Maskells Post Election Opinion

The UK is open for business, so says Rachel Reeves (who must be congratulated on becoming the first female Chancellor). The new Labour Government seems to have hit the ground running and the first cabinet meeting on a Saturday morning is evidence of their commitment to hard work. But will this mindset really bring about ‘Change’ – they are at the start of a marathon, and no-one is tired. Can they go the distance?

With lots of ideas, Labour was surprisingly light on detail about how they will pay for their policies – tax on School Fees, change in tax on Carried Interest and a change to the Non-Dom status are those highlighted in the Manifesto. These are policies which will produce tiny amounts compared to what is needed, if indeed they can be taxed at all.

For example, Lord Pannick wrote an opinion stating that taxing school fees was likely to breach ECHR and there is a question of taxes on chartities, so this policy is likely to be held up by litigation. Additional Taxes, particularly National Insurance contributions, on Carried Interest will likely drive the Private Equity / Venture Capital businesses offshore (and their advisors) and at best the individuals will leave for the time when the carried interest is paid (and will therefore be outside the reach of HMRC). This is negative for UK Tax receipts. Additionally, retrospective taxation on the mobile capital of non-doms is also likely to fail for the simple reason that their capital is … mobile, and as it leaves, so do the taxes. Increasing income tax, national insurance and VAT across all taxpayers is really the only effective way of increasing tax revenues at a material level. The rest is window dressing. Will Labour do this? Possibly. But not to the extent that they need to (taxing the rich alone will drive capital flight), and it will not be popular with ‘working families’. Labour are likely to be hindered in their spending as a result. The likely outcome is that not much will happen at all. Labour are however likely to focus on trading links with Europe and see that as their salvation to grow the economy. They would be right.

Will Property Tax increase? Our opinion is more likely than not with regards to Council Tax but not on any other basis. Council Tax is low relative to property tax in other countries and could be increased. Council Tax in RBKC is circa £3,000 for Band H or £250 per month. If it were doubled to £500 per month or £6,000 per year, whilst painful, it is a fraction of the 1.62% average on a home in New York, which on a £2m property would equate to £32,400 a year. For Paris, there is property tax and real estate wealth tax. This could easily surpass £10,000 and potentially more on our £2m example. However, Council Tax is for local services, which are also paid for by business rates and central government grants. An increase in council tax on higher value properties may allow central government to reduce the grants to that area and increase the grants elsewhere. This seems possible and likely as it will raise tax and not impact the ‘working family’.

Regarding taxes on primary residences (which have been rumoured), voters may view this as they do Inheritance Tax: The amount payable will be small for the majority of the country in the same way that IHT is only paid by 4% of estates, but it is seen as confiscatory and a tax on aspirations. In fact, the ongoing YouGov poll “How fair is inheritance tax” shows that over 50% of those polled describe the tax as unfair or very unfair vs those who believe that it is fair (12%) or very fair (5%). A person’s primary home truly is their castle in the UK and woe betide anyone who seeks to attack (or tax) it.

As to the lettings market, in our opinion, the private Buy to Let market is also likely to remain relatively untouched. Section 21 evictions may well be removed but there must also be a balance for the landlord, including a functioning Court system. The bottom line, which is often forgotten, is that a BTL property is a private investment – it is not Government housing stock and Ministers will do well to remember that. A Landlord cannot be compelled to rent their property and if the returns fall versus other investments open to them, they may sell. Complicated guidelines and evictions may well see the Private Rental Sector stock reduce, leading to higher rents and less housing. Large scale change in this sector may therefore produce unwanted results for our new government.

Lots to digest and ultimately, in our opinion, little will change. The UK is therefore likely to become more socially liberal and, we sincerely hope, fiscally conservative – if Labour are to be believed. There will hopefully be small but measured changes as stability is key and the financial markets have indicated that they like what they hear…so far. In fact, and in many ways, the UK is in a better place than the US or Europe, where difficult and divisive politics make headlines every day. This may lead to more people moving to work in London and produce more buyers and renters in our market. We could not help but smile when we read the following headline in The Times this week: ‘French Left-Wingers prepare to govern with 90% Tax on Rich’. Wonderful. Ms Reeves should be saying loud and clear: “Welcome to the UK - please spend your money here!”


Posted on Wednesday, July 10, 2024