If the Labour party wins a majority at the next general election and we have Jeremy Corbyn as prime minister and John McDonnell as chancellor of the exchequer, what will their tax policies look like? This article considers, with an apolitical stance, the key policies that Labour announced in its 2017 manifesto and subsequently, which are of interest to tax advisers. In particular, it refers to a report commissioned by the Labour party entitled Land for the many which contains some far-reaching ideas about land reform. Some of these ideas are not fully developed, so this article focuses on the tax measures which have been adopted as Labour policy.
Income tax
The 2017 manifesto guaranteed no increase for those earning £80,000 or less but said that the top 5% of earners would be expected to contribute more. Prior to the 2017 election, Labour proposed to reintroduce the short-lived 50% rate, but from £123,000 rather than £150,000, and to introduce a 45% rate on earnings between £80,000 and £123,000.
Capital gains tax
Labour has said that it would reverse the Conservatives’ cuts to capital gains tax, so the rates would go up from a basic rate of 10% and higher rate of 20% to 18% and 28% respectively (with the 8% surcharge on residential property not qualifying for main residence relief on top). In Land for the many, a higher rate is proposed specifically for second homes and investment properties which would be at least in line with income tax rates (presently 20% and 40% but set to rise as above) in order to ensure that asset price appreciation is not taxed at a lower rate than income derived from labour.
Inheritance tax
As a first step, Labour would abolish the Conservatives’ residence nil rate band, returning to the simple nil rate band of £325,000 per person.
In Land for the many, the proposal which has been endorsed by the shadow chancellor is to replace inheritance tax with a lifetime gift tax levied on the recipient. Tax would be payable on all capital gifts above a lifetime allowance of £125,000. Instead of a flat 40% rate, Land for the many indicates that the surplus would be taxed at income tax rates. Once the lifetime allowance has been exceeded, consequently inheritances would be taxed not just at the 40% level but often at 45% or 50% under these new rules. The Resolution Foundation which helped develop these proposals suggested a slightly different framework with an initial rate of 20% and a top rate of 30% over £500,000. Even at those rates, the receipts are projected to be £5bn higher in 2020/21 than under the current system.
The spouse exemption would remain. The reliefs for agricultural property and business property would be tightened so that they operate as a tax deferral rather than a full relief, and the report suggests a cap (either monetary or by acreage, giving the example of 250 acres) above which relief would not be given on farmland.
Land reform
In its 2017 manifesto, Labour mooted replacing business rates and council tax with a new land value tax payable by landlords, not tenants. In 2018, Labour announced a new annual levy on second homes that would be equivalent to double the rate of council tax. The Land for the many report also suggests capping annual rent increases and making tenancies open-ended. These measures are specifically designed to remove the appeal of the buy-to-let market and second home ownership, but the report contains many more radical ideas to redistribute land so that, in their words, it ceases to act as a source of wealth for the few but better serves the interests of the public as a whole.
Corporation tax
In 2017, Labour committed to raising the main rate of corporation tax to 26% over a three-year period with a small profits rate of 21% for business with annual profits of less than £300,000. This contrasts with the current rate of 19% which is set to fall to 17% in 2020/21. It is a fundamental shift since 17% is amongst the lowest of all the EU countries, whereas 26% would make us the seventh highest in the EU.
Other corporate measures
Corporation tax is far from the whole story as there are further measures designed to reduce inequality. The 2017 manifesto announced the excessive pay levy which would require companies to pay a levy of 2.5% for individual staff earning more than £330,000, increasing to 5% for earnings about £500,000. Labour has also outlined its commitment to renationalising the utility companies and railway operators, as well as the Royal Bank of Scotland and Royal Mail.
At the 2018 party conference, the shadow chancellor introduced the idea of an inclusive ownership fund which would be compulsory for companies with more than 250 employees. These companies would be required to transfer at least 1% of their ownership into an inclusive ownership fund annually, up to a maximum of 10%. The fund would be held and managed collectively, and their shares would not be sold or traded. Workers’ fund representatives would have voting rights. The employees would enjoy the dividend payments but crucially these would be capped at £500 a year and any additional dividends would be paid into a national fund, which would be used to pay for public services and welfare. This is where any resemblance to the John Lewis model ends, because that surplus is not just taxed but taken in full by the exchequer. Labour has estimated the cost to business at £2.1bn a year, but other estimates are much higher. The CBI has said that this is not the way to encourage employee share ownership and have suggested an employee ISA would be far more effective.
Tax transparency
Labour’s tax transparency and enforcement programme, also issued in 2017, contains many measures to eliminate tax avoidance, including the publication of tax returns of large companies and individuals earning more than £1m. Notably the general anti-abuse rule, which was introduced in 2013 to counteract the tax advantages arising from tax arrangements that are abusive, will be recast as the general anti-avoidance rule ‘designed to end sham transactions’. The paper states: ‘any transaction lacking economic substance will be considered to be a sham and thus not allowed for tax purposes’. The GAAR panel will have a broader representation. There is no more detail than that, but this is clearly intended to be a significant extension in the scope of the GAAR.
Conclusion
Clearly there is an intention to increase taxes on higher earners and businesses. There is an interesting approach of seeking to treat capital gains and capital gifts as if they were income arising in a particular year and taxing them all at those much more progressive, and higher, rates. There is a wider agenda in seeking to redistribute the ownership of land and companies more widely which arises from a perception that those assets are held in too few hands at present. There is also a drive to eliminate avoidance and increase transparency in all tax matters.
Readers will have their own views on the likelihood of a Labour government and indeed on the merits of the policies, but it is important as tax advisers that we are aware of what a Labour tax system would look like so that we can advise our clients accordingly.
If the Labour party wins a majority at the next general election and we have Jeremy Corbyn as prime minister and John McDonnell as chancellor of the exchequer, what will their tax policies look like? This article considers, with an apolitical stance, the key policies that Labour announced in its 2017 manifesto and subsequently, which are of interest to tax advisers. In particular, it refers to a report commissioned by the Labour party entitled Land for the many which contains some far-reaching ideas about land reform. Some of these ideas are not fully developed, so this article focuses on the tax measures which have been adopted as Labour policy.
Income tax
The 2017 manifesto guaranteed no increase for those earning £80,000 or less but said that the top 5% of earners would be expected to contribute more. Prior to the 2017 election, Labour proposed to reintroduce the short-lived 50% rate, but from £123,000 rather than £150,000, and to introduce a 45% rate on earnings between £80,000 and £123,000.
Capital gains tax
Labour has said that it would reverse the Conservatives’ cuts to capital gains tax, so the rates would go up from a basic rate of 10% and higher rate of 20% to 18% and 28% respectively (with the 8% surcharge on residential property not qualifying for main residence relief on top). In Land for the many, a higher rate is proposed specifically for second homes and investment properties which would be at least in line with income tax rates (presently 20% and 40% but set to rise as above) in order to ensure that asset price appreciation is not taxed at a lower rate than income derived from labour.
Inheritance tax
As a first step, Labour would abolish the Conservatives’ residence nil rate band, returning to the simple nil rate band of £325,000 per person.
In Land for the many, the proposal which has been endorsed by the shadow chancellor is to replace inheritance tax with a lifetime gift tax levied on the recipient. Tax would be payable on all capital gifts above a lifetime allowance of £125,000. Instead of a flat 40% rate, Land for the many indicates that the surplus would be taxed at income tax rates. Once the lifetime allowance has been exceeded, consequently inheritances would be taxed not just at the 40% level but often at 45% or 50% under these new rules. The Resolution Foundation which helped develop these proposals suggested a slightly different framework with an initial rate of 20% and a top rate of 30% over £500,000. Even at those rates, the receipts are projected to be £5bn higher in 2020/21 than under the current system.
The spouse exemption would remain. The reliefs for agricultural property and business property would be tightened so that they operate as a tax deferral rather than a full relief, and the report suggests a cap (either monetary or by acreage, giving the example of 250 acres) above which relief would not be given on farmland.
Land reform
In its 2017 manifesto, Labour mooted replacing business rates and council tax with a new land value tax payable by landlords, not tenants. In 2018, Labour announced a new annual levy on second homes that would be equivalent to double the rate of council tax. The Land for the many report also suggests capping annual rent increases and making tenancies open-ended. These measures are specifically designed to remove the appeal of the buy-to-let market and second home ownership, but the report contains many more radical ideas to redistribute land so that, in their words, it ceases to act as a source of wealth for the few but better serves the interests of the public as a whole.
Corporation tax
In 2017, Labour committed to raising the main rate of corporation tax to 26% over a three-year period with a small profits rate of 21% for business with annual profits of less than £300,000. This contrasts with the current rate of 19% which is set to fall to 17% in 2020/21. It is a fundamental shift since 17% is amongst the lowest of all the EU countries, whereas 26% would make us the seventh highest in the EU.
Other corporate measures
Corporation tax is far from the whole story as there are further measures designed to reduce inequality. The 2017 manifesto announced the excessive pay levy which would require companies to pay a levy of 2.5% for individual staff earning more than £330,000, increasing to 5% for earnings about £500,000. Labour has also outlined its commitment to renationalising the utility companies and railway operators, as well as the Royal Bank of Scotland and Royal Mail.
At the 2018 party conference, the shadow chancellor introduced the idea of an inclusive ownership fund which would be compulsory for companies with more than 250 employees. These companies would be required to transfer at least 1% of their ownership into an inclusive ownership fund annually, up to a maximum of 10%. The fund would be held and managed collectively, and their shares would not be sold or traded. Workers’ fund representatives would have voting rights. The employees would enjoy the dividend payments but crucially these would be capped at £500 a year and any additional dividends would be paid into a national fund, which would be used to pay for public services and welfare. This is where any resemblance to the John Lewis model ends, because that surplus is not just taxed but taken in full by the exchequer. Labour has estimated the cost to business at £2.1bn a year, but other estimates are much higher. The CBI has said that this is not the way to encourage employee share ownership and have suggested an employee ISA would be far more effective.
Tax transparency
Labour’s tax transparency and enforcement programme, also issued in 2017, contains many measures to eliminate tax avoidance, including the publication of tax returns of large companies and individuals earning more than £1m. Notably the general anti-abuse rule, which was introduced in 2013 to counteract the tax advantages arising from tax arrangements that are abusive, will be recast as the general anti-avoidance rule ‘designed to end sham transactions’. The paper states: ‘any transaction lacking economic substance will be considered to be a sham and thus not allowed for tax purposes’. The GAAR panel will have a broader representation. There is no more detail than that, but this is clearly intended to be a significant extension in the scope of the GAAR.
Conclusion
Clearly there is an intention to increase taxes on higher earners and businesses. There is an interesting approach of seeking to treat capital gains and capital gifts as if they were income arising in a particular year and taxing them all at those much more progressive, and higher, rates. There is a wider agenda in seeking to redistribute the ownership of land and companies more widely which arises from a perception that those assets are held in too few hands at present. There is also a drive to eliminate avoidance and increase transparency in all tax matters.
Readers will have their own views on the likelihood of a Labour government and indeed on the merits of the policies, but it is important as tax advisers that we are aware of what a Labour tax system would look like so that we can advise our clients accordingly.
