Rachel Reeves, the UK’s first female chancellor, will deliver her Budget this Autumn and with Government debt of £22bn, we are likely to see significant changes announced.
As part of their manifesto, Labour pledged not to increase “working taxes,” with Rachel Reeves confirming that they would not raise National Insurance, Income Tax, Corporation Tax, or VAT. However, she didn’t rule out potential changes to Inheritance Tax (IHT), Capital Gains Tax (CGT), or pension taxation, all of which could be on the horizon.
In addition, Rachel Reeves confirmed that VAT on private school fees will be applied from January 1, 2025, with any payments made before this date or for the January term being taxed from July 29, 2024, onwards. Labour has also confirmed its intention to proceed with the Conservative’s plans to abolish the furnished holiday lettings (FHL) regime, effective from April 2025.
Additional changes to the UK non-domicile regime were also announced. This means that individuals who have been resident in the UK for more than four years will pay UK tax on their worldwide income and gains.
Not only that but Labour also confirmed that the proposal for a four-year Foreign Income and Gains (FIG) regime will remain unchanged, allowing qualifying individuals to elect for foreign income and gains to be exempt from UK tax, regardless of whether the income or gains are brought to the UK. We expect more to be announced here, including details on the introduction of a rebase rate on foreign assets, plans for a Temporary Repatriation Facility, and the end of the use of Excluded Property Trusts.
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With so much potentially changing and many details still to be clarified, we are hosting an Autumn Budget webinar on 5 November where we will talk through the announcements and answer any of your questions on how you could be impacted. Let’s navigate these changes together!
Budget rumours
Capital Gains Tax
To some extent, CGT has already been squeezed with the reduction to the Annual Exempt Amount (AEA), now sitting at £3,000, and increases in rates applied to residential property, as well as the reduction in Business Asset Disposal Relief.
Therefore, increasing the CGT rate now seems most likely. The worst-case scenario would be the alignment of CGT rates with Income Tax, we could also see an introduction of different tax rates for different assets including residential property, investment and business assets.
If we do see an increase in CGT rates, we also expect this to be coupled with an increase in the Business Asset Disposal Relief (Entrepreneurs Relief) on selling your business from £1m. Labour could also increase the tax paid on dividends.
Another unlikely move could be the removal of Principle Residence Relief (PRR), however it is more likely we could see it 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 from the new Government.
On death, Labour could remove the CGT uplift from assets that qualify for relief from IHT including businesses, agricultural property, transfers to spouse etc. If this were to happen, Labour would need to consider how this is introduced without forcing the breakup of businesses (and similar assets) on death to pay the liability.
Pensions
Labour has confirmed that it will not reintroduce the Lifetime Allowance (LTA) however it could consider a flat relief on pension contributions (as opposed to linking this to tax rates). This has been discussed for many years so seems unlikely.
A more likely scenario is the reduction of the Lump Sum Allowance (LSA) and addressing the taxation of pensions on death. Following the abolition of the LTA, 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 – receiving tax relief on contributions; tax-free investment growth and then passing the funds on tax-free on death. Given the level of wealth stored up in pensions, we expect that the Labour may seek to tax pension funds on death moving forward.
Inheritance Tax (IHT)
The number of estates paying IHT has increased significantly over the years due to inflation and frozen thresholds. It is therefore no surprise that any changes introduced will raise concerns. Some of the areas the Government could look to remove are Business Relief on AIM assets, limiting Agricultural Property Relief to working farmers, or changing the seven-year gifting rules.
By and large, there is little to plan for here. For those already planning, it’s worth considering how you make use of the current gifting allowances sooner, rather than later.
Business Property Relief (BPR)
Business Relief (BR)
Rumours are swirling around significant changes to BR, a valuable IHT relief for business owners, which could now be capped at £500,000 per person. This would be a drastic move from the current system, where BR can provide up to 100% relief on qualifying business assets (typically shares in a trading company).
Capping BR could have a catastrophic impact on business owners, the most damaging being the possibility that business assets may need to be sold to fund the tax bill. The Government will need to consider how they balance the need for increased tax revenue with the importance of supporting business continuity.
An alternative to setting a cap may be to tighten criteria on what can be considered ‘qualifying’ for within the business, resulting in the need for the business owners to consider separating trading activities and what could be considered ‘investment assets’ into different entities.
A Business tax roadmap has been promised within six months of Labour being elected into Government so whilst we do expect changes, these are unlikely to be implemented immediately, giving individuals, families and businesses hopefully time to plan.
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