As we fast approach the date of the General Election and the possibility of new Downing Street residents, we attempt to cut through the political rhetoric and focus on those areas that may be of most concern to our clients and explore what, if anything, can be done before any changes are implemented. The areas we analyse below include: capital gains tax, inheritance tax, VAT on school fees, Lasting Powers of Attorney, trusts and “non-dom” reforms.
For our analysis of what the Conservative and Labour parties included in their manifestos on tax policy, please click here.
Powers of Attorney Act and digital Lasting Powers of Attorney (“LPAs”)
The Powers of Attorney Act 2023 received Royal Assent in September 2023. It was unclear then, however, when exactly the provisions of the Act would come into force, and the impending General Election and possible change of government only serves to exacerbate that uncertainty. Original projections suggested a timescale around Autumn 2024 but it seems likely that this timeframe will now be pushed back.
The Act aims to modernise the process of making an LPA and is set to allow LPAs to be made digitally. The procedure for making an LPA will become very different – instead of one paper form for all parties to sign, there will be a series of online forms which can be completed separately. While the current system has its faults (paper heavy, long delays, difficulties with raising objections, among others), the new proposals are not without concerns. Digital “tick boxes” instead of signatures may on the face of it make the process quicker and simpler, but not necessarily safer or more accurate, and there is a real danger of undervaluing the significance of these documents.
Another change under the Act is that only the donor (the person making the LPA) will be able to register the LPA. The attorneys (the people appointed to act on behalf of the donor) will no longer be able to register the LPA on the donor’s behalf. An LPA is only valid once it has been registered with the Office of the Public Guardian (“OPG”) and cannot be used by the attorneys until such time as it is registered. Therefore, if a donor has an unregistered LPA and loses capacity to register it, their attorneys will have to apply to the Court of Protection, which can be time consuming and very costly.
We therefore recommend making an LPA under the current tried and tested paper-based system rather than wait for these changes to be introduced, particularly as there is no certainty as to the timing of the new digital version, and how smooth the transition will be. We also recommend registering LPAs as soon as they are made to avoid possible problems under the proposed new rules if a donor has an unregistered LPA and loses capacity.
Capital Gains Tax (“CGT”)
We are quickly learning during this Election campaign that the phrase “no plans” can actually mean anything is on the table.
While the Conservative manifesto ruled out any rises to CGT rates, Sir Keir Starmer has repeatedly refused to deny the possibility of an increase in CGT rates. The Labour manifesto published on 13 June 2024 promises that taxes on working people will be kept “as low as possible” and that none of the major taxes (income, national insurance and value added tax (“VAT“)) will be increased; but there is no mention of CGT rates. This brings CGT back into the spotlight as Labour come under mounting pressure to evidence how their spending plans will be funded. Sir Keir has subsequently ruled out levying CGT on the sale of the main home, but he has remained tight lipped when questioned about raising CGT rates more generally.
CGT rates were historically aligned with those for income tax; however, rates are currently 10% for basic-rate taxpayers, 20% for higher and additional-rate taxpayers and 24% for gains on residential property (with the exception of your “main residence”) and carried interest: much lower rates than for income tax (which has a top rate of 45%). Shadow chancellor Rachel Reeves proposed in 2018 that CGT should be paid at income tax rates with the annual allowance halved; and in 2021 stated that people who get their income through wealth should pay more. While the tax is not as lucrative as the UK’s biggest taxes, it has been suggested that equalising CGT and income tax rates could raise as much as £16bn a year with further reforms to limit exemptions potentially raising around £1.5bn in the current tax year. Not only would this produce much needed cash for public services, it would also reduce the incentive to switch income into capital gains for tax advantages and promote Labour’s quest for fairness in the tax system.
For those with sizeable investment gains, now could therefore be a good time to realise profits before a potential Autumn Budget and take advantage of the current rates.
Inheritance Tax (“IHT”)
The current “nil rate band” (tax-free allowance) for IHT purposes has been frozen at £325,000 for fifteen years and consequently the number of estates subject to this tax has increased year on year. Once again, therefore, this tax is the subject of some speculation and, as with CGT, a party’s silence on IHT (and any other wealth tax) could be interpreted as meaning changes may be on the cards.
Despite being described by the current chancellor as “profoundly anti-Conservative”, there was nothing in the Conservative manifesto about IHT. While it may be unlikely for Labour to consider a rise in IHT rates (40% is arguably high enough), the tax raising opportunities from IHT may be hard to ignore. Their manifesto pledge to renew focus on “tax avoidance by the wealthy” could suggest a review of reliefs such as those for business assets and agricultural property, plus the current exception from IHT enjoyed by inherited pension funds if death occurs before the age of 75.
IHT planning should always be kept under review and awareness of the available options and allowances is critical, and will become more so if there are signs from the new government that cuts to IHT reliefs, increases to the IHT rate, or even the introduction of a wealth tax are going to be considered.
VAT on school fees
Labour has confirmed that it will remove the tax break currently enjoyed by private schools and will introduce VAT on fees if it wins the Election on 4 July. It is likely to depend on the individual school and its financial health as to how this additional cost will be managed and how much of it, if any, will be passed on to parents. Payment in advance has been much discussed; however, this may fall foul of any retrospective legislation and is not without risk.
An alternative solution could be a shift of generational wealth, from grandparents for example, to help fund school fees as part of an overall long term tax efficient succession plan.
In summary and based on the current position, for IHT purposes, anyone is permitted to give away up to £3,000 in tax-free gifts each year. If the previous year’s allowance has not been used, this can be rolled forwards, but only for one year. Gifts in excess of this limit are classified as potentially exempt transfers (“PETs“) and are only completely free from IHT if the donor (person making the gift) survives for seven years after making the gift. There are some exceptions to this. One of particular value, and which may align well alongside a wish to provide regular support with, for example, school fees, is the “gifts from surplus income” allowance which permits any amount to be gifted free from IHT subject to satisfying various conditions. These include that the gift must constitute purely income rather than capital, there must be an established pattern of giving and the amount given must not impact the donor’s standard of living.
In addition to tax efficient Wills and general lifetime planning, we can advise on the use of trust structures and, in particular, the creation of education trusts, both of which can be used to provide funds for schools fees and take advantage of specific tax exemptions.
Trust Register Consultation
In March this year, HM Treasury began a new consultation on the legislation which saw the introduction of HMRC’s central Trust Register in 2017. With a few exceptions, all UK trusts must be registered on the Trust Register.
The consultation closed on 9 June 2024; however, with the current political uncertainty it remains to be seen how much, if any, of the proposals will be implemented and when. If you are a trustee of a UK trust and would like advice on whether and how the trust needs to be registered, please contact us.
Non-dom reforms
As expected, the Labour manifesto included changes to the tax regime for non-UK domiciled individuals (“non-doms“), proposals for which Jeremy Hunt had already announced in the 2024 Spring Budget. Labour has pledged to abolish non-dom status but exact details of their plans are unclear; reference to “a modern scheme for people genuinely in the country for a short period” suggests that they may keep the four-year period exemption period proposed by the Conservative government, but equally the lack of a specific reference to the four year period gives non-doms some hope that the period could be slightly longer. The manifesto also includes a promise to “end the use of offshore trusts to avoid inheritance tax”. Whilst we need to await details, this is likely to refer to the ability for the offshore “excluded property” trusts of UK resident non-doms to remain outside the scope of UK IHT provided they are set up before 6 April 2025 – something that Labour have previously identified as a “loophole” in the Conservatives’ plans.
Our “2024 Budget: Non-Dom Changes” hub on our website contains more information about these reforms and how our Private Client Offshore team can assist with any relocation planning for non-doms who are reviewing whether to stay in the UK as a result.
Closing comment
The timetable for any policy changes remains to be set; while any big tax changes are usually reserved for a fiscal statement or Budget, typically in Autumn and Spring, a new governing party may trigger a break from this tradition. Labour has, however, stated that if they win the General Election, they would not announce a Budget before September and Rachel Reeves has said she would get forecasts from the Office for Budget Responsibility before any fiscal event, which requires ten weeks’ notice. Coupled with the summer recess, this may provide an opportunity to review and plan accordingly.
Our Private Client department can advise on all points covered in this article and for further information or advice on these, or any other issues, please do contact your usual WB adviser.