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Labour’s Potential Budget Reforms: What Businesses and Individuals Could Expect

11 Oct 2024


Budget

Do My Shoulders Look Broad in this? What can we expect from Labour’s first budget

As Labour prepares to deliver its first budget since 2010, there is growing anxiety and uncertainty about what lies ahead. In this article, we’ll break down what we know so far, analyse Labour’s key fiscal priorities, and explore what we might expect from this pivotal budget.

What do we know?

The Government’s manifesto emphasises both economic growth and stability, following several tumultuous and challenging years for businesses. A key priority is enabling businesses to plan long-term and invest confidently. From a tax perspective, this translates into a commitment to capping corporation tax at 25%, retaining full expensing and the annual investment allowance, and providing clarity on eligible claims. Additionally, the Government has pledged to limit itself to one major fiscal event per year.

The manifesto also promises no increases in income tax, National Insurance, or VAT rates in this budget.

Alongside these commitments, the manifesto outlines ambitious plans for public investment, including increased funding for the NHS, expanding the availability of social and affordable housing, achieving net-zero carbon emissions by 2030, and various other measures aimed at supporting economic growth.

With the primary tax bases for government revenue ringfenced, a key question remains: how will these investments be funded?

The answer may lie in what was left unsaid in the manifesto—especially given Labour’s focus on addressing wealth inequality. 

Capital Gains Tax (CGT)

Broadly speaking, CGT is paid on gains incurred when you sell an asset from more than you bought it for. CGT is likely to be a key target for Labour’s “broadest shoulders” approach, as wealthier individuals are more likely to be buying and selling assets other than their primary residence (which is subject to CGT relief).

Consistent with this perspective, we may see the rates of CGT increased to align more closely with Income Tax rates. Currently, the highest rate of CGT is 20% for disposals of most assets, and 24% for disposals of residential property. This is significantly below the highest rate of income tax, at 45%. Whether or not this increase would help to close the £22bn “black hole” in public finances described by Reeves is not certain. Increased tax rates do not necessarily lead to increased tax revenue. In fact, HMRC forecasts from June 2024 indicated that even a 5% increase in the higher rates of CGT could see a £115m fall in revenue in the first year as people hold off selling due to the additional tax cost. In the conservative Government’s final budget, Jeremy Hunt actually reduced the highest rate of capital gains tax from 28% to 24% in an apparent effort to increase revenue by stimulating additional disposals.

In addition to raising the rates of CGT, Labour might increase the number of transfers that are subject to CGT. In particular, there has been speculation of a “double-death tax” whereby death could be treated as a chargeable disposal for CGT purposes, such that an individual’s assets could be subject to CGT in addition to Inheritance Tax on death.

If this were to happen, the tax paid on some assets after death could increase from 40% to over 50%.

Inheritance Tax

Inheritance Tax (IHT) is also considered highly likely to be targeted on 30 October, particularly as concerns grow over the widening wealth gap. The current design of IHT has been heavily criticised, especially agricultural and business reliefs, which the Institute for Fiscal Studies (IFS) argues primarily benefit wealthier estates and don’t achieve what they were intended to do. Labour could respond by either capping, restricting, or abolishing these reliefs altogether. The IFS predicts that these reliefs account for a loss of £1.1 billion in IHT revenue (about 20% of all IHT revenue), so this could potentially be a lucrative move for labour.

The residence nil-rate band has also been criticised by the IFS both for disproportionately benefiting property owners in the south, and for disadvantaging inheritors who are not the children of those they inherit from. In line with IFS suggestions, Labour might choose to get rid of the residence nil rate band altogether, and perhaps increase the general IHT nil rate band above £325k, in an effort to make the tax more equitable. Like potential changes to CGT, these changes would signal a shift toward targeting the transfer of wealth more aggressively.

Reduced relief for Pension Contributions

Labour may consider abolishing the higher rates of tax relief on pension contributions. Currently, higher and additional rate taxpayers receive pension contribution relief at 40% or 45%. Capping relief at the basic rate would generate significant savings for the government and is seen as a way to redistribute tax benefits more fairly. However, this reform would likely spark debate, as it could reduce the incentive for higher earners to save for retirement, and pension contributions are a significant source of investment funds for the Government. Alternatively, the Government might introduce a flat rate of tax relief on pension contributions at 30%. This would increase the tax relief available to lower earners, incentivising them to save, while still reducing the relief available to higher earners.

Additional revenue might also be earned by targeting the 25% lump sum which can currently be withdrawn from defined-contribution pensions tax free. This could either be by reducing the percentage of the pension pot that can be removed without incurring a tax charge, or by abolishing the tax-free sum altogether. However, this change would also disincentivise saving and, for this reason, seems less likely than other options for raising additional revenue in the next budget due to the Government’s emphasis on encouraging long-term investment.

Conclusion

While no one can predict the specifics of Labour’s budget with certainty, the signals point toward significant changes. We may see increases in Capital Gains Tax rates, reforms to Inheritance Tax, and potential reductions in pension relief for higher earners.

As the October budget approaches, WR Partners is here to help you navigate any announcements and assess how they will impact you and/ or your business. If you want help making sense of the budget, check out one of the FREE budget update events taking place near you:

Author

Freya Webb: Tax Associate

Email: fwebb@wrpartners.co.uk

Telephone: 01743 636772

LinkedIn: Freya Webb

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