By next Friday, we are very likely to have a Labour government with a working majority, if not a landslide victory – and as Rishi Sunak has repeatedly pointed out during his campaign, the threat of higher taxes is looming large. I am going to make a few suggestions about how we might prepare.
The problem facing the new chancellor has been illustrated by a report from the Institute for Fiscal Studies (IFS). Simply stated, the economic situation is very tight. Following the Covid pandemic and the war in Ukraine, Britain’s debt to GDP (gross domestic product) ratio has risen to almost 100pc.
Taxes relative to GDP are heading for a post Second World War record, and pressure is rising for higher public spending on virtually all departments including, health, welfare and defence.
Labour has said it will keep to the existing rules to reduce the debt-to-GDP ratio in five years with capped annual borrowing at 3pc of GDP.
Something has to give. I have seen little to suggest that Labour is prepared to make cuts in spending departments, so even higher taxation seems inevitable. Labour wants to help “working people” – so where will the additional revenue come from?
Senior Labour figures seem to, at the very least, have sympathy with radical plans to raise taxes. So, what can be done now to prepare?
VAT on private school fees
There are some tax changes that have already been announced, such as removing the VAT-free status on private school fees and removing tax breaks for non-doms.
However, in neither case is it clear that these will raise significant amounts of tax, and the changes may even result in a net cost to the new government.
I wrote about school fees recently with a suggestion that, although there are risks, it could make sense to pay some fees in advance.
The question is how many parents will decide that private education is no longer affordable and attempt to move their children into the state system, thereby placing an additional cost on the education budget.
The rise of inheritance tax
I think Labour plans to raise even more from inheritance tax (IHT), despite receipts already being at record levels.
In particular, we should expect greater scrutiny by HMRC of deceased estates. Lifetime transfers are a possible way forward, but I would urge caution not to rush into that without some careful consideration.
I may be wrong, but I do not expect the removal of IHT exemptions on businesses, including farms. Farmers have been enduring very hard times financially and I think Labour understands that. Having said that, Environment Secretary Steve Barclay has accused Labour of plotting an IHT grab on agricultural land.
What would not surprise me is the removal of IHT relief on let farmland. Many believe that the relief has had the effect of pushing up prices of land to the disadvantage of working farmers.
I also think the panel will recommend that pension funds should be treated as part of the estate for IHT by removing the protection introduced by George Osborne.
Tax for pension savers
Tax relief on pension contributions may be a target with some suggesting that relief on contributions could be limited at 30pc. It may be wise to make any planned contributions before the election accordingly.
There must also be a risk that the 25pc tax free lump sum from pension schemes could be targeted by Labour.
Described by Nigel Lawson in his 1985 Budget as the “anomalous but much-loved tax-free lump sum”, rumours of its demise have so far been wide of the mark. Nevertheless, I would not be surprised if Labour views it as too tempting a target to ignore, possibly capping the amount that can be taken.
Depending on your circumstances you could consider taking a lump sum early, but there are complications involved and it would be appropriate to take advice before doing so.
Isa contributions
I am not expecting restrictions on Isa contributions, but if you have not yet used up your allowance for this year, it would make sense to contribute now if you can afford it so that more income and gains are sheltered.
Changes for non-doms
Labour claims that its plans are fully costed, but I am losing count of the number of times it’s claimed that any funding required will come from the removal of the remaining tax breaks for non-doms. I also have serious reservations about the amount that this would raise – with figures suggesting the crackdown would raise just £8,000 per person.
It is also impossible to predict how many will depart the UK and leave the Treasury worse off.
The last time Labour changed the tax position on non-doms was in 2008 to fund the introduction of the inheritance nil-rate band transfers between married couples.
Alistair Darling and Ed Balls estimated that they would raise £500m a year from the change. It was revealed two years later that it had raised less than half that amount, at just £226m.
Tax for workers
Under the current rules, you do not pay National Insurance contributions (NICs) if you continue working after reaching state pension retirement age. Edward Troup has already set his sights on this as an easy win.
Alistair Darling introduced the 50pc top rate of income tax just ahead of the 2010 election as a trap for the Conservatives to walk into.
When the coalition government duly reduced the rate to 45pc in 2012, Rachel Reeves said in the parliamentary debate: “The tax cut for millionaires is worth more than the money that most of our constituents take home in a year. The hon. Member for Carmarthen East and Dinefwr spoke about a tax cut for the mega-rich that leaves a bad taste in the mouth”.
Ms Reeves has said that Labour will not raise income tax and NIC rates. However, I would not rule out an increase in the top rate to 50pc, which could be a reason for taking bonuses early.
Capital gains tax changes
When the Prime Minister disclosed his personal tax affairs, there was the inevitable outcry that by generating most of his income from capital gains on share sales he paid a 20pc rate, half the higher rate of income tax.
There are some very sound reasons why the CGT rate should be less than the income tax rate, but I would not be surprised if this came up for discussion among the Labour advisory team.
The outlook for council tax
Councils up and down the country are struggling financially. Many voices in Labour have spoken in favour of increasing the tax take from land, so council tax could be seen as a logical source of additional revenue.
The last time properties were revalued was in 1991 (2003 in Wales), but it was a mammoth exercise and rather unscientific. Individual properties were not visited. Instead, an army of valuers drove around in pairs at slow speed in second gear and noted down amounts without even stopping the car.
These so-called “second gear valuations” were never accurate. More likely, I suspect a revaluation would be the introduction of a higher council tax band for larger properties, as applies in Wales.
To misquote the song, things are not going to get better any time soon.
Mike Warburton was previously a tax director with accountants Grant Thornton and is now retired. His columns should not be taken as advice, or as a personal recommendation, but as a starting point for readers to undertake their own further research.
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