With Labour winning the general election we delve into their manifesto and what it could mean for tax.
The below tax changes are of course not yet set in stone, and we expect a Budget announcement in late September / early October, unless a ‘mini Budget’ is called sooner.
What are the key tax pledges in Labour’s manifesto?
In terms of tax, there are five broad changes which Labour proposes to make in order to fund their spending pledges:
- Abolishing non-domiciled status and reducing tax avoidance
- Ending the VAT exemptions for private school fees
- Taxing performance-related pay for private equity managers as income rather than capital gains
- Increasing the stamp duty land tax surcharge, applicable when non-residents purchase UK residential property
- Subjecting oil and gas giants to a windfall tax.
We explore these pledges in more detail below.
Individuals – Personal taxation
- Income tax and national insurance contributions: The Labour manifesto pledges not to increase national insurance contributions, VAT or the basic, higher or additional rates of income tax.
- Capital gains tax: There is no mention of capital gains tax, and there is the possibility that the rate of capital gains tax will be increased. Similarly, there is no suggestion of the introduction of a wealth tax.
- Inheritance tax: There was little mention of changes to inheritance tax in the Labour manifesto, except changes to the inheritance tax treatment of trusts created by non-domiciled individuals (as explained below).
- Taxation of Non-Dom’s:
- Abolishing of non-domiciled status: The labour manifesto has pledged to abolish non-domiciled status and replace it with “a modern scheme for people genuinely in the country for a short period”. There is no further information as to what the replacement regime will look like and how it might differ from the four year ‘foreign income and gains’ regime proposed by the Conservatives in the 2024 Budget.
- Labour will not introduce the proposed 50% discount for ‘foreign income’ in 2025/26: The Conservatives had announced in the 2024 Budget that for individuals who have been in the UK for four years, and who will pass from being remittance basis users in the 2024/25 tax year to being taxed on an arising basis in 2025/26, will only pay tax on 50% of their foreign income (but not foreign gains) for the 2025/26 tax year. However, the Labour manifesto confirms that it would not introduce such transitional relief.
- Most significantly, Labour will bring offshore trusts within the scope of Inheritance Tax (IHT): This has particularly caused concerns for non-doms, as previously during the 2024 Budget the Conservatives had confirmed that trusts created by non-domiciled individuals before 6 April 2025 would retain their favourable tax treatment for inheritance tax even following the abolition of the non-dom status, which may now not be the case. The manifesto does not have any detail as to how Labour would implement this change and no reference is made to the change proposed in the 2024 Budget to charge inheritance tax by reference to residence, rather than domicile.
- Trusts created by non-dom individuals: There are also no details given in the manifesto as to how trusts which were created historically by non-UK domiciled individuals will be taxed, but there is a risk that they will be subject to inheritance tax charges every ten years, charges when assets leave the trust structure, potentially as well as charges on the death of the settlor if they or their spouse are able to benefit from the trust. These changes could have far-reaching consequences for UK residents who have set up trust structures when they were non-UK domiciled, even if created decades ago and even if they are unable to benefit from them. Similarly, no guidance is given as to how existing trusts will be taxed in terms of income tax or capital gains tax.
- Property taxes: We are likely to see a 1% increase in the stamp duty land tax surcharge paid by non-resident individuals on purchasing UK residential property. The current rate of the surcharge is 2% on top of all other residential rates of Stamp Duty Land Tax, which under Labour would increase to 3%.
- Pensions: Labour plans to undertake a “review of the pensions landscape” to consider steps to improve outcomes and increase investment in UK markets. Specific reference to pensions tax or Labours rumoured intention to reintroduce the Lifetime Allowance is not included in the manifesto.
Business – Corporate tax
- Corporation tax rate: To provide businesses and investors with certainty, Labour proposes to cap corporation tax at 25% for the entire parliament and states that it will act if tax changes in other countries pose a risk to the competitiveness of the UK corporation tax rate. Labour also proposes to publish a roadmap for business taxation for the next parliament to allow businesses to plan investments with confidence.
- Business investment: Labour has pledged to retain a permanent full expensing system for capital investment, as well as the Annual Investment Allowance for small businesses. It intends to provide greater clarity on what qualifies for these allowances to improve business investment decisions. No mention is made in the manifesto of the Patent Box and current R&D tax credit system, which Labour’s Business Partnership for Growth document (February 2024) noted would be retained.
- Business rates: Labour considers that the current business rates system disincentivises investment, creates uncertainty and places an undue tax burden on our high streets. In England, Labour will replace the business rates system with an unspecified new model, with the aim of levelling the playing field between the high street and online retailers and encouraging entrepreneurship.
- Oil and gas company windfall tax: The manifesto also includes a proposal to subject the excess profits of oil and gas companies to a time-limited windfall tax, to support families with the cost of living.
Other measures
- VAT and private schools: Labour will not increase the overall VAT rate, but they will end the VAT exemptions for private school fees, which will now be subject to VAT at 20%. The business rates relief which is currently available for private schools will also end, however no timetable is provided for this.
- Private equity: Labour proposes to tax the performance-related pay for private equity managers, known as ‘carried interest’ as income rather than capital gains.
- Tax avoidance: Labour has indicated a clear intention to enhance HMRC’s capabilities to tackle tax avoidance. This includes increased registration and reporting requirements and substantial investments in new technology to build capacity and close the tax gap.
When might there be a Budget announcement?
Given that Labour has committed to a full Office of Budget Responsibility (OBR) review prior to a Budget announcement, as well as the Party Conference already set for September, we anticipate that we will see a Budget announcement between late September and early October.
We may then see these tax changes and possibly others being announced, though there is scope for the government to make more immediate changes, so we will wait to hear any updates in the coming days.
According to the Labour manifesto, the Budget will become an annual Autumn Budget announcement.
Oscar heads our tax department and provides advice on tax structuring, planning and compliance services to entrepreneurs and their businesses.