A new fiscal landscape: how Labour’s budget impacts wealthy taxpayers

After weeks of speculation, leaks, and briefings, Rachel Reeves was yesterday (30 October 2024) the first female Chancellor of the Exchequer to deliver a Budget Statement to the House of Commons. As expected, her speech was sombre, though intensely political – criticising the Conservative Party now in Opposition for what she repeatedly called their 14 years of failure and promising to “fix the foundations to deliver change”, especially in improvements in public services. The government’s Budget measures are predicted by the independent Office for Budget Responsibility to generate nearly £40 billion ($52 billion) in additional revenue in the 2025/26 tax year.

Notably, Labour’s key manifesto tax pledges (abolishing the non-dom tax regime; adding VAT to private school fees; and increasing tax on private equity carried interest payments) all made it into the Budget – despite apparently well-sourced recent press commentary indicating that the Chancellor’s plans (and especially the revenue intended to be generated by them) were encountering difficulty with the OBR’s more conservative predictions. The non-dom changes, for example, are now valued at £4.2 billion in 2028/29, not the £5.2 billion anticipated in Labour’s manifesto. Conversely, adding VAT to private school fees is now said to be worth an additional £1.665 billion in 2028/29 – more than the £1.5 billion hoped for by Labour, despite the fact that this policy, in particular, was reported to be in difficulties over the fear it would raise much less than predicted – or even end up costing money. Certainly, assumptions about the value to the Exchequer of the non-dom changes and parents’ willingness to pay higher private school fees, for example, will be subject to very significant variation dependent on behavioural changes by those affected.

As ever, it will be very difficult to assess the overall economic effect of the Budget changes in real time, and anecdotal experience of clients’ intentions will be the first guide as to the success of this Budget (measured against its aspirations) – certainly, that is true in terms of inward investment by internationally mobile high net worth private clients. It remains to be seen whether this is the Budget for growth promised by Reeves.

In line with expectations

The Capital Gains Tax (CGT) changes were largely in line with what many expected; the worst fears of 39% were not realised. The main rate is increasing from 10% to 18% and the higher rate from 20% to 24%. The residential property rate remains unchanged at 24%.

Importantly, these CGT changes are effective immediately, and any disposals made on or after midnight on 30 October 2024 will attract the new rates. This is only the second time in recent years that there has been a mid-year CGT rate rise, and both HMRC and accountants’ tax software packages will have to move quickly to allow for the change. “Anti-forestalling” of this kind (i.e., Finance Bills retrospectively making tax increases effective immediately as from the date of the Budget) has become an article of faith at HMRC and HM Treasury, seemingly because they see any attempt to pre-empt rate increases by triggering disposals before they come into effect as tantamount to “avoidance”. This is despite the fact that such disposals, if they were allowed to take place, would bring forward significant revenue into the Exchequer.

From 6 April 2025, the rate of charge for Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief) and Investors’ Relief will increase to 14%, and will increase again to match the main rate of 18% from 6 April 2026. Furthermore, the lifetime limit for Investors’ Relief will be reduced from £10 million to £1 million (matching that of Business Asset Disposal Relief) for all qualifying disposals made on or after 30 October 2024. The only good news here is that those who have already made use of these reliefs won’t be punished by eating into their lifetime limit.

As previously mentioned

Labour said in its election manifesto that the way carried interest is taxed would change. The Chancellor has confirmed it will – twice. First, as an interim measure, from 6 April 2025, carried interest will be taxed at Capital Gains Tax rate of 32%. Then, from April 2026, it will be taxed at the taxpayer’s income tax rate with a multiplier of 0.725. For those in the private equity world, these CGT increases will feel like a massive tax hike.

In one of the numerous unannounced and less-headline-grabbing changes in this Budget, from today, those contributing assets to a Limited Liability Partnership (who can presently qualify for relief from CGT) will suffer a clawback of tax if the LLP is later liquidated, and its assets disposed of to a contributing member (or a person connected to him/her). While this may be a response to a certain type of aggressive tax avoidance scheme, the changes are widely drawn, and the risk is that it will have a wider impact than apparently intended, also catching many innocent situations.

Aidan Grant is a Partner in our Trusts, tax and estate planning team. He joined Collyer Bristow in September 2016 and advises resident non-domiciliaries, UK and international trustees and domestic clients on matters spanning pre-immigration planning, residency and domicile rules, international tax planning and UK wills and estate planning. His work focuses on working with high net worth clients with UK/US interests, for example, mixed domicile marriages, UK resident US citizens or UK resident beneficiaries of US trusts.

James Austen is a Partner specialising in Trusts, tax and estate planning, specifically acting for high net worth individuals, entrepreneurs and business owners.