As the UK government prepares for the October budget, the anticipated tax changes will play a crucial role in shaping the economic landscape for the coming year. Policymakers must carefully strike a balance between supporting growth and maintaining fiscal health. Clear communication regarding the rationale behind these changes will be essential for public understanding and acceptance. The outcomes of this budget could have lasting effects on the UK economy, influencing everything from consumer spending to business investment and overall economic stability.

Rachel Reeves has been very clear that taxes will need to be raised and has been very clear that this will be “painful” and those with the “broadest shoulders should bear the heavier burden.”

SO WHAT DO WE KNOW?

Reeves has repeated she will not raise income tax, VAT, corporation tax or national insurance. In the case of national insurance contributions, it is not clear if this includes employers’ contributions which are currently about 13.8% which is lower than many EU countries (in Germany it is 19% and Italy 30%).

SO GIVEN SHE NEEDS TO RAISE REVENUES, WHICH TAXES COULD BE HIKED?

The taxes that have not been given pre-budget protected status include:

• Capital gains tax;
• Inheritance tax;
• The tax treatment of contributions to and withdrawals from pension schemes;
• Property taxes and in particular council taxes
  

CAPITAL GAINS TAX

Capital gains tax rates for higher rate taxpayers are currently 24% on residential property, 20% on gains on most other assets and 28% on what is referred to as “carried interest” (this mainly affects private equity managers). These rates compare to the top marginal rate of income tax of 45% (47% if national insurance is included).

The last time we saw a big increase in the rate of capital gains tax was in Nigel Lawson’s famous tax cutting budget in 1988 when he raised capital gains tax from 30% to 40%. One of the lessons from this hike in the capital gains tax rate was that it resulted in a big fall in capital gains tax receipts. This should come as no surprise because capital gains tax is (for most taxpayers) a voluntary tax. It only applies if you sell or gift an asset that is pregnant with a capital gain. If you don’t have to sell or gift the asset there is no tax and one of the unintended consequences of a rise in the rate of capital gains tax is that this distorts the market.

Despite the lessons learned from the Lawson rate hike the optics of leaving the rate of capital gains tax at what are historically low rates does not sit well against the backdrop of the broadest shoulders mantra which makes an increase a likely option.

Other possible reforms could include:

• Reinstating a flat rate of 30% (which was the rate charged on gains from 1965 to 1988).
• Reforming the current exemption on the sale of principal private residences – many countries apply a roll over relief (i.e. if you reinvest all of the proceeds from the sale of your private residence in a new private residence there is no liability to tax but a partial rollover will attract capital gains tax).
• Introducing a higher rate of capital gains tax on short term gains.
• Introducing capital gains tax on what are referred to as “exempt assets”. These are assets that are exempt from capital gains tax and include assets such as wine, vintage motor cars, and gold sovereigns.

Action points

Ahead of the budget, possible tax planning options include:

• Review any assets pregnant with a capital gain that are non-core and look at selling before 30th October.
• For liquid assets (shares, securities etc) there is an opportunity to crystallise capital gains at the current rate of 20% and lock in a higher base cost going forward. There are “bed and breakfasting” rules that prevent an immediate sell and buy back but provided these are observed the gain is triggered on sale.
• If you own any “exempt assets” look at selling and buying back before 30th October.
  

INHERITANCE TAX

The current rate of inheritance tax is 40% levied on estates that exceed £325,000 (this increases to £500,000 if you own your own home, pass this to your children or grandchildren and your estate is worth less than £2 million. There are various reliefs for interspousal gifts, lifetime gifts (the seven-year rule) and for business assets (business property relief).

As this is a tax on wealth this is an easy target where the “broadest shoulders” could be leaned on to pay a greater share.

Possible reforms could include:

• Introducing progressive bands of inheritance tax starting at say 25% and increasing to 50% on larger estates.
• Reducing and/or capping the current 100% business property (BPR) and agriculture property (APR) reliefs.
• Tightening the BPR and APR qualification criteria (e.g. removing the relief for AIM shares and less active farmers).
• Reforming or even abolishing the current seven-year rule for lifetime gifts (currently if you make a lifetime gift and survive for the following seven years there is no inheritance tax on that gift). Removing the inheritance tax exemption for residuary pension funds.

Action points

Ahead of the budget, the main tax planning option is to:

• Look at accelerating lifetime gifts. If you were considering making lifetime gifts at some point in the future and you are able to make this gift now, do consider doing this before 30th October.
  

PENSIONS AND ISAS

There has been significant reform of the tax relief on contributions to pension schemes and the pension pot values that are eligible for tax favourable treatment. It seems unlikely that the annual and lifetime allowance will be subject to further change given the assurances that the government have made. Therefore, the most obvious change on the current pension arrangements would be to limit relief on contributions further to say 30% or removing relief at the higher rates (45%). Given the impact a change like this would have to those who have defined benefit schemes (especially those in the NHS who the previous LTA reforms were designed to assist) it is unlikely we will see these changes as there are more simple and coherent ways in which revenue can be raised.

Currently for anyone over the age of 55 it is possible to take up to 25% of any pension as a ‘tax free’ lump sum up to a maximum of £268,275. This amount is higher in certain cases where the pension qualifies for enhanced protection. This pension benefit has an estimated long-run annual cost of £5.5 billion. It has already been capped by the last government and further change would involve an element of retrospection. Constant change and uncertainty in an area which requires long term commitment and stability to encourage saving for retirement is undesirable. Again, our view is that it would be unlikely that further changes would be made given the reforms we have already seen in this area.

In response to the gradual squeeze on pension contributions ISA’s have grown in importance as a part of an individual’s retirement planning. The current ISA rules allow for a £20,000 contribution in each tax year. This has been the case since the 17/18 tax year and is unlikely to be reduced.

Action points

Ahead of the budget it would be prudent to:

• Top up ISAs before 30th October if funds permit.
• Likewise, if you are considering taking a pension tax free sum, it may be prudent to arrange this before budget day.
  

PROPERTY TAXES

Economists have long argued that a progressive economy should move to taxing property and away from taxation on income and purchases (VAT). Notwithstanding this economic argument the one thing that is very apparent is that the current council tax regime is not fit for purpose. There are two main issues with the current council tax regime

1. Council tax is capped – very valuable properties don’t pay a lot more than very small properties in the land. Is it fair that the council tax on a semi-detached house in Bolton is higher than the council tax payable on a £100m penthouse in Knightsbridge?
2. Council tax is based on outdated valuations and local authority spending which is why the average council tax bill in the likes of Knightsbridge will look out of proportion to the likes of Bolton.

Successive Governments have steered clear of council tax reform (perhaps the memory of Thatcher’s poll tax still lingers) and it will be interesting to see if this government has the appetite to tackle a long overdue overhaul.

NON-DOMS

There are currently around 74,000 non- domiciled people in the UK and before changes announced by the previous Chancellor, Jeremy Hunt, they were allowed to avoid liability for UK tax on their overseas earnings. Although (in the past) non-dom overseas income has not been subject to UK tax, in 2022-23 they paid around £9bn on UK income and gains.

Jeremy Hunt announced changes to the non-dom tax exemption that would be phased in for existing non-doms and provide exemption for four years for new non-doms arriving in the UK. The concern in the non dom community is that Reeves will accelerate the non dom changes in her 30th October statement.

The current uncertainty is seeing heightened interest from many other jurisdictions trying to tempt the UK non-dom and HNW community. As one non-dom said, “I would like to continue living in the UK but I cannot afford to die in the UK.”

Assuming we see reforms that will increase the tax burdens of the wealthy we expect to see more international movement and tax planning as the benefits of other tax jurisdictions increase.

VAT ON SCHOOL FEES

The Government has published details for the removal of the VAT exemption on fees paid to private schools. This change is to be effective from 1st January 2025 but unfortunately there are a number of unresolved issues and we are awaiting further guidance from HMRC.

OTHER TAXES

The budget will no doubt cover the plethora of other taxes, insurance premium tax, air passenger duty, fuel duty, tax on alcohol and the like. The one “other” tax that stands out to be reformed is stamp duty on shares and securities where the current rate in the UK is higher than any other country in the OECD except for Ireland.

There are also long-standing reliefs aimed at encouraging investment (such as the Enterprise Investment Scheme) and against a backdrop of “growth is the number one priority” any reform to these allowances would hopefully be most unlikely.

IN CONCLUSION

The Reeves’ budget on 30th October has overtones of the George Osborne first budget delivered on behalf of the newly elected Conservative government on 22nd June 2010. Osborne spelt out a budget that was “tough but fair” and essential to tackle Britain’s record debts. Sounds familiar?

Whilst we can only make recommendations based on current legislation, we do anticipate that the budget on 30th October will bring changes to the current tax regime that will impact you. There are clearly other considerations in addition to potential tax saving (cash flow, transaction costs etc) but the general principle is to look at the risk against the benefits of any action in a holistic manner.

If you would like to discuss this further in advance of the budget, please do let us know.

We will be working hard after the budget to ensure any changes that could impact you are addressed as best as is possible.