We are pleased to bring you this Stop Press special edition of In Trust. Our next main issue will be after the Autumn Budget on 30 October 2024 but in the meantime we provide this interim update on the Labour party’s victory in the General Election on 4 July 2024 and the impact this may have on private clients in relation to personal taxation and estate planning.
The key areas affecting private clients where we may see changes in the months ahead are as follows.
- Capital gains tax (“CGT”) – a possible increase in CGT rates.
- Carried interest – the rate of tax may increase to 45% in some cases.
- Inheritance tax (“IHT”) – a possible change to the “seven-year rule” and/ or curtailing of reliefs for business and agricultural assets.
- “Non-dom” taxation – will be further tightened up from April 2025.
- Offshore trusts – IHT benefits will be curtailed.
- Value added tax (“VAT”) on school fees – will be introduced from January 2025.
CGT
Throughout the General Election campaign, Sir Keir Starmer repeatedly refused to deny an increase in CGT rates, and the Labour party manifesto was silent on the topic. This, along with the fact that Chancellor Rachel Reeves has previously shown support for aligning CGT (the main rate of which is currently 20%) with income tax rates (which are up to 45%), mean increases to CGT rates in the Autumn Budget are widely predicted, particularly given fiscal pressures and the likelihood that some of the government’s spending will need to come from tax rises.
Those with sizeable investment gains may want to start considering whether to realise profits at current CGT rates before the Budget.
Carried interest
The Labour party manifesto included the pledge to close the carried interest “loophole” so that performance-related pay within the private equity industry is no longer treated as capital gains and taxed at 28%, but as income and taxed at up to 45%. Rachel Reeves confirmed the government’s commitment in this regard in an announcement on 29 July 2024, and HM Treasury published a “call for evidence” on the same date. This policy is very much tied up with the government’s approach to CGT rates (above).
“Non-dom” taxation
In respect of the taxation of non-UK domiciled individuals (“non-doms“) – on 29 July 2024, the government published a summary policy paper confirming their commitment to proceed with the main framework of non-dom tax changes first announced by the Conservative government in the 2024 Spring Budget, albeit subject to certain material differences. Those differences are consistent with Labour’s April 2024 press release and party manifesto.
The proposed rules are complex but you can read a full analysis on our “2024 Budget Non-Dom Changes” webpage. In brief summary, non-doms who are resident in the UK will, from 6 April 2025, only be permitted to enjoy an exemption from UK tax for their foreign income and gains if they have been tax resident in the UK for no longer than four years, and will be subject to IHT on their worldwide assets after ten years of tax residence. Currently, the exemption periods are more generous. Further, offshore trusts set up by non-doms for their offshore assets (the assets in which, at present, are not subject to IHT) will in the vast majority of cases come within the scope of IHT from 6 April 2025. There are various areas of uncertainty around how the rules will work in practice and, specifically, how non-doms and their offshore structures will be “transitioned” into the new regime, the details of which are expected to be confirmed in the Autumn Budget.
Those affected will need to be reactive to developments in the Budget if they wish to mitigate the effect on their UK tax liability after 6 April 2025, and this may involve undertaking an analysis of the UK with relocation options. Our Private Client Offshore Team can assist with this analysis.
IHT
There was no mention of IHT in Labour’s manifesto; accordingly, reform cannot be ruled out and rumours are circulating that IHT could be one of the taxes targeted in the Autumn Budget.
The IHT reliefs for business and agricultural property are generous at present and have been rumoured for reform for some time. Clients with valuable business or agricultural property qualifying for IHT relief may want to consider accelerating plans to gift such property to the next generation or settle such property into trust, if circumstances are right.
There has also been speculation following the General Election that the government may target how IHT applies to gifts and, specifically, abolishing the “seven-year rule” in favour of a gift tax that applies at the date of the gift. It would be unusual for this to be introduced immediately without prior consultation, so it is to be hoped that affected individuals would have time to plan appropriately.
VAT on school fees
On 29 July 2024, it was announced that as of 1 January 2025, private school fees and boarding services will be subject to VAT at 20%. The same applies to pre-payments of fees (for school terms after 1 January 2025) that are paid on or after 29 July 2024. Similar pre-payments that took place before 29 July 2024 will generally not be subject to VAT. Draft legislation to effect these changes has been published for consultation.
As one of Labour’s flagship policies, the introduction of VAT on private school fees was expected. Affected families will be considering their options for funding the likely corresponding increase in school fees from 1 January 2025. One option is a shift of generational wealth, from grandparents for example, to help fund fees as part of an overall long-term succession plan. Education trusts can be used to provide funds and take advantage of specific tax exemptions.