By Nikki Spoor, White Hart Associates Travel, Audit and Tax Director
The new Labour government launches its much-anticipated autumn budget on October 30th. A rise in income tax, National Insurance or VAT have already been ruled out, so how will the government raise finances? Here we look at the possibilities.
Capital Gains Tax (CGT)
Prime minister Sir Keir Starmer calmed some nerves among homeowners by ruling out charging CGT on primary residences. However, it’s likely that CGT rates generally could be raised or reliefs removed to bolster the Treasury coffers.
One thing seems certain; there won’t be any increase in reliefs or decrease in rates as Chancellor of the Exchequer Rachel Reeves has repeatedly talked about the ‘black hole’ in the finances being larger than expected.
Media outlets have said Reeves is considering increasing CGT rates to match those on income tax. The highest rate of CGT is 24% on non-business assets, compared to the top rate of income tax of 45%.
Applying the 45% rate to all types of assets is likely to be at odds with Labour’s claim to want to encourage wealth creation, so business assets may continue to be taxed at a reduced rate. Currently, under Business Asset Disposal Relief, unquoted shares that are part of a personal trading company attract a much lower CGT rate of 10% on gains of up to £1m.
Meanwhile, second homes and holiday-let properties could be seen by Labour as an easy target for further rate rises as, in the current climate, there is unlikely to be much sympathy for people who own multiple properties.
In their meetings with top investment managers, Labour has suggested that any tax rises announced in October would not be applied until the beginning of the next tax year, from April 6, 2025. This ‘grace period’ may lead to a quick injection of cash for the government as taxpayers rush to sell property and pay the lower rate of CGT.
However, this is by no means guaranteed and we are currently working with clients to ensure that all clearances for share buy backs, sales of company shares, solvent liquidations, property sales, employee share schemes, EIS share assurances, reorganisations and capital distributions are on track to complete before the budget.
It is advisable that clients review with their financial advisors any listed investments, property portfolios or share portfolios to assess whether any sales should be accelerated to guarantee paying the current rate of CGT.
Inheritance Tax (IHT)
IHT is hated by many, as it is seen as a tax on money that has already been taxed. However, it is an area that could be targeted as it affects less than 4% of estates and is another tax that is often viewed as only affecting the very wealthy.
Currently, the IHT rate is 40% on anything over £325,000 in your estate. It has remained unchanged since 2009, so many more people have been affected as property prices have risen. There is also an additional exemption of up to £175,000 for the sale of your private residence, if the full estate is worth £2m or less.
Other suggested targets are Business Property Relief (BPR) and Agricultural Property Relief (APR), which allows people to pass on family firms or farms, in some cases free of IHT. This allows continuity of business and removing the reliefs will have a significant impact.
The laws on gifting to avoid IHT could also be changed. Gifts to individuals are tax-free if you survive for at least seven years after making the gift and are a popular way for wealthy individuals to pass on assets, while they are relatively young and in good health. If you don’t survive 7 years, tax is due on a sliding scale, depending on the date of death; someone who dies 6 years after gifting will attract an IHT of 8%, while passing on within three years of gifting will leave the recipient with a 40% bill. Labour may consider increasing some of the rates or scrapping the 7-year rule altogether.
It is advisable that anyone planning any gifts or transfer of shares to family members accelerates the process to ensure they qualify for relief under the current legislation.
Pension Tax Relief (PTR)
Sir Keir has already pledged that the lifetime limit on the amount you can build up in a pensions savings pot without triggering a tax charge, previously set at £1.073m and removed by the Conservatives, will not be re-instated.
However, a two-stage pension review has already been launched by the Chancellor and she could also announce changes to pension tax relief.
Currently, savings to a pension pot get tax relief at source on contribution, depending upon the rate of income tax paid. Basic rate taxpayers get 20% relief, while higher rate and additional rate taxpayers are entitled to 40% and 45% relief respectively. It’s possible that the higher and additional rate tax relief bands could be scrapped and limited to 20%. Alternatively, some studies have suggested Reeves’ preference is for a flat rate of 30% for everyone.
Meanwhile, the pension ‘carry forward’ rule could be amended or reduced. Currently you can pay £60,000 per year into a pension before incurring tax and the rule allows you to take advantage of any unused annual allowances from the previous three years, provided earnings are at least equal to the amount you are contributing.
Tax relief for company contributions to an employee pension scheme operate differently in that they obtain corporation tax relief on gross contributions made as part of trading expenses. The employee’s annual income and annual relief are still taken into account, so where possible it may be worth accelerating the contributions for the tax year 2024/2025 to secure certain tax relief under current legislation, in addition to utilising the ‘carry forward’ rule if applicable.
The other area of pension tax under scrutiny is the tax-free lump sum, where you can take up to 25% of your pension tax-free, up to a maximum of £268,275. Some who fear this may be scrapped or reduced are planning to secure the 25% earlier than planned, before the budget, with the aim of re-investing it if the lump sum is not affected.
It is likely that something will happen to pension taxation and we advise clients to discuss their options with their financial advisors and the implications of any new action.
Corporation Tax (CT)
Labour is keen to be seen to be on the side of business and Reeves has stated there will be no increase to the 25% rate, hence there has been little discussion on CT.
There may be a cut on the rate but as Reeves has been quiet on this area it is difficult to plan for any eventuality regarding CT.
Summary
I’ve summarised the current pertinent talking points but without a crystal ball or perhaps the intervention of Derren Brown, it’s impossible to know what will happen. It’s never wise to plan based on what might happen as historically there have been some left-field changes that few anticipated. However, if there is anything within your control that you wish to change or a planned event in the future, it is worth considering the timing of your actions.
White Hart Associates are specialist accountants for the travel industry. Visit whitehartassociates.com or contact 0208 878 8383 for more information.
