Labour’s Tax Reforms: What to Expect

The Labour Party has secured electoral victory on the promise of not raising taxes on ‘working people’ . Their fiscal plan, outlined below, aims to increase tax revenue by over £8.5 billion by 2028-29. This ambitious target raises important questions about the sources of this additional tax revenue and the segments of society likely to bear the increased financial burden.

Given that the Office for Budget Responsibility (OBR) needs to be given ten weeks’ notice, the first Labour Budget in more than 14 years probably won’t be unveiled until October. Meanwhile, here are the fundamental changes we expect, mostly based on Labour’s agenda.

Additional revenue (2028-29)	£m
Charging carried interest to income tax instead of CGT	565
Adding 1% to SDLT on purchases of residential property by non-UK residents	40
VAT and business rates from private schools	1,510
Non-dom tax changes and investment in reducing tax avoidance	5,230
Additional windfall tax on oil and gas companies	1,200
Rounding	5
Total	8,550

Income-tax

While Labour has pledged not to raise income tax rates, the party has announced its intention to maintain frozen income tax thresholds until April 2028. This will effectively result in increased tax burdens for many individuals. As incomes rise over time, a larger proportion of people’s earnings will become subject to taxation, and a greater share of taxable income will fall into higher tax brackets. Consequently, despite the nominal promise of no tax increases, this approach will lead to a gradual expansion of the tax base and increased tax revenue.

Private equity fund managers are one category that would be more severely impacted by a Labour plan about income tax. The party aims to address what it terms a ‘loophole’ in the current tax system. Under this proposal, the carried interest of private equity fund managers, which is presently subject to capital gains tax (CGT), would instead be charged as income tax.

 This change could substantially increase the tax burden for these professionals, given the typically higher rates of income tax compared to CGT. However, the new Chancellor of the Exchequer, Rachel Reeves, has introduced a potential caveat to this policy. She suggests that capital gains treatment might still apply in circumstances where private equity managers are “putting their own capital at risk.”

Example:

John is an additional rate taxpayer and receives carried interest of £400,000.

If the interest is taxable as a capital gain, John will pay CGT of £112,000 (28% on £400,000).

If the interest is instead taxable as income, John will pay income tax and National Insurance of £188,000 (45% tax and 2% National Insurance on £400,000).

Tax on capital gains

Labour’s manifesto did not include specific commitments regarding capital gains tax (CGT). However, during the election campaign, Sir Keir Starmer provided one clear assurance: under a Labour government, individuals selling their main residence would not be subject to CGT.

Starmer’s careful avoidance of ruling out CGT increases in other areas has fuelled speculation about potential reforms to this tax. Nevertheless, he has emphasized that Labour’s plans are “fully funded and fully cost,” asserting that they do not necessitate tax increases beyond those already announced.

SDLT

Under current regulations, non-UK resident individuals purchasing residential property in England or Northern Ireland are subject to a 2% surcharge on Stamp Duty Land Tax (SDLT), in addition to the standard rates applicable to UK residents. Labour’s proposed policy aims to increase this surcharge to 3%.

Example:

John is a non-UK resident for SDLT. He purchases a £2.5 million residential home in England as an individual. John does not own any other properties and is not a first-time buyer. 

John would have to pay £261,250 in SDLT under the current regulations (2% on the first £250,000, 7% on the following £675,000, 12% on the following £575,000, and 14% on £1,000,000, which is the remaining amount over £1.5 million).

John would pay £286,250 under Labour’s proposals, assuming no other changes. The amounts would be 3% of the first £250,000, 8% of the following £675,000, 13% of the next £575,000, and 15% of the £1,000,000, which represents the final sum over £1.5 million.

Company tax

It is anticipated that the government will deliver a comprehensive five-year business tax roadmap within the next six months. This initiative aims to provide businesses with a clear framework for investment planning, enhancing confidence in long-term decision-making.

Additionally, more detailed guidance is expected to clarify eligibility criteria for full expensing and the annual investment allowance.

VAT

Labour proposes to eliminate the VAT exemption for private schools, a key policy initiative that would apply VAT to school fees. While initially slated for immediate implementation, Chancellor Reeves has clarified that this change will be introduced in Labour’s first Budget, without retrospective application.

 The new policy could potentially take effect from January 2025, though a September 2025 start, aligning with the 2025-26 academic year, seems more probable.

Previous media reports suggested Labour’s intention to retrospectively tax advanced payments, though the feasibility of this approach under current VAT law principles remains unclear.

Non-doms

Prior to the election call, the Conservative government had proposed significant reforms to the non-dom tax regime in the 2024 Spring Budget, set to take effect from April 2025. These changes aligned with Labour’s pre-existing plans. However, the Conservative proposals have not yet been enacted into law.

It is anticipated that any draft legislation will be revised to incorporate Labour’s more comprehensive approach, which aims to abolish non-dom status once and for all, replacing it with a modern scheme for people genuinely in the country for a short period.

Inheritance tax

Labour’s manifesto makes a single, yet significant, mention of inheritance tax (IHT): a pledge to eliminate “the use of offshore trusts to avoid inheritance tax.” While acknowledging that offshore trust structures can serve legitimate and legal purposes, this proposal seems rooted in findings from a 2018 report commissioned by the previous Conservative government. The report highlighted tax avoidance as a primary motivation for establishing offshore trusts.

Speculation is rife about potential widespread IHT reforms. Industry experts anticipate possible changes to agricultural property relief and business property relief, potentially making these provisions less generous. Any such reforms are likely to begin with a consultation process, which could commence as early as this autumn.

Windfall tax

Regarding the Energy Profits Levy imposed on the profits of producers of gas and oil, Labour has committed to:

1. Eliminating investment allowances for oil and gas companies.
2. Extending the levy until the end of the current parliament,
3. Raising the levy by an additional three percentage points,

Tax Avoidance

Labour’s plan to boost tax revenue largely relies on tackling tax avoidance. To close the tax gap, the party proposes a pronged approach:

Enhancing HMRC’s compliance capabilities by hiring and training an additional 5,000 staff, investing in technology to modernize the tax system, and introducing legal reforms to effectively deter tax evasion.

Additionally, Labour plans to explore expanding the scope of reportable tax avoidance schemes under DOTAS rules and empowering HMRC to collect disputed taxes from investigated taxpayers.

One Budget a Year

Labour has pledged to introduce a single major fiscal event annually, providing families and businesses with advance notice of tax and spending policies. Consistent with its earlier statement promising “One Budget every autumn, at least four months before the new tax year”, we anticipate significant tax announcements to be made only once a year, each autumn.

If you want to know more about how any of these prospective changes will affect you or your business please contact us.

---