Tax – the road ahead

Our analysis of what practitioners might anticipate in the way of changes is based on what was in the King’s Speech of 17 July 2024, as well as some of the Labour party’s campaign messaging in the lead-up to the general election. A clearer indication of the new government’s direction on these issues and the immediacy of any changes is expected in an anticipated autumn budget. A date has not yet been set for this, but due to the timescales involved for the Office for Budget Responsibility to produce its report on the economic impact of the government’s proposed policies, it is not likely to be before October 2024.

However, we do know that the key areas of impact for private clients, on the basis of current information, are as follows:

• capital gains tax (CGT) – a possible increase in CGT rates
• carried interest – rate of tax may increase to 45% in some cases
• inheritance tax (IHT) – changes unlikely early on but business and agricultural assets could eventually be targeted
• non-UK domiciled taxation – further tightened up from April 2025
• offshore trusts – IHT benefits likely to be curtailed, and
• value added tax (VAT) on school fees – expected to be introduced but the timing is unclear.

Capital gains tax

Throughout the election campaign, Sir Keir Starmer repeatedly refused to deny an increase in CGT rates, and the Labour manifesto was silent on the topic. This, along with the fact that the chancellor of the exchequer, 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%), means increases to CGT rates are widely predicted. This is particularly likely given fiscal pressures and the fact 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 an autumn budget.

Carried interest

The Labour manifesto included a pledge to close the carried interest ‘loophole’ so that performance-related pay within the private equity industry is no longer treated as capital gains (taxed at 28%), but as income (taxed at up to 45%). Indications are that this pledge may be watered down by Rachel Reeves, who has said that where fund managers put their own capital at risk alongside investors’ (a co-investment approach), carried interest would still be taxed at CGT rates; and there will be a consultation on any changes. This policy is very much tied up with Labour’s approach to CGT rates (see above). 

If it goes to consultation, it looks like carried interest will not be one of the pledges that Labour can introduce quickly; but those affected should keep a watch on developments, and the publication of the consultation. 

Non-domicile tax

The taxation regime for non-UK domiciled individuals (non-doms) is due to be tightened up from 6 April 2025 (as already announced by the previous government). The Labour manifesto confirmed their intention to abolish non-dom status but the exact details of a replacement regime are unclear. 

Non-dom tax reform was not one of the policies referred to in the King’s Speech, meaning that non-doms may not receive any meaningful detail before the autumn budget and should be prepared to be reactive to developments over the next few months. In the meantime, those affected could start an initial analysis of comparing the new UK regime (based on what is known) with those of potential relocation jurisdictions.  

Offshore trusts

The Labour manifesto included a pledge to “end the use of offshore trusts to avoid inheritance tax”. This is likely to refer to the Conservatives’ proposal that offshore “excluded property” trusts of UK resident non-doms can remain outside the scope of IHT if set up before 6 April 2025.

Non-doms considering setting up an offshore excluded property trust to help manage their IHT exposure should not now do so for IHT reasons alone. Once further details are announced, existing offshore trusts will need to review the IHT impact on the structure. Given that there is very little published detail on the IHT aspect of the proposed reforms, and with the April 2025 implementation date getting closer, it is possible that this part of the reforms could be delayed. This would allow the government time to finalise their policy, including gathering stakeholder feedback (as the Conservative government had committed to do) and giving non-doms sufficient time to plan. Nevertheless, affected non-dom individuals should assume that April 2025 will be the implementation date until further information is known, and plan accordingly.

Inheritance tax

There was no mention of IHT in Labour’s manifesto, so reform cannot be ruled out, although it would be a surprise if wide-ranging changes feature early in Labour’s tenure.

Individuals who have 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. These reliefs can be generous and have been rumoured to be up for reform for some time. There has also been speculation following the election that the new government may target how IHT applies to gifts and, specifically, abolish the seven-year rule in favour of a gift tax that applies at the date of the gift. It would be unusual for this latter policy, in particular, to be introduced immediately without prior consultation, so affected individuals should have time to plan appropriately.

VAT on school fees

As one of Labour’s flagship policies, the introduction of VAT on private school fees is likely to be a policy the new Labour government looks at early on and this was a policy confirmed in the King’s Speech. However, it is doubtful that the change could be introduced in time for the next academic year (September 2024). 

Affected individuals could look at payment of school fees in advance; however, this may fall foul of any retrospective legislation. An alternative solution is to shift generational wealth (from grandparents, for example) to help fund school fees as part of an overall long-term succession plan. Education trusts can be used to provide funds for school fees and take advantage of specific tax exemptions as well.

It’s too early to tell what will happen in detail, but there is likely to be significant change to the tax regime on the horizon, so practitioners will need to keep up with developments as they evolve.