Will the new Labour government Raise Capital Gains Tax?

The election is over, Rachel Reeves has taken possession of 11 Downing Street, and the Kings speech has laid out the new governments’ legislative agenda. But the UK money markets are still abuzz with speculation about Labour’s tax plans.

At the top of their anticipated hit list lies capital gains. 

If the rumours are to be believed, Labour is planning to align capital gains and income taxes. This would represent a massive tax rise for UK companies. 

As an insolvency practitioner, when I first heard the whispers, I was immediately struck by the enormous impact this would have on directors looking to voluntarily wind up their businesses.

That’s because currently one of the biggest advantages of a Member’s Voluntary Liquidation is the tax savings a company can make. By distributing remaining assets to shareholders as capital rather than income, higher-rate taxpayers can reduce their tax liability from 32.5% on the dividend to 20% – or as little as 10% if they qualify for Business Asset Disposal Relief.  If the changes are introduced, these savings could all be lost. 

But do the rumours stand up to scrutiny? 

Let’s consider the good news first. The Labour manifesto made no promises regarding the tax, and during the campaign Keir Starmer reassured voters all their plans were fully funded and costed and “none of them require tax rises over and above the ones we’ve already announced.” 

So far so promising. But there remain good reasons for concern.

Generated largely from the business community and the country’s wealthiest individuals, capital gains tax makes a tempting target for an incoming government which has promised to fix ‘broken’ public services without raising taxes for ‘working people’. 

Many on the political left also consider the current tax regime unfair, and a recent Resolution Foundation study which showed wealth inequality is nearly twice as high as income inequality in the UK has strengthened their case. 

Labour also has a worrying history with capital gains. In 2018, Rachel Reeves published a pamphlet calling for the rates at which capital gains tax is levied to be bought into line with income tax. The Labour manifesto also promised to raise £565 million a year for the treasury by closing a capital gains ‘loophole’ in the private equity industry. 

Ideology aside, there are also practical issues at play.

While modest, Labour’s spending commitments, which include £1.6 billion to pay for more NHS appointments and equipment and £365 million to fund free school breakfast clubs, will require a significant financial investment, and the changes could bring as much as £16 billion into the treasury’s coffers. 

If the government’s ambitious plans to make the UK the highest growth economy in the G7 don’t materialise, a rise in capital gains tax could be the only way for them to meet their spending promises, especially since they have publicly ruled out making changes to the big four revenue raisers – income tax, national insurance, VAT, and corporation tax.

This all means it is likely a matter of when, not if, changes to the capital gains regime will be introduced. 

The stakes for directors have now been raised. 

Rush into a decision, and they may regret losing a company they have invested years of dedicated service to building. But wait too long, and they could face a punishing financial burden.

Thankfully, there is a little time left yet for directors to consider their options. 

Labour’s first Budget is now expected on 30 October, and it is likely, though not guaranteed, that any changes will not come into effect straight away. This could allow directors time to assess the implications for their company, and make informed choices, based on facts not rumour.

After all, we cannot be certain the government will issue any changes to the capital gains regime this year, or what they may look like if they do. They may, for instance, decide to reintroduce the indexation allowance, or something similar, as a counterbalance to inflationary price rises. 

Waiting is a risk, however, and one many businesses will, completely understandably, prefer not to take.

But there is one thing we can be reasonably certain of. Right now, the tax advantages on offer for Members Voluntary Liquidations are excellent, and they are not going to get any better. 

The safest course of action is to act fast.