Labour currently face a catch-22 situation: they need to encourage growth in a country that recently exited a recession, while also filling in the £22 billion fiscal ‘black hole’. But how will they approach fiscal policy in this upcoming Autumn Budget? Will Labour continue their approach of making ‘hard decisions’ or will they take a tamer approach on the 30^th of October? As always, the government has been extremely vague about possible tax proposals, but this article will explore possible proposals which the Labour cabinet may be considering right now.

One area that Kier Starmer certainly has not been vague on is the scrapping of the ‘Non-Dom’ tax regime. 

Labour plan to further develop the Conservative Spring Budget proposals of removing the non-dom regime with a few significant changes: they will remove excluded property status for all trusts so that non-UK property will also fall under inheritance tax and Labour would not proceed with the previously proposed 50% relief for foreign income subject to UK tax in a transitionary period. There may be other minor changes and tweaks but it is widely understood that the above will be the core of Labour’s policy towards non-domiciles.

This will affect the tax burden of immigrants, especially wealthy immigrants who have their assets deployed worldwide. They will no longer be able to use remittance basis to shelter their foreign income and gains, so they will face the UK tax on their worldwide income and gains. In this regard, proper tax planning would be very important as the simple solution of remittance basis would no longer be valid.

Furthermore, such changes have prompted some wealthy people to emigrate or plan to emigrate to other countries, such as Italy, Greece, and Switzerland who offer simpler, flat-fee based regimes aimed at attracting wealthy individuals, often with fewer long-term tax implications than the UK’s system. The USA taxes all foreign income except for $120,000 (2023) which is exempt from taxes. However, it is questionable how long such incentive will last: Italy has already seen problems, such as a hike of property prices due to the large amount of wealthy immigrants, and it has doubled its flat income tax threshold to EUR 200k per year.

However, it is unclear how many wealthy people will eventually leave the UK. In 2017, further restrictions were put on non-dom status and only 5-10% of wealthy people left the UK. Although, the changes this time are much more significant, so Labour may scare more wealthy people away. 

This brings several concerns: Will the Labour government get the additional tax revenue as they expected? How will the fleeing of wealthy people affect the overall economy of the UK, especially in the situation that the UK heavily relies on its leading financial services. Will this discourage foreign investment into the UK? If so, how would this affect the overall economy? However, it may be that even such extreme changes to the non-dom status will not affect the UK too much, both negatively and positively. Although there will be an exodus out of the country to a limited extent, it is unlikely to be en-masse: after-all, the ultra-rich are very good at paying as little tax as possible, so such changes are unlikely to affect them enough for them to move out of the UK completely. This also shows how scrapping non-dom is unlikely to raise much funding for government spending; Indeed, Reeves recently was warned that the removal of non-dom loopholes and other crackdowns on the extremely rich would not raise as much money as the previously thought £2.6 billion; a partial reversal of policy may be in the works right now. It could therefore be said that abolishing the non-dom policy is a political move to carry on Labour’s narrative of fighting against the elite. 

Nevertheless, Labour may implement some incentive policies to encourage foreign investment to the UK even without non-dom status: for example, Reeves may implement an investment incentive for non-domiciles by making income from investment into the UK free from some or most UK tax.  

Another area of tax that Labour may want to change is IHT, or inheritance tax. Reeves may consider a higher tax rate or even scrapping IHT reliefs entirely, such as BPR (Business Property Relief, which is tax relief upon inheriting a business). Labour also expressed support concerning the Conservative proposal that tax residence, not domicile, will determine whether non-UK assets are subject to UK inheritance tax, although whether this will impact tax revenue to a meaningful extent is debatable.

However, it is very uncertain whether changes to IHT will even happen: IHT was barely mentioned in the Labour election manifesto, with the party only saying that they will ‘end the use of offshore trusts to avoid inheritance tax’. Therefore, changes might mainly be focused on the use of offshore trusts, which is around 6% of IHT revenue.

Even if changes happen, it is relatively unlikely that a major increase of IHT rate will happen. The current IHT rate of 40% is already very high and there have been opinions from tax professionals that are against such changes: they say such drastic measures will not work as well as the government expects. 

There is also speculation that Labour could amend or abolish the aforementioned BPR, particularly as it applies to AIM (Alternative Investment Market, a sub-market of the London Stock Exchange that aims to help small businesses gain capital) investments. Such changes could significantly impact ordinary investors who have utilised AIM shares as part of their IHT planning strategy, potentially leading to higher tax bills and reduced attractiveness of these investments. 

For those with large estates, including farms and business properties, the impact could be particularly significant if such changes really come true: farming families may face increased tax burdens and the potential need to sell parts of their estates to meet IHT obligations. However, it’s merely speculation at the moment, and the Labour government are likely introduce certain policies to mitigate the impact on ordinary families and small businesses if they really make the changes as speculated.

For a few weeks now, rumours concerning changes to CGT, Capital Gains Tax, have been swirling around the media. Still, there are doubts whether there really will be changes to CGT under the Labour government. Although Reeves previously stated there are ‘no plans’ to raise CGT, rumours have spread about a possible hike: their manifesto neither addresses or invalidates such proposals, discussions within the party were held concerning CGT before the election and Sue Gray, Keir Starmer’s chief of staff, recently liked a social media post that said a CGT hike would be ‘politically wise’ .

A possibility may be that Labour chooses to eliminate or minimise the gap between the top band of CGT rate and top band income tax rate, by increasing CGT rate to 45%, or a compromise may be found between the current 28% and 45% rate.

But should Reeves raise CGT? 

On one hand, surely a CGT raise would make this tax fairer. Raising CGT means someone who makes a profit from selling land, buildings, shares or works of art will not be taxed more lightly on that activity than someone who works for a living.

However, it can also be said that a rate hike punishes ‘wealth creators’: the entrepreneurs who take huge risks in setting up a business and employing people. They should, it is argued, be rewarded for their efforts and risk-taking.

Furthermore, other countries, especially on the European continent have CGT equivalents with rates at around 20-30%. (E.g. Italy has a 26% CGT rate). Therefore, if Labour raises CGT to around 40%, the UK would be a major outlier compared to its neighbours.

Higher CGT could also mean investors become less willing to invest if a larger portion of their gains is taxed. As mentioned, a 40% rate hike would make the UK a major outlier compared to other western countries. Therefore, the UK would become less attractive for high-net-worth individuals and investors, leading to potential loss of capital in the country.

Thus, a rate lower than 40% may be considered by Reeves as a compromise. She has also expressed intent to incentivise investment in the UK, possibly to counteract a CGT rate hike: the recently created National Wealth Fund aims to invest strategically and attract private investments. 

A final major aspect of fiscal policy that Labour may change is pension tax. Tax relief, especially, may be under scrutiny in a bid to raise funds. Pension tax relief in the UK encourages saving for retirement by refunding some of the tax you have paid on the money you contribute to your pension. For every £80 you contribute, the government adds £20 (if you’re a basic rate taxpayer), making it £100. Higher and additional rate taxpayers can claim even more back (40/45%).

There are really only two possible ways Reeves could go about changing Pension Tax relief: either, there would be flat rate of around 30%, or Reeves will cut pension tax relief to 20%.

It is somewhat surprising that such a possibility is even on the cards for Labour: they previously emphatically shut down any rumours around changes to pensions, but Reeve’s new ‘discovery’ about public finances means it is rumoured the Labour government will change pension tax relief. 

However, the way pension tax relief works means any cuts of relief up to 20% will fortunately not affect basic rate taxpayers, i.e. people on low wages. However, taxpayers in higher bands will have less incentives to save, as a rate cut from 40% to 20% or 30% only negatively affects high band taxpayers, although it is reported that Reeves has recently been warned that a cut to higher band tax relief could disproportionately hit those with middle incomes (those who just make the second band, such as those in the public sector). Therefore, it is disputed whether such changes may occur.

There are also rumours that Labour may enact a simple pension inheritance tax reform to raise funds. Currently, inheriting the pension of a under 75-year-old is tax free. Labour may therefore decide to apply the usual 40% inheritance tax rate.

Clearly, as this article hopefully shows, possible changes of individual tax in the Autumn budget are often complex. Whether or not the current fiscal black hole is genuine or a political ruse, as some critics have suggested, the Chancellor faces a trade off between boosting growth and painful measures to repair the public finances. Unfortunately, currently we can only speculate; the government not only wants to be vague to avoid confirming fears of tax hikes, but also make sure that the rich do not reorganise their capital and assets in anticipation on specific tax changes, which would lead to less tax revenue. Unfortunately, It is clear that painful tax changes are coming to the UK. The only question is which taxes will be altered to what degree.