With the change in government and the upcoming budget there has been lots of speculation in the media about what the Chancellor might announce on 31/10/24.  We thought it would be a good idea to relay our thoughts in a video and article written by our Head of Proposition Simon Hoult. This is an experiment and we would welcome feedback or suggestions on any other topics you’d like us to talk about.

This note is not intended to provide advice, because it is impossible to do so on rumours and hearsay.  If you are looking for advice on this, please make sure you speak to your Financial Planner first before taking any actions.

However, it would also be foolish to ignore the signs and the potential impact that the upcoming budget could have on finances. While Sir Keir Starmer and Rachel Reeves have claimed to be “pro growth” and to not raise taxes for workers, it has become apparent that they are building for some tax rises, and probably spending cuts, in their first budget since taking power. This has already begun with the cancelling of winter fuel payments for all but the lowest income pensioners and Sir Keir also stated that the “broadest shoulders” should carry the most burden. With the size of the black hole, they will be looking for changes that will raise significant taxes immediately and will maybe consider wider longer-term reform to the tax system.

There is however a need to strike a balance between raising taxes and cutting spending, impacting the growth agenda and also not implementing something that would be too difficult politically.  So, what could they do?

These are just our thoughts on some areas that The Labour Party could target having already ruled out rises to VAT, Income Tax and National Insurance:

Capital Gains Tax (CGT)

• Raising the rate at which CGT is paid.  Currently this is 10% and 20% for basic and higher rate taxpayers respectively on all taxable assets except residential property which is 18% and 28%.  Could these rates be equalised at the higher level, or a different flat rate introduced on all assets?
• Removing the annual exemption; it has already been reduced to £3,000, but could it be further reduced, or removed entirely?
• Removing the inter spousal exemption where assets can be passed between spouses without triggering a taxable gain.
• Removing the base cost uplift on death; currently capital gains ‘die’ with you and rebase to zero.  This could be another area that could be targeted.

Inheritance Tax (IHT)

The Treasury is taking more tax receipts from Inheritance Tax each year as the baby boomers begin to die off and as the effects of fiscal drag continue to bite.  It is a complicated area and a divisive tax, but what could the government consider?

• Continue the fiscal drag by freezing bands for longer.
• Raise the rate at which IHT is paid.
• Tax immediate transfer of wealth – currently you can give as much wealth away as you like and it will be tax free provided you survive for 7 years from making the gift; could these rules be amended to impose an immediate charge?
• Make changes to the rules and exemptions surrounding Business Relief assets.  Will they look into the spirit of this and consider whether AIM portfolios and other Business Relief structures should remain relievable? This could have a significant impact on small cap company valuations.

Pensions

Pensions have been a target for tax for many years, ever since Gordon Brown famously raided pension funds in the 1990’s. Since then there have been significant changes to the system by both parties, making it ever more complicated to understand.  But there is no hiding that the cost to the Treasury of tax relief on pension contributions is considerable and could be targeted again.  This has already been reformed over the years with restrictions to the Annual Allowance and tapering of contributions and tax relief for higher earners, but could they do more?  It would be very unpopular but areas that could be considered for change could include:

• Reduce the rate of Income Tax relief for higher earners or further restrict the level of maximum tapering so even less people are benefiting from significant tax relief.  Currently this kicks in at £260,000 of annual income; could this level be reduced?
• Equalise the rate of tax relief so basic rate tax payers and higher rate tax payers have less disparity in the tax relief they receive and the tax incentives are shared more evenly.
• Further restrict the amount of tax-free cash that can be taken.
• Make income payments from death benefits prior to age 75 taxable.

Business Asset Disposal Relief

• What about entrepreneurs? At the moment there is a CGT rate of 10% on the first £1,000,000 of gains made from selling business assets – surely it would be anti–growth to target this?  

More politically difficult options that would take longer to implement and raise longer term taxes could be:

• Means testing the State Pension; this has apparently been ruled out for now, but longer term could be a target.
• Applying CGT to the principal private residence.
• Introducing a wealth tax over a certain level of wealth.
• Bring pension funds into the estate and subject to Inheritance Tax

I have simply listed a number of areas where reform could be made; we are not trying to scaremonger on this, but simply show that we are constantly thinking about what changes could be made and how those changes could affect you, our clients.

Some of the more longer term measures that I have mentioned above are not likely to be implemented without consultation and therefore I would expect an announcement about certain consultations that will take place following this budget to look at some of the bigger things and the long–term impact changes could have.  For example, historical changes to pension rules have had the knock-on effect of disincentivising certain medical staff from working which has put more strain on an already pressurised NHS.

It is important to understand all of these potential impacts before large changes are made… let’s hope that Rachel Reeves does show some restraint and sense.

What considerations should you be making?

CGT

If you are planning to sell assets anyway, then it may make sense to bring this forward to take place prior to the budget while the rate of tax is 10% or 20% and is a known rate which could be higher in the future.  If you have significant gains in portfolios and the decision is purely a tax decision then it becomes a judgement call and very difficult to consider best actions. We would suggest discussing your own personal situation with your Financial Planner.

Pensions

If you are someone who normally makes a lump sum pension payment during the tax year then we would suggest considering bringing these payments forward to be done prior to the budget.

Inheritance Tax

Again, if you know that you have plans to make gifts in the next few years, you could elect to bring these forwards and do it sooner; this of course should be balanced with the management of that gift and the loss of control of that money once the gift is made.  

In some instances, you may be able to offset tax paid on CGT by making pension payments or investing in other tax privileged assets.  There will be some people that have not made pension payments recently due to previous restrictions that now may not apply and could have an opportunity to do something now.  For certain individuals, investments into other tax planning vehicles can also provide reliefs that could help offset some of the tax that could be created now.

We will be in touch with the people who we recognise could be impacted, however, if you want to discuss your own situation, please get in touch with your normal contact and please make sure you seek advice first before taking any action.

This communication is for general information only and does not constitute advice. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Please seek advice from your qualified Financial Planner before taking any action on points raised within this communication.