18 July 2023
With a general election likely in 2024 and opinion polls predicting a Labour Party win, there has been considerable press focus on its proposals to change the tax rules relating to non-UK domiciled individuals (non-doms) and international investors into the UK.
The remittance basis tax rules relating to non-doms have been frequently referred to as a ‘tax loophole’ by ministers in debates over their merits. For tax specialists, that could be seen as an unfair categorisation of their advice in this area, since the current rules are the result of specific decisions made by successive UK governments going back over 200 years, not the twisting of the law by advisers. Realistically though, it needs to be recognised that, if elected, Labour intends to overhaul the tax system in a number of ways, and this article considers some of these, their implications, and whether action should be taken now. We do not discuss the future of trusts here, as that merits a whole article of its own.
Stamp duty land tax – a higher burden on overseas investors
Although a 2% stamp duty land tax (SDLT) surcharge already exists for overseas investors in residential property in England and Northern Ireland, Labour has published plans to increase this. It is also considering plans to restrict the ability of overseas investors to purchase new-build homes UK wide.
The aim of these policies would be to deter foreign investors from the UK and allow the UK property market to be led by UK residents, in particular to assist first-time buyers.
This proposal sounds attractive for UK residents, potentially freeing up property to buy and reducing house prices. However, life is rarely simple and discouraging foreign investors into UK residential property may have other implications as well, such as:
- property market growth may slow if property prices fall - sellers may choose not to move, actually reducing rather than increasing opportunities to buy;
- slower uptake and demand for new-build residential developments due to the absence of overseas investors with liquid funds may slow down construction; and
- discouraging overseas investors to the UK in one sector could easily change attitudes elsewhere, affecting confidence and turning investor focus abroad, impacting other UK business investments which contribute towards the growth of the UK economy.
Recent statistics indicate that the surcharge on overseas investors does not seem to be slowing down the rate of residential property purchases at its current rate. Figures show an increase in the number of property purchases since April 2021, when the surcharge was introduced, with more properties purchased by overseas investors in the last quarter of 2022 compared to the first few months following its introduction.
From a tax perspective, even if a legislative change deters some overseas investors and the UK residential property market shrinks, the additional surcharge could nonetheless lead to increased SDLT receipts – a result that Labour will have no doubt anticipated.
If any overseas investors are considering purchasing such property in the medium term, it may be sensible to purchase prior to the general election to secure current SDLT rates. Likewise, if investors are building their property portfolios, it is worth noting that tax relief for purchases of multiple dwellings may be available under current rules. As ever, tax advice should be taken.
Capital gains tax – mixed messages
Another fiscal policy area that has seen heightened recent press coverage concerns the future of capital gains tax (CGT).
Labour’s shadow chancellor Rachel Reeves has confirmed that the party ‘has no plans’ to increase CGT rates, but deputy leader Angela Rayner has hinted that a rate increase could still be included in the party’s manifesto.
Although we expect the shadow chancellor’s position to prevail, it is still sensible to consider the actions that could be taken now to forestall a potential increase in CGT rates.
- Transfers of assets between spouses/civil partners are currently free from CGT. If one partner is a basic rate taxpayer, the lower CGT rate will be charged on a subsequent sale.
- Selling assets during the current tax year will lock in current CGT rates, at the cost of bringing forward tax payment dates to January 2025. For those planning to sell anyway, bringing forward plans can provide certainty to the CGT bill.
- If CGT rates increase, the effect on trusts with stockpiled gains pools will be exaggerated: the maximum effective stockpiled gains tax rate is 32 per cent today but would be 64% if CGT rates generally rose to 40% . Making distributions to beneficiaries now to use up CGT pools can avoid this, at the cost of creating a ‘voluntary’ liability.
- It is often possible to ‘re-base’ assets with a low CGT base cost by changing their ownership. A sale and subsequent repurchase on the market may work for quoted shares, but transfers into trust or sales to a wholly owned company can also work to create an uplift in tax base cost. Of course, this process will itself generally create a capital gain that is either taxable immediately or else added to stockpiled gains pools.
Because there is a good chance that CGT rates will not change, it is important for taxpayers to consider their appetite for a CGT bill in January 2025, particularly in relation to assets that are designed as a long-term investment.
What to do?
Every general election carries with it the threat of the unknown. This is especially the case for the 2024 election given the current state of opinion polls, and trustees and advisers need to make sure that their clients are aware of the possibilities with plenty of time to act. There are many ways in which UK tax exposures can be managed, but very few that do not have side-effects, which means that no action may be the best action. The only way to work out what approach will be appropriate in an individual case is by talking to the people involved and taking advice. Just make sure you don’t leave it too late though, because tax advisers will all be very busy as election day gets closer.
For more information, please get in touch with Andrew Robins, Laura Greenhill or your usual RSM contact.