Tax Under Labour - Top 5 Things To Consider

With a new Party (who won't have parties) in charge for the first time in 14 years, we need to understand Labour's approach to tax policy.

We might interpret what we've seen so far as reminiscent of a post-war approach of choosing to fund people (this time - public sector pay) instead of new infrastructure (this time - cancelled projects) with a sprinkling of sign posting about what Labour stands for, which may make little difference to the country's finances.

What are the areas to consider and possibly act on?

1. Pension Income Tax Relief - The temptation to raise several billion from higher earners must be great. Restricting tax relief to 20%, is still 20%, and is the tax rate most people pay during their lifetime and in retirement. The Chancellor, should she feel the need, might particularly blame this one on the 'unexpected' poor state of the country's finances.

This may encourage you to maximise your pension contributions before Budget Day on 30th October or before 6 April 2025. It would be odd to make a change effective mid tax year, but still possible! 

Company owner-managers making company pension contributions may still benefit from 25%/26.5% tax relief making this look even more tax efficient in comparison.

2. Capital Gains Tax Rates (CGT)- Most people don't pay capital gains tax. If you do it's a 18%/24% rate on buy-to-let residential/second home properties or 10%/20% on selling a successful business or other assets. It's easy to argue this should be closer to the 40% rate many of the same people pay in income tax. 

If you were planning to sell an asset anyway you may decide to sell it soon. Even if you weren't, it may be a reason to lock in the lower rates, if you believe they will increase.

In this area, it's easy for the Chancellor to make the increase effective immediately on Budget Day so you may want to aim to exchange before 30th October rather than before 6 April 2025. 

3. Pensions Inheritance Tax (IHT) - Wealthier semi/full retirees are often not drawing their pension (above the 25% tax free lump sum) before 75. If you die before 75, there's no inheritance tax due, leaving 'only' the rest of your estate to pay 40% above the threshold.

Without a lifetime limit on pension pots, and with the increased £60k per year gross contribution limit, you can understand why many are paying maximums into their pension pots, not for a pension but for inheritance tax protection! Even after 75, the beneficiaries pay only their marginal tax rate. This might be 20% if beneficiaries keep their other income low, possibly encouraging older adult children to reduce hours or stop working, which is presumably not what the government wants.

As you'll still benefit from tax relief, for now, from paying into a pension pot, it may be worth carrying on as planned, unless you'd rather invest in (currently) other inheritance tax friendly areas such as unquoted shares. If you stopped making payments or started to withdraw your pension earlier than planned, you may end up with that cash in your estate which would anyway suffer inheritance tax. It may therefore be sensible to wait-and-see what's announced in the Budget.

4. Furnished Holiday Lets (FHLs) - Although already announced by both the previous and current governments, the changes treating FHLs the same as normal Assured Shorthold Tenancy (AST) lettings aren't effective until 6 April 2025. 

Existing FHLs will lose a semi-trading status which essentially enabled:

• Full tax relief on mortgage interest
• 10% capital gains tax up to £1m of lifetime gains, 20% above that instead of 18%/24% for other assets
• Better tax relief on fittings and furnishings
• Flexible spousal split of profits and losses

The knock-on effect of the mortgage interest relief change is potentially very expensive. Your income before tax is increased by the mortgage interest, which can take you into unexpected tax bands such as the 40% tax band at £50k, child benefit loss between £60k to £80k, loss of tax free personal allowance after £100k or 45% tax rates from £125k. With only a 20% tax credit after your (higher) tax has been calculated, you pay more tax overall.

Any FHL tax losses in existence on 5 April 2025, will be available to reduce other property rental profits in later years, which isn't currently possible. Therefore, if you have a mixed portfolio of FHLs and ASTs, ensure any FHL losses are correctly calculated taking advantage of existing rules such as first time purchases of kitchen equipment, bed linen etc which will can reduce rental profits on your other properties from 6 April 2025. 

If all this looks too expensive or unattractive compared with future net-of-tax capital growth, you may wish to sell up before 6 April 2025, pay 10% capital gains tax and invest your cash elsewhere. This won't upset the government too much, as, in theory, these properties are released into the rented or owned sectors for normal homes. If your rental business ceases altogether before 6 April 2025, you may have three years in which to sell and benefit from the 10% rate.

Alternatively, incorporation of your FHL business to ensure corporation tax relief for mortgage interest and then control over income tax may look more attractive than before.

5. Non-Doms Abolition - Foreign Income Gains (FIGs) and IHT - A welcome simplification announced by both governments but not so welcome tax liabilities once non-UK domiciled people have been tax resident for 4 years. Enjoy no UK tax on your worldwide income for the first 4 years, whether you bring it into the country or not, after which it's all subject to UK tax, with a credit (usually) for any tax paid elsewhere. 

If you're in your first 4 years of residency, keen to bring in some cash or assets into the UK, you may now be able to do so tax free before your 4 years is up. However, not for any FIGs that arose before 6 April 2025 which will still be taxed in the UK under the Remittance rules.

This sounds like it could be good for certain areas of the economy in the first 4 years, such as luxury purchases or high end property purchases. But will it encourage people to set up business interests and stay for longer?  For these, Business Investment Relief remains available and may remain attractive.

If you're here for 10 years or more, you'll now also pay IHT, like everyone else, on your UK and worldwide assets. Don't try to avoid it after 10 years by leaving temporarily, as you're still caught for the following 10 years after leaving the UK. 

There are still lots of details to come out, presumably some soon after the summer break, so only take action when you have the full facts or are willing to take a risk. You may take the view that the direction of travel doesn't suit you and you decide to leave the UK. Others may be attracted to come to the UK to enjoy the four years 'tax free' and then leave.

Other - Sign Posting - VAT on school fees may be a great idea to signal an element of levelling up, but, in all likelihood, it won't be a significant overall net win for the economy. Meals, transport, books and childcare during holiday clubs remain VAT-free, so expect detailed invoicing and allocation of prices to these categories. It's interesting as to whether private medical services will ultimately suffer the same fate! There seems little difference to me.

In all decisions referred to above, take appropriate advice such as investment advice, because tax mustn't be the only consideration in any financial decision.