In its first few months in office, the new Labour government has highlighted a £22 billion ‘black hole’ in the public finances, as well as repeated warnings of the need for ‘tough decisions’ to deal with problems in the UK economy, the NHS and other areas of the public sector.
This gloomy picture presented by the government has been used to justify cuts to the winter fuel payment and other measures, including potential tax increases ahead. This is the backdrop for the Chancellor, Rachel Reeves’ first Budget on 30 October.
Whilst the expectation is for a tax raising Budget, it is important to recognise that specific plans have not been announced or confirmed by the government at this stage. Accordingly, there is a lot of speculation and scaremongering in the media, but no certainty in respect of what may or may not be in the chancellor’s red box on Wednesday in 3 weeks’ time.
During the general election campaign, the Labour Party committed not to increase the ‘big four’ taxes of income tax, national insurance, VAT and corporation tax. The manifesto also pledged not to ‘increase taxes on working people’. This gives the Chancellor little room for manoeuvre since these four main taxes account for nearly three-quarters of UK tax receipts.
Accordingly, the government may decide to proceed with a combination of tax rises, additional borrowing and changing the basis of accounting. This could include balancing the books over the life of the parliament with some optimistic growth assumptions in future years.
Capital Gains Tax
In respect of potential tax rises in respect of personal taxation, there has been significant speculation regarding capital gains tax (CGT). CGT is charged on the sale of investments not held within an ISA or pension, or on the sale of property which is not an individual’s main residence. Currently, the rates of CGT are half income tax rates for investments and slightly higher for property at 18% basic rate and 24% higher rate. The current CGT rates are likely to increase, potentially to align with income tax, although this may be viewed as counter-productive if it resulted in a significant change in behaviour and taxpayers deciding not to sell assets.
The Chancellor may decide to remove the forgiveness of gains on death and levy a double charge to CGT on gains and then Inheritance tax (IHT) on the value of the asset. This could potentially significantly increase the £15 billion raised from CGT currently. Such a measure would undoubtedly be unpopular amongst families since more than half the value of an asset could be lost in tax if enacted.
The Chancellor could also potentially remove CGT reliefs, such as Business Asset Disposal Relief, often referred to as entrepreneur’s relief.
Inheritance Tax
Inheritance tax (IHT) could also be in firing line for tax raising measures, even though it currently only applies to approx. 4% deaths in the UK and raises around £7.5 billion. Measures which may be announced could include bringing pension death benefits into the IHT regime, as well as removing the IHT relief from business assets (such as AIM shares) and agricultural land (especially if tenanted and not farmed by the owner of the land).
Pensions
There is likely to be a tax raid on pensions since it could raise significant additional tax revenue and may be viewed as politically acceptable by the government. The most likely measure is to restrict or abolish higher rate income tax relief on pension contributions. This is expensive for the Exchequer and benefits high earners disproportionately. A new flat rate of pension tax relief may be introduced to replace the current marginal rate tax relief rule on pension contributions.
As noted above, pension death benefits may be brought within the scope of IHT on death, this is also likely to be implemented on the basis it is a stealth tax and would affect beneficiaries of an estate such as children, not the pension holder or their spouse. Rather less likely is a further restriction or abolition of pension tax-free cash; it would be very unpopular and would most likely impact ‘working people’ as well as wealthier individuals. Moreover, it would undermine confidence in pension saving, something which the government claims it wants to promote.
Council Tax
Council tax is also likely to be increased, especially for more valuable properties and second homes. The government may just raise additional tax within the existing framework, or potentially announce larger scale reforms of the system. This could particularly affect owners of holiday homes.
Stamp Duty
Stamp Duty Land Tax (SDLT) already raises approximately £13 billion and is due to raise more money from next year as temporary increases in thresholds are due to expire. It is viewed by many experts as an economically damaging tax, so SDLT may escape further tax raising measures for now.
Furnished Holiday Lets
Finally, some tax changes have already been announced which will impact many clients. This includes the abolition of the Furnished Holiday Letting (FHL) tax regime from April 2025. In summary, the owners of qualifying holiday let properties will lose many valuable tax advantages. These include a full offset of mortgage interest against rental income for tax purposes; low 10% CGT rate on sale via business asset disposal relief; capital allowances for tax purposes; pension contribution eligibility based on rental income profits; potential small business rates rather than council tax.
Action Required Now
Since individual circumstances vary and almost all the potential tax raising measures are speculation at this stage, it is impossible to generalise in respect of whether it is appropriate to act in advance of the Budget. However, I consider the following may be a useful checklist:
- A higher rate taxpayer should consider accelerating pension contributions this tax year and pay into a pension before the Budget.
- An individual with a General Investment Account (GIA), (ie. investments held outside an ISA or pension) with significant latent capital gains should consider if it is appropriate to take any gains for CGT purposes in advance of the Budget.
- An individual with a furnished holiday let (FHL) property should consider potential planning options including making use of CGT holdover relief to gift the asset. Whilst the FHL regime is due to end on 5 April 2025, it may be sensible to make decisions as soon as possible in case there are further measures announced in the Budget.
If you have any questions or concerns in advance of the Budget, please do not hesitate to contact the office for advice or further information.
Please note that our view on the Budget is based on our understanding and the available information; we cannot be held responsible for any errors, and you should not act on the basis of the information in these articles, nor do they constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch via telephone at 01392 875500 or email at info@SeabrookClark.co.uk.