The prime minister added that "those with the broadest shoulders should bear the heavier burden".
Keir Starmer has announced in a speech today that October's Budget is "going to be painful", stating that the state of the economy is "worse than we ever imagined" after announcing a £22bn 'black hole' in the public finances last month.
The prime minister said: "There is a budget coming in October, and it’s going to be painful. We have no other choice, given the situation that we’re in.
"Those with the broadest shoulders should bear the heavier burden, and that’s why we’re cracking down on non-doms.
"Those who made the mess should have to do their bit to clean it up, that’s why we’re strengthening the powers of the water regulator and backing tough fines on the water companies that let sewage flood our rivers, lakes and seas."
He added: "I’ll have to turn to the country and make big asks of you as well, to accept short-term pain for long-term good, the difficult trade off for the genuine solution.
"And I know that after all that you have been through, that is a really big ask and really difficult to hear. That is not the position we should be in. It’s not the position I want to be in, but we have to end the politics of the easy answer, that solves nothing.
"In the first few weeks we discovered a £22bn black hole in the public finances and before anyone says ‘Oh this is just performative or playing politics’ let’s remember the OBR (Office for Budget Responsibility) did not know about it, they wrote a letter setting that out.
"They didn’t know because the last government hid it and just last Wednesday, we found out that thanks to the last government’s recklessness we borrowed almost £5bn more than the OBR expected in the last three months alone. That’s not performative, that’s fact."
What areas of tax may Labour look at following Starmer's Speech?
Nicholas Nesbitt, partner at Forvis Mazars in the UK, has explored what areas of tax that Labour might look at.
Capital Gains Tax
Nesbitt said: “To some extent, the CGT regime has already been squeezed in recent years with reductions to the Annual Exempt Amount (AEA), increases in rates applied to residential property, and reductions in the amount of business sale proceeds that attract 10% CGT under Business Asset Disposal Relief.
"Increasing the CGT rates now seems the most likely course of action. A probable worst-case scenario would be an alignment of CGT rates with Income Tax rates. An alternative would be to extend the regime of having different tax rates for different assets (residential property, investment, business assets etc.).
"Ultimately, we expect that if rates are to increase, this may be coupled with an increase in the Business Asset Disposal Relief limit on selling businesses from £1m.
“From a financial planning perspective, it may make more sense to realise gains within investment portfolios now at the known rates, instead of deferring the problem with little likelihood of future reductions. This is reinforced by the fact that, due to the reduction in the CGT AEA, many investors are now paying CGT regularly on investment portfolios when they previously haven’t. Where clients don’t anticipate requiring the funds in the near future, they may consider deferring realising gains to death but that is somewhat restrictive from an investment perspective and could be a potential area of attack as well."
On death
“The principle behind a base cost uplift on death is to avoid individuals suffering tax twice on death (IHT and CGT). However, for assets that benefit from an IHT relief (Businesses, Agricultural Property, transfers to spouse etc), it would not be surprising if the CGT uplift was removed. If so, Labour will need to consider how this is imposed without forcing the breakup of businesses (and similar assets) on death in order to pay the liability."
Principal residence relief
“When it comes to principal residence relief, its removal seems unlikely. It could, however, be replaced with a rollover mechanism or the introduction of a cap. Typically the home is a protected asset so this would signal a significant change."
Pensions
“Labour is unlikely to reintroduce the Lifetime Allowance (LTA). One potential consideration is a flat relief on pension contributions (as opposed to linking this to your tax rate) however this has been discussed for years and is technically difficult to implement. “The more likely areas are reducing the Lump Sum Allowance (LSA) and addressing the taxation of pensions on death. Following the abolition of the Lifetime Allowance, the LSA is no longer linked to any wider legislation and therefore the government could easily reduce the amount of tax-free cash individuals can take from their pensions.
"The taxation of pension death benefits has long felt anomalous – you get tax relief on contributions; you get tax-free investment growth and you can pass the funds tax-free on death. Given the level of wealth stored up in pensions, we expect that the new government may seek to tax pension funds on death moving forward.
“Any consideration around taking lump sums from pensions should weigh up the individual's objectives and the various tax consequences of drawing the lump sum.”
Inheritance Tax
“The number of estates paying Inheritance Tax has been increasing over the years due to inflating asset prices and frozen thresholds. So, it is no surprise that changes to this might worry people. We do not expect that the 40% headline rate of IHT will change, and we don’t expect the limits (known as Nil Rate Bands) to decrease. However, we do think that the government may look to tighten rules on gifting money away, perhaps by taxing gifts over a certain size, or introducing a lifetime limit of gifts.
"Some other areas that the government could look at are removing Business Relief on AIM assets, and limiting Agricultural Property Relief.
“Given the uncertainty over how the government might look to change IHT legislation, and given that IHT planning typically involves significant decisions that can impact individual’s long-term financial position, we are being cautious about undertaking planning in this area currently. However, where individuals have planned to make certain gifts, we are discussing with them whether such gifts should be made over the coming months."
Wealth tax “A wealth tax would be a very complex taxation to introduce and would be very different to the UK’s current approach to tax. However, it shouldn't be completely ruled as there are examples of this being introduced in other countries."
Article by Rozi Jones | Editor, Financial Reporter
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