(Bloomberg) -- The UK’s wealthy are relieved that the new Labour government did not hit them as hard as expected in its first budget, but were less reassured about tax raises that could yet come.
Taxes on capital gains and private equity deals increased by less than feared, while rich residents using the non-dom rules were given more time to bring money into the country — all seen as signs that Labour listened to warnings that punishing the rich would prompt them to leave the UK.
The richest 10% of British households will lose an average of £1,200 ($1,558) next year to tax hikes in the budget, according to Treasury modelling. Still, the feeling seems to be: it could have been worse.
“There will be a slight sigh of relief that there is nothing new,” Iain Tait, head of the private investment office at wealth manager London & Capital, said. Still, he anticipated some “rumblings and grumblings” that Chancellor Rachel Reeves went through with other changes to methods used by the wealthy to pass on assets to their families, namely agricultural and business property relief.
There was also a clamp down on tax relief on inherited pensions, which could spark upset among those affected, Tait said. Pensions in the UK benefit from an array of tax perks to encourage more Britons to save for old age, but the government wants to close a loophole on passing unspent pension pots to descendants, in a move it said will affect around 8% of estates each year from April 2027.
The main inheritance tax rate of 40% still kicks in on estates worth £325,000 ($421,830) and above, with that level fixed until April 2030.
While the government has “not wrangled with inheritance tax quite as much as had been expected,” the policies “will draw more families into IHT by the process of fiscal drag,” according to Ian Dyall, head of estate planning at wealth management firm Evelyn Partners.
After Labour won the general election in July, new Prime Minister Keir Starmer laid the groundwork for a budget that would be particularly painful for those “with the broadest shoulders.” As ministers spent the summer talking up the economic damage wrought by the previous government, they raised fears of a spike in tax burdens for the wealthy.
The budget on Wednesday was the first chance to see what this rhetoric meant for British wallets, though some of its policy measures are still to be finalized.
For instance, private equity executives learned they will now pay 32% on carried interest — their returns on asset sales — from April, up from 28% now. That rate is well under the 45% top rate of income tax which some thought Labour would move to, and showed ministers had understood the “international competitiveness” of the sector, according to Michael Moore, chief executive of the British Private Equity & Venture Capital Association.
But that is not the government’s final plan. It also launched a consultation about further changes from April 2026 to align carried interest with income tax, with some caveats. The hope is that the government continues to understand the value of the sector to the UK economy, Moore said.
Others said the government’s plan appeared to show the industry has succeeded in shaping the debate. Questions in the consultation showed private equity had “won,” according to Haakon Overli, co-founder of investment firm Dawn Capital, with the future rules now looking “murky.” Overli wants the government to carve out venture capital from tax rises to avoid choking investment in startups.
Sales tax on private school fees, long trailed by the government, was confirmed.
Foreign Investors
Another area subject to intense lobbying before the budget was the rules for non-domiciled individuals, who can avoid tax on overseas earnings for as long as 15 years. The system has already been pared back by previous governments, and Labour confirmed it would replace the rules as expected.
For the tens of thousands of non-doms, a new residence-based program will offer them three years to bring their wealth to the UK — up from the two years proposed by former chancellor Jeremy Hunt.
However, despite repeated lobbying, Labour stuck to its plans to extend inheritance tax to the group. “The exposure of capital assets which have no connection to the UK to a 40% tax charge is likely to be a matter of considerable concern to the wealthiest who will factor it into their plans regarding how long they will stay in the UK,” said Alex Henderson, tax partner at PwC.
Foreign Investors for Britain, a group that has opposed Labour’s changes for non-doms, said Reeves’s announcements were concerning.
“These proposals could drive investment away from the UK, with significant impact on the economy and future public services,” said Leslie MacLeod-Miller, the group’s chief executive. Of particular concern is the “bombshell” about business property relief that would hit entrepreneurs, he added.
Meanwhile, the higher rate of capital gains tax paid on most assets, such as shares, will increase to 24% from 20%, and the lower rate to 18% from 10%. This was not as severe as business owners had feared. The business asset disposal relief will be kept, but the rates paid will rise if assets are worth more than £1 million.
There was some bad news elsewhere: stamp duty land tax surcharge for second homes will increase by two percentage points to 5% starting Thursday, in what was a “big surprise,” according to Kate Arnold, head of the private client group at law firm Cripps. Landlords have already been selling property in the face of higher interest rates and lower tax relief on their mortgage repayments.
And there was also pain for private jet users, who will face a 50% rise in air passenger duty. The government didn’t set out how much this specific part of the change would raise, but Reeves aimed the announcement squarely at her opposition, the outgoing Conservative leader Rishi Sunak, when she said the policy would mean an additional cost of £450 for one person flying to California.
--With assistance from Charlie Wells, Kate Duffy, Leonard Kehnscherper, Damian Shepherd, Jack Sidders, Aisha S Gani and Jack Ryan.
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