As the General Election is now imminent and all the political parties have launched their manifestos, we have outlined the tax policy proposals from the Labour, Conservative and Liberal Democrat manifestos and the impact these changes may have on individuals and entrepreneurs’ businesses.
The Labour Party indicate that they intend to abolish Entrepreneurs Relief (ER) - which currently allows a 10% tax rate on £10 million of capital gains. They say they will consult on an alternative form of support for entrepreneurs, but do not say whether that alternative would come in at the same time as the ending of ER but what we do know is that it would not be as generous. They will also abolish the CGT annual exemption, and tax capital gains at income tax rates at an individual’s top slice of income, increasing tax on assets by 30% or more if their income tax rises also come in.
Rates of CGT are not mentioned but the Conservatives do imply that ER hasn’t ‘fully delivered’ on its objectives. So a review and reform of the relief in its current guise looks likely. There has been quite a lot said about the originally projected cost of ER compared to its higher current cost. Entrepreneurs with a disposal in the offing may be keen to transact sooner rather than later.
The Liberal Democrats have said that the separate CGT-free allowance of £12,000 would be abolished and capital gains and salaries would be taxed together with a single allowance, the personal allowance, currently £12,500.
Labour propose that the additional rate of income tax (currently 45%) will commence at income levels of £80,000, rather than the current £150,000 threshold. This is understood to affect the top 5% of earners, many of whom may not consider themselves to be particularly rich nor have particularly ‘broad shoulders’. They have also proposed a further ‘super-rich’ rate of income tax will apply to income above £125,000 – they do not say at what rate, some commentators assume this to be 50%, compared to the current maximum rate of 45%.
On dividend income Labour have proposed no ‘dividend rate’, nor any dividend allowance. What this means is that dividends would be taxed at the same rate as other income and earnings at the taxpayers marginal rate of tax. This dividend income will be after the company has suffered higher corporation tax rates (see below). So this measure will likely hit the pockets of business owners as well as investors.
Labour are not intending to change rates of tax or NIC for other income groups. There are hints that certain income tax pension charges whose effects have been well publicised will be relieved; but perhaps only for those who work in the NHS.
The Conservative Party have promised not to raise the rates of income tax or NIC. The big news is that the NIC threshold which affects 31 million workers will be raised with a stated ambition to restore parity with the personal allowance at £12,500.
Under the Liberal Democrats the Marriage Tax Allowance would be scrapped. They would also like to end ‘retrospective tax changes’ such as the loan charge and promise to review recent proposals to change the IR35 rules which are set out in the current Finance Bill.
The Labour party has proposed no increases in the rate of VAT, however there is a clear intention to levy VAT on school fees.
The Conservatives have also agreed not to raise the rates of VAT.
The Liberal Democrats have proposed VAT reductions on electric vehicles and home insulation.
Labour has proposed that the main rate of corporation tax would initially rise to 24% and then to 26%. When combined with dividends being taxed at marginal rates of income tax, personal service company structures may become tax inefficient. As indicated above, owner managers should review their remuneration structure to ensure it remains efficient.
Under the Labour Party’s proposals large companies will have to place 10% of shares into a newly created fund, an Inclusive Ownership Fund (IOF), with dividends of up to £500 each paid to all employees and then the balance paid to a new Climate Apprenticeship Fund. Some see this as a new business tax, akin to a further increase in the effective rate of corporation tax.
The Conservative party has shelved a proposed cut to corporation tax ‘in order to free up £6bn for extra NHS spending’. There are a number of other measures whose impact is perhaps minor; tweaking Structures and Buildings Allowances to perhaps 3%, some improvement in R&D credits, reducing business rates and increasing the Employment Allowance to £4,000 for small businesses.
The Liberal Democrats have proposed that Corporation Tax would be set at 20%. Business taxation would be simplified, presumably to reduce administration costs. Business rates would be replaced in England with a Commercial Landowner Levy based solely on the land value of commercial sites in an attempt to shift the burden of taxation from tenants to landowners. As to workers ownership, the Liberal Democrats would encourage employers to promote employee ownership by giving staff in listed companies with more than 250 employees a right to request shares which would then be held in trust for the benefit of employees.
The Labour Party have proposed a second homes tax which appears to be a new annual levy on the owners of second homes some 70% of which are used as holiday homes and who will be charged an equivalent to 200% of the current council tax bill.
The Labour Party plans to abolish the residence nil-rate band as part of the drive to raise tax to fund their programme. The residence nil-rate band which only recently reached its full effect, allows families to transfer estates worth up to £1 million without charge.
All parties include some tough measures on reducing tax avoidance further despite HMRC’s current powers being the most formidable in living memory. Similarly all parties seem to have a desire to tax multinationals more heavily, although it is far from clear how this political will can be brought to bear by unilateral action by any UK government in an age of increasingly mobile international businesses.
The outcome of the election could result in some huge changes for investors and business owners. Our advice would be to review your current exposure to areas of risk and start thinking about a plan B should the tax rates change. It will certainly mean in some cases a review of remuneration structure and potentially investment strategy.