Urgent Pre-Budget Tax Planning
The Budget will be held on Wednesday 30 October, the Chancellor has confirmed as she set out plans to deal with an ‘unsustainable’ £20bn blackhole.
The Budget will be the first chance to see what direction tax policy will take under the Labour administration but we don’t suggest that you just wait and find out if you’ve been caught by changes. During the general election campaign, the chancellor Rachel Reeves repeatedly stressed that Labour would not increase the three big taxes, income tax, national insurance and VAT, keeping taxes down for ‘working people’.
This means that there are serious concerns about where the tax axe will fall, with capital gains tax, inheritance tax and pensions tax all possible contenders for increases. The new government’s policy on VAT on private school fees and their ‘anti-forestalling measures’ accompanying that show they may be inclined to some form of retrospective taxation, so care needs to be taken. But it seems appropriate to give serious consideration in advance of this first Budget under the new government.
With a shortfall of £20bn set out by the Chancellor in her speech in the Commons on 29 July, following an audit of government finances, and confirmation that a generous public sector pay settlement of 5.5% will go ahead, she also stressed that she had agreed a backdated 22% rise for hospital doctors over the next two years.
Without doubt, tax increases and departmental budget cuts will be outlined in the Budget.
‘It will be a Budget to fix the economy,’ Reeves said.
Capital Gains Tax (CGT)
There is speculation that Reeves will use changes to CGT to try to help fill the hole in the public finances – possibly by equalising the rates of income tax and CGT. Whether this works when CGT is charged on disposals of assets, and taxpayers can alter their decisions about whether to make such disposals, we’ll have to be wait to see. Availability of tax reliefs will also be an important consideration.
2022-2023 was a record year for CGT, with receipts at £16.92bn. This marked a fourfold increase in the last 10 years with over 400,000 people paying CGT. That might indicate the ‘Laffer effect’, where low tax rates result in higher activity and actual tax receipts. It would seem likely to have a negative impact on the economy if business disposals were to be taxed at higher rates, resulting in lower business activity. But that possibility cannot be ignored.
There is only a short time to take some pre-emptive measures before the Budget, but worth considering quickly if you are planning to dispose of a business and are concerned that potential removal of Business Asset Disposal Relief (old Entrepreneurs’ Relief) to give an effective CGT rate of 10% on the first £1 million of gain..
Pensions Tax
Another option for the chancellor is to review pensions tax, with some talk of a single rate of tax relief on all contributions, effectively reducing the tax relief for higher rate taxpayers.
Changing the way pensions are taxed could increase the amount the government can invest into UK growth by over £20bn a year, adding up to £100bn over five years, according to analysis by pensions specialist Hymans Robertson.
Inheritance Tax (IHT)
Other speculation on Inheritance Tax (IHT) includes removing or reducing Business Relief or Agricultural Property Relief when gifting businesses or assets, which again could have a negative effect on the economy.
It has also been mooted that an individual’s pension fund could be regarded as part of their estate on death, therefore being taxed at IHT rates, instead of currently being outside of the estate and not taxed to IHT.
Action
Now could be a good time to discuss with us whether you have appropriate planning in place to avoid such increases if they happen, or if you are able to do anything now.
30 July 2024
