Following the result of the general election, changes that may soon be implemented by the new Labour Government could have financial implications for individuals and businesses.
Below, we have outlined the potential actions of a Labour-led Government and the implications for taxpayers.
Income Tax and National Insurance
Whilst in office, the Conservatives had frozen Income Tax thresholds until 2028. Labour has committed to not increasing Income Tax, VAT, or introducing a wealth tax, though these promises have not yet been formalised in a manifesto.
Tax-efficient investing, wealth taxes, and Inheritance Tax
Labour has previously dismissed the idea of a wealth tax. With the Capital Gains Tax (CGT) allowance reduced to £3,000 as of April 6, 2024, and no changes to CGT rates planned, alternative methods to increase taxes on the affluent are being considered.
For instance, applying VAT to private school fees and ending the business rates relief for private schools could significantly increase educational costs. Prepaying fees before these changes take effect could result in substantial savings.
The concept of Individual Savings Accounts (ISAs), introduced by Labour in 1999, might see a cap of £100,000 on ISA savings, as suggested by the Resolution Foundation, affecting a small portion of the population.
The Conservatives’ introduction of an additional £5,000 ISA allowance for UK assets could be expanded by Labour, potentially influencing investment choices and portfolio diversification.
Tax-incentivised investments – e.g. Venture Capital Trusts, the Enterprise Investment Scheme and Business Relief investments – are to be considered in 2025, with Labour expressing support for schemes that bolster UK business growth.
Labour may also decide to reset capital gains on assets on the death of an owner. Currently, when a person passes away, any assets inherited are considered newly acquired at their market value, erasing previous gains.
This exemption also applies to half of any jointly owned assets. This provision is highly beneficial, allowing for tax-free disposal of assets. Coupled with Business Relief, the impact is significant. For instance, a portfolio could be liquidated, invested in Alternative Investment Market (AIM) shares, and after two years, be exempt from Inheritance Tax (IHT) under existing regulations.
Should there be a revision in the CGT reset policy, taxes would apply to all gains not realised during the individual’s lifetime, followed by IHT. Utilising offshore bonds to accumulate yearly gains could circumvent CGT and income tax liabilities and if multiple lives assured are included at the outset, this can prolong the longevity of the bond past the death of the policy owner.
Areas to consider:
- Time will tell if any changes are made. At this point, revisiting your financial pan with a professional adviser, to ensure your assets are held within the correct tax structures is prudent advice.
Reduce the additional rate income tax threshold
Labour may also reduce the additional rate income tax threshold from £125,140 to £100,000 which would significantly enhance the appeal of pension contributions for individuals earning above this amount.
Currently, the tax-free allowance decreases by £1 for every £2 earned over £100,000, resulting in a 60% marginal tax rate on earnings above this level. If the additional rate threshold were also reduced to £100,000, the marginal rate would increase to 67.5% (or 72% in Scotland).
- Areas to consider: Pension contributions benefit from tax relief and can also be used to reclaim the personal tax allowance.
- The annual pension contribution limit without suffering a tax charge is £60,000 for the 2024/25 period, and the standard lifetime allowance of £1,073,100 was removed on April 6. Labour, which had considered reinstating this allowance, has reversed its position. The rules governing pension contributions and withdrawals remain complex and dependent on personal circumstances, including whether it’s a defined contribution or a defined benefit pension scheme.
Comment
To raise funds for its plans, changes to long-standing taxes, allowances, and investment schemes may be introduced by the new Labour Government, potentially impacting those who are unprepared. Engaging in sensible financial planning now can help you maximise current opportunities and avoid future pitfalls.
How can Nelsons help?
Zoe Till is a Partner and Chartered Financial Planner in our expert Independent financial advisers team. Zoe’s areas of expertise include investment advice, retirement planning, IHT and lifetime cash flow modelling.
If you would like any advice concerning the subjects discussed in this article, please get in touch with Zoe or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online form.
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