The party, which on opinion polling evidence appears slated to win a majority on 4 July, as expected, reiterated its desire to end the non-dom system, and cut off the ability of such persons to shield offshore assets from inheritance tax. Private equity “carried interest” also figured in the proposals.
The Labour Party, which on opinion polling evidence is slated to
win a comfortable majority in Westminster in the 4 July general
election, set out in its manifesto yesterday. A number of items
likely to grab wealth managers’ attention.
As expected, the document reiterates Labour’s desire to end the
UK’s non-domiciled residency system. It also wants to change the
tax treatment of private equity carried interest.
The document said ending the non-dom system will raise £5.23
billion (£6.67 billion) in the period 2028-29. That figure, it
said, does not include £600 million in revenue it said would be
gained from removing a non-dom “discount loophole” in 2025-26.
Under UK chancellor Jeremy Hunt’s proposal to replace the non-dom
system with a temporary residency one, he suggested a 50 per cent
discount on the amount non-doms have to pay in tax in the first
year of the new ban. Labour wants to remove that
discount.
The inheritance tax status of non-doms, so lawyers have told this
publication, has been a potential deal-breaker. The manifesto
gave them no cause for cheer: “We will end the use of offshore
trusts to avoid inheritance tax so that everyone who makes their
home here in the UK pays their taxes here.”
Tax battles
The ruling Conservatives, trying to retain power after being in
office for 14 years, have promised to raise the tax-free pension
allowance every year, and take 2 pence off National Insurance
(aka payroll tax) by April 2027. In the long term, the party said
it wants to completely abolish NI. The Conservatives, like
Labour, have pledged to end the non-dom system. Instead, they
would bring in a temporary residency system under which those
living outside the UK for at least 10 years could avoid paying
tax on foreign-sourced income and gains for four years.
The Conservatives are in trouble, based on polling evidence. The
Reform Party, which on certain issues such as immigration
positions itself to the Right of the Tories, has an opinion poll
level of 14 per cent, with the Conservatives at 22 per cent and
Labour way ahead at 43 per cent (source: BBC poll tracker). The
Liberal Democrats are at 10 per cent, and the Greens at 6 per
cent. Given the first-past-the-post electoral system in the UK
(unlike under proportional representation) a split in non-Labour
voting intentions gives Labour a big majority in the House of
Commons.
With complaints, rightly or wrongly, about wealth inequality,
lack of affordable housing, crime and sluggish growth concerning
voters, the Conservatives face a battle to persuade the
electorate that they deserve yet another shot at office.
Labour, however, has been under pressure to clarify its stance on
tax and spending at a time when public debt is high and taxes at
their highest level, in proportionate terms, since the early
1950s. Labour has also recovered after being heavily defeated in
2019, when it was led by hard-Left figure Jeremy Corbyn, and when
Brexit was a dominant issue.
Other tax changes
On private equity, the manifesto pledges to raise £565 million on
closing the carried interest “loophole” on private equity, in
which such interest currently attracts capital gains tax, not
income tax.
Elsewhere, Labour said it will raise £1.51 billion by imposing
value added tax on private schools. Opponents say this will force
some schools to close or push up fees, adding to demands on the
state system, and that £1.5 billion is a small figure in the
context of overall education spending.
The manifesto also said it will cap UK corporation tax at its 25
per cent current level for the duration of the entire parliament
– saying this is also the lowest such rate in the Group of Seven
industrialised nations. It added that “we will act if tax changes
in other countries pose a risk to UK competitiveness” – leaving
open the suggestion that the rate might fall.
“We will retain a permanent full expensing system for capital
investment and the annual investment allowance for small
business. And we will give firms greater clarity on what
qualifies for allowances to improve business investment
decisions,” the document said.
Sir Keir Starmer, Labour leader, said the party has ruled out
rises to income tax, National Insurance and VAT for
households.
For overseas owners of UK property, Labour plans a 1 per cent
hike to the higher rate of stamp duty land tax on purchases of
residential property by non-UK residents to raise £40 million.
Currently non-resident buyers face a 2 per cent surcharge on UK
stamp duty rates.
Reactions
Within the private client and wealth sectors, reactions to the
Labour plans were mixed.
“Virtually all politicians vow to tackle tax avoidance, but
Starmer neglects to mention specific areas of tax the
Conservatives have not dealt with during their term in office,
which makes this seem a glib throwaway,” Miles Dean, partner and
head of international tax at Andersen, said. “The non-dom regime
is being significantly overhauled per the Conservative Budget
2024 and we have already seen non-doms leaving the UK in droves,
which was perhaps inevitable given that Labour is so far ahead in
the polls.”
“Labour’s plans to remove the remaining benefits of the non-dom
regime left in by the Conservatives will almost certainly cause
many more non-doms to leave the UK. It is doubtful that the
changes to the non-dom regime will have the impact Labour
suggest, as the number of remaining non-doms will fall
dramatically as they can so easily relocate to friendlier
jurisdictions,” Dean said.
Sarah Coles, head of personal finance at Hargreaves Lansdown,
said: “For anyone who sends their child to private school, this
will be another challenge on top of runaway fee rises in recent
years. However, anyone tempted to consider one of the schemes
that are claiming to get around VAT should think twice. Rules are
highly likely to include measures designed to catch these schemes
out, so you could end up wasting money, or stretching yourself to
pay early, and facing the tax charge anyway.”
“Starmer made it clear that nothing in the manifesto will need
additional tax rises, but Labour has not ruled out changes to
capital gains tax. At this stage, it’s difficult to know exactly
what these changes might be, or whether they would be needed, but
for investors with holdings outside tax wrappers, there could be
an extra cost. Labour said it is advocating for wealth creation,
so it will have to tread carefully on CGT if it wants to ensure
the right incentives are in place to create this wealth,” Coles
said.