they previously haven’t. Where clients don’t anticipate requiring the funds in the near future, they may consider deferring realising gains to death but that is somewhat restrictive from an investment perspective and could be a potential area of attack as well.”

On death

“The principle behind a base cost uplift on death is to avoid individuals suffering tax twice on death (IHT and CGT). However, for assets that benefit from an IHT relief (Businesses, Agricultural Property, transfers to spouse etc), it would not be surprising if the CGT uplift was removed. If so, Labour will need to consider how this is imposed without forcing the breakup of businesses (and similar assets) on death in order to pay the liability.

Principal residence relief 

“When it comes to principal residence relief, its removal seems unlikely. It could, however, be replaced with a rollover mechanism or the introduction of a cap. Typically the home is a protected asset so this would signal a significant change.

Pensions:

“Labour is unlikely to reintroduce the Lifetime Allowance (LTA). One potential consideration is a flat relief on pension contributions (as opposed to linking this to your tax rate) however this has been discussed for years and is technically difficult to implement.   

“The more likely areas are reducing the Lump Sum Allowance (LSA) and addressing the taxation of pensions on death. Following the abolition of the Lifetime Allowance, the LSA is no longer linked to any wider legislation  and therefore the government could easily reduce the amount of tax-free cash individuals can take from their pensions. 

“The taxation of pension death benefits has long felt anomalous – you get tax relief on contributions; you get tax-free investment growth and you can pass the funds tax-free on death. Given the level of wealth stored up in pensions, we expect that the new government may seek to tax pension funds on death moving forward.  

“Any consideration around taking lump sums from pensions should weigh up the individual’s objectives and the various tax consequences of drawing the lump sum”

Inheritance Tax:

“The number of estates paying Inheritance Tax has been increasing over the years due to inflating asset prices and frozen thresholds. So, it is no surprise that changes to this might worry people. We do not expect that the 40% headline rate of IHT will change, and we don’t expect the limits (known as Nil Rate Bands) to decrease. However, we do think that the government may look to tighten rules on gifting money away, perhaps by taxing gifts over a certain size, or introducing a lifetime limit of gifts. 

“Some other areas that the government could look at are removing Business Relief on AIM assets, and limiting Agricultural Property Relief. 

“Given the uncertainty over how the government might look to change IHT legislation, and given that IHT planning typically involves significant decisions that can impact individual’s long-term financial position, we are being cautious about undertaking planning in this area currently. However, where individuals have planned to make certain gifts, we are discussing with them whether such gifts should be made over the coming months.”

Wealth tax: 

“A wealth tax would be a very complex taxation to introduce and would be very different to the UK’s current approach to tax. However, it shouldn’t be completely ruled as there are examples of this being introduced in other countries.”

Nicholas Nesbitt is a Partner at Forvis Mazars