A £10.1bn funding hole raises the prospect of increased capital taxes
In the business world, Labour has tried not to spook the horse, having pledged to cap Corporation Tax at 25% and keep the current R&D tax credit and Patent Box system.
Meanwhile, Keir Starmer and Shadow Chancellor Rachel Reeves have been lobbying City boardrooms like there’s no tomorrow, keen to separate themselves from Corbyn’s 2019 general election manifesto, which proposed a higher corporation tax, a windfall tax on oil companies, a reduction in annual tax allowances on dividend income, and raising income tax on high earners.
However, it was Benjamin Franklin who said that “in this world nothing can be said to be certain, except death and taxes”, and there remains a cloud of uncertainty over how the party will fund its campaign promises on education and the NHS.
The Treasury estimates that Labour’s current tax and spending plans would raise an extra £6.1bn a year but cost as much as £16.2bn, leaving a £10.1bn funding hole.
Where might Labour find the money to plug the hole?
Potential tax changes
Private Equity and Carried Interest
Labour aims to tax carried interest (profits paid to private equity fund managers) as income, potentially at 45%. While this mainly affects large investors, it signals a shift towards higher taxation on profits.
Capital Gains Tax (CGT)
There is a possibility of increased CGT rates – which could impact you directly if you’re planning to sell your business.
Capital Gains Tax is a tax on the profit that you make when you dispose of an asset that’s increased in value – such as your business.
Notably, Labour’s “plan for growth” does not rule out raising CGT. In fact, Paul Dales at independent economic research business Capital Economics suggests that the Labour government may choose to fund their plans through hikes to interest and dividends, capital gains and inheritance tax – which are less controversial to the general populace and potentially lucrative.
During the Corbyn era, shadow chancellor Rachel Reeves even proposed ramping up CGT in a 2018 pamphlet entitled, ‘The Everyday Economy’.
Get moving on your business sale to lock in the current rate of Capital Gains Tax
Given the current economic and political uncertainty, business owners are advised to speed up their exit plans to secure the current CGT rate.
The annual exemption has already been drastically cut, from £12,300 in the 2022/23 tax year to £3,000 in 2024/25, showing the government’s increasing reliance on CGT revenue.
With both Labour and the Conservatives facing significant spending deficits, further increases in capital taxes by the next government look more likely than not.
