Apparently, it’s time for another general election in the UK and as a tax adviser that inevitably means the possibility of real change to the existing tax regime in the UK. Clients may want to look closely at Labour’s tax policies and think about what they might do if they are introduced – there may only be six weeks post-election to undertake planning.
At the time of writing (5 Nov 2019), Labour are 14/1 to have a majority but only 4/1 to have formed a Labour led minority government. These then, are the odds of an intense six weeks of work following the election result and John McDonnell’s statement that an emergency budget would be held within six weeks of their taking office – i.e. the cancellation of my extended Christmas holidays and New Year plans to get to work on planning!
Here we explore and speculate on five changes that might arise in the upcoming manifesto and a future Labour government, as well as the planning to explore.
It is expected that under a Labour government income tax rates would be increased with the 45% tax band starting at £80,000 of income and a new 50% tax rate starting at £125,000 of income. This will result in a top rate of 50% for many clients and for those unfortunate to have income between £100,000 and £125,000 a top marginal rate of 67.5% (due to the tapering of the personal allowance). It is more likely that such changes to the rates and bands would be brought in the following 6 April but even so individuals will be looking to bring forward any income events within their control which might include declaring dividends, bonuses, adjustment of accounting periods, exercising options etc.
Capital Gains Tax
We’ve been saying that capital gains tax rates can only go in one direction for some time. Currently they are 28% on residential property and carried interest and 20% on other assets. If you qualify for entrepreneurs relief there’s a potential 10% rate. All these rates are on the table and may well rise under either government. The abolishment of entrepreneurs relief was discussed at the last budget, and the rates are historically low. The labour proposals would appear to see rates on residential property rising in line with income tax, and a minimum capital gains rate of 28%, but they may well be fully aligned with income tax – a significant change. There would also be a more significant disparity between the US federal long term capital gains tax rate of 20% and a UK rate of 50%. Sales of capital assets (or a deemed sale using entities) may well be contemplated in those weeks immediately following election as there is precedent for a mid-tax year change in capital gain rate.
The headline corporation tax rate under a Labour government is 26% as opposed to the current rate of 19% (going down to 18% from 1 April 2020). This will have a real impact on our clients who have owner-managed businesses and live on the salaries and dividends. Companies are likely to remain attractive with a tax rate significantly lower than income tax rates however, for those who need to withdraw the profits of the company each year to live on they could expect to see 42p of each £1 of profit compared to 46p currently (assuming top rates of tax). Interestingly for certain American expats, this increase in corporation tax would improve their US tax situation, putting certain companies within US high tax exceptions (e.g. for the Global Low Tax Intangible Income regime).
Land Value Tax – possibly a Wealth Tax and Capital Controls…
There have been suggestions that there will be changes in council tax to move towards a land tax, this would likely see more taxes on vacant properties, second properties, buy-to-lets and high value properties (a rebranded “mansion-tax”?). We will watch with interest to see how much of the “Land for the Many” policy document makes it into the Labour manifesto. The proposed land tax looks like another strike at buy-to-let property and overall it is landlords who look hardest hit of all our clients – increased income tax, a proposed land tax, increased capital gains tax, already subject to restriction on deductibility of mortgage interest and certain landlords potentially subject to tenants with a new “right-to-buy” – it is clear Labour would like a big shake up in housing and costs with landlords targeted. For our US clients who are accustomed to being allowed full relief on interest and depreciation and lower rates of income tax (37%) and capital gains tax (20/25%) this will be another reason to avoid UK buy-to-let investments.
It was not long ago there was talk of a wealth tax and John McDonnell has previously said capital controls may be required to stop the wealthy from immediately removing funds and assets from the UK tax net – potentially an inevitable consequence for expats who are not tied to the UK. This knowledge tied to the possibility of wider ranging radical tax changes could see action taken in those first weeks to limit exposure to UK assets.
Abolition of the “non-dom” regime
Lastly, there is little expectation of a Labour government maintaining the beneficial regime for those not domiciled in the UK. Under this regime, those not domiciled in the UK can claim the remittance basis of tax to exclude foreign income and gains from UK tax and foreign situs property from UK inheritance tax. The abolition the regime would require those non-doms claiming the remittance basis to quickly review their foreign assets and structures and rearrange their affairs prior to 6 April 2020. For many of our American clients the remittance basis is not as beneficial but it is still used by a number of clients to avoid double taxation. These tax savings would be removed and for some perhaps planning to leave the UK by 5 April 2020 would be preferred.
In any case, a Labour victory will mean a busy few weeks / few months for tax advisers and clients getting grips with the new tax regime. If these odds shorten, clients might be advised to look more closely at the proposals and start to think about what they will do – there may only be six weeks to act.