With the Labour government’s first Budget fast approaching on 30 October 2024 (“Autumn Budget“) and the party’s known position on the “broadest shoulders” bearing their fair share of the country’s tax burden, this article looks at how wealth disparities are currently addressed through taxation and briefly looks at how this may change after 30 October. For further details on what we currently expect to be included in the Autumn Budget, please see the article, “Welcome from the Editors“.
Income tax
The UK government uses progressive taxation to ensure that individuals with higher incomes contribute a higher proportion of their earnings in taxes. At present, the top rate of tax for income in excess of £125,140 is 45% (39.35% for dividend income). The Labour party manifesto included a pledge that the rates of income tax will not rise in this Parliament; however, an adjustment to the rate thresholds has not been ruled out and nor has an increase in dividend rates to equal income tax rates.
Wealth tax
The UK does not currently have an annual tax on wealth despite rumours and research papers in 2020/21 exploring whether such a tax could be the answer to the fiscal deficit caused by the costs of the Covid-19 pandemic. Wealth taxes are largely viewed as “hard left” policies and Sir Keir Starmer has carefully managed to disassociate himself from his leftist predecessor, Jeremy Corbyn; but with the hole in the public finances the Labour government has repeatedly emphasised it has inherited from the Conservative government, the wealth tax rumours have started again and, although an ongoing regime is unlikely, a “one off” is not out of the question.
Capital taxes
The UK taxes wealth on death and when certain gifts are made during lifetime by an “inheritance tax” (“IHT“). The rate of tax on death is 40%. There are exemptions and thresholds originally intended to ensure only the wealthiest estates had to pay, but these have been frozen for so long that IHT now draws in a wide section of society. It is rumoured that the Autumn Budget may include restrictions on IHT reliefs for business and agricultural assets which, if true, would particularly hit wealthy entrepreneurs and landed estates.
Capital gains tax (“CGT“) is levied on profits made from the sale (or gift) of assets. The top rates of CGT are currently 28% (private equity gains) and 24% (residential property gains); all other gains are taxed at 20% albeit there are lower rates for basic-rate income taxpayers. Business assets can benefit from a concessionary 10% rate (subject to a £1million lifetime limit). The disposal of your main home remains (for now) CGT-exempt. CGT is strongly rumoured to feature in the Autumn Budget. Increased rates of CGT are highly likely given fiscal pressures and the fact that the Labour party manifesto did not rule out any changes. The question is whether they will come in at midnight on 30 October 2024 or from 6 April 2025; practitioners are largely divided on this but there is precedent for splitting a tax year.
Trusts
Trusts have been used in the UK for centuries to manage wealth and control succession. Since 2006, trusts have been more heavily taxed and most trusts (with UK assets or a UK domiciled settlor) are now subject to an IHT charge every ten years (at a maximum rate of 6%) and a similar IHT charge when assets leave the trust. Income tax rules for trusts can be complex but many UK trusts will pay the 45% top rate of income tax. These tax rates are unlikely to be lowered and, as part of the package of non-dom reforms referred to below, the majority of offshore trusts set up by a non-dom settlor will, from 6 April 2025, be brought within the scope of IHT with the income and gains within such trusts not as protected from UK tax as currently.
Non-doms
Non-doms are perceived to have “broad shoulders” and the package of tax benefits that they have enjoyed in the past to encourage such individuals to reside in the UK and invest in the UK economy will be significantly cut back from 6 April 2025 as part of the government’s proposed reforms to non-dom taxation.
Under the current outgoing regime, non-doms who come to the UK can be resident here for up to fifteen years without becoming “deemed domiciled” and fully within the IHT net. During the same period, they can also elect to keep their unremitted non-UK income and gains free of UK tax (for an annual fee of up to £60,000).
From April 2025, most non-doms will need to pay more UK tax if they want to be resident here and, probably most critically, are likely to have their worldwide estates exposed to IHT (at 40%) after a period of ten years of UK residency, with such assets being within scope for a “tail period” of ten years after the non-dom leaves the UK. These reforms are still at the proposal stage with no legislation published as yet, but for further details, please see our non-dom hub on the Wedlake Bell website. The latest research suggests that those non-doms who might have made a meaningful contribution to forecast revenues have already left the country and the Office for Budget Responsibility may need to change its advice to the government on how much revenue the proposed reforms are calculated to raise.
Closing comment
Wealth has always been political in the UK, but as a result of the upcoming Autumn Budget and the Labour government’s need for revenue, it is likely to get increasingly more so. Awareness of the new rules, once fully known, and related planning strategies will be more important than ever.