It’s been less than a month since the general election which saw the Labour party secure its landslide victory and return to power after 14 years in opposition.

Already we are seeing signs of how the tax landscape may change in the near future.

This week, in a statement to the Commons, the chancellor, Rachel Reeves, announced the date of her inaugural budget speech, which will take place on the 30^th of October. While she didn’t quite do a Liam Byrne (“I’m afraid there is no money”), her reference to a £22 billion black hole in public finances carried similar sentiment.

Several policy documents were also released by the Treasury this week, setting out further details about some of the government’s plans. These included a policy summary on the new rules for non-UK domiciled individuals, as well as a technical note on the policy to apply VAT to private school fees.

Labour’s manifesto promised no tax rises for working people, with a commitment not to increase income tax, national insurance, or VAT. Yet only a few weeks down the line, it’s becoming apparent that increased taxes in some form are somewhat inevitable.  With a draft version of some of the legislation now published, we have a better idea of what those tax rises may look like. Here’s what we might expect from the upcoming budget…

1. Private schools in the UK to face VAT on tuition fees from 1 January 2025.

   The plan to apply VAT to private schools was included in Labour’s fiscal plan, set out in the run up to the election, so this announcement was no surprise. However, the draft legislation and accompanying technical note gives further details and clarification on how this will be applied. We now know that not only will the introduction of 20% VAT apply from 1 January 2025, but that this rate will also apply to pre-payment of fees as of 29 July 2024. This means that it will not be possible for parents to pay fees upfront for 2025 in order to save on VAT.

   We also know that the new tax measure will not apply to fees for pupils with special education needs, where their needs can only be met in private schools. There had been concern that the proposals had not given enough consideration to specialist schools who cater for children with special education needs.Labour had previously confirmed that the VAT changes would not apply to children with an education, health and care plan (“EHCP.”)

   While the legislation does not specifically mention EHCPs, the technical note explains that “where parents and carers of children with SEND have chosen to send their child to private school, but their needs could be met in the state sector, VAT will apply to their fees”. This would infer that a private school would have to be named in a child’s EHCP for the exemption to apply. The government welcomes comments on these proposals, and I would expect further clarity to be published around the implementation for specialist provision.

2. Abolition of ‘non dom’ status.

   Again, this policy change was included in Labour’s manifesto and Sir Keir Starmer had been very vocal on the need to close so called ‘loopholes’ on the taxation of non-UK domiciled individuals. The policy summary published is essentially an extension of the plans previously announced by the Conservatives, however, some of the transitional reliefs have been removed.

   From 6 April 2025, the concept of domicile will be replaced by a residence-based regime, meaning that foreign income and gains that arise from 6 April 2025 will be taxable in the UK for those who are long-term UK residents. The current ‘remittance basis’ of taxation will be abolished, removing preferential tax treatment for those not domiciled in the UK. However, relief will be given for new arrivals to the UK in their first four years of residence, providing they have not been UK resident in any of the prior 10 consecutive years.

   Changes will also be made to the inheritance tax (IHT) regime, affecting the scope of property chargeable to IHT in the UK and will, again, be based on a residence-based regime rather than a domicile-based system. The government is still considering how this will impact excluded property trusts. It may be that some form of grandfathering provisions are introduced – the following statement in the policy summary certainly seems to suggest this: “the government recognises that trusts will already have been established and structured to reflect current rules”.

   It’s possible that a grace period will be introduced, giving trustees time to wind up trusts without incurring an IHT liability. It will be interesting to read further details on these changes as they emerge.

3. Goodbye to the Furnished Holiday Letting (FHL) regime.

   This change was announced by the Conservative government in the March budget, but there was little practical detail that followed. We now have draft legislation that confirms the regime will be abolished from 6 April 2025.

   This regime provided some useful reliefs (albeit the benefits had diminished in recent years) including business asset disposal relief when furnished holiday rental properties were sold, as well as full deduction for interest relief. These reliefs will no longer apply as of next April, meaning FHL properties will form part of the taxpayer’s normal UK or overseas property business and will be taxed in line with other property income and gains.

4. Changes to the taxation of carried interest

   While we may not see changes to this immediately, the government has published a ‘call for evidence’ and is inviting views from stakeholders on its plan for reform of the tax treatment of carried interest.

   Carried interest is paid to investors as a share of profits, typically from private equity funds, and is currently taxed in line with capital gains tax rates (18% or 28%). While the document published provides no detail on the proposed changes, it seeks to answer the following questions:

   • How can the tax treatment of carried interest most appropriately reflect its economic characteristics?
   • Are there lessons that can be learned from approaches taken in other countries?’

   The carried interest rules were amended in 2015 and any further changes would likely not be welcomed by fund managers.

5. Potential changes to capital gains tax (CGT) or inheritance tax (IHT)?

While not yet specifically announced, it is possible that we will also see hikes to CGT in the Autumn Budget. Reeves has alluded to tax rises, and if Labour keeps their promise to not raise income tax, national insurance or VAT, the chancellor will have to look for other ways to balance the books, with CGT being an obvious contender.

Possible measures may involve increasing the current CGT rates or removing CGT or IHT reliefs, such as business property relief. There have also been some whisperings about removing the current tax-free CGT uplift on death. With such uncertainty surrounding these taxes, bringing forward any planned disposals may be prudent to make use of the current reliefs or allowances available.

We would always recommend taking professional advice in respect of tax planning opportunities. Do get in touch with our private client team, who would be happy to assist.

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