The first Budget of the new Government is due on 30 October. While it was expected that there would be tax rises and changes to certain legislation, it has now become apparent that these changes could come in far earlier than expected and even from 30 October. So which taxes could be affected and what should you do?
The Government has repeated its commitment not to increase income tax, National Insurance or VAT rates. But, on Capital Gains Tax (CGT) and Inheritance Tax (IHT), the Government has so far stayed silent, so it seems reasonable to assume that these may be on the rise. So what could the changes be?
Capital Gains Tax
The current rates range from 10% for business assets, 24% for residential property sales and 20% for all other disposals. The rates could be aligned with income tax (currently up to 45%) and certain reliefs could be withdrawn or cut.
Currently, certain transactions can attract “holdover relief”, notably gifts of business assets or transfers into trust, which means the capital gain is deferred and CGT is only payable by the seller on an eventual sale. This relief could be withdrawn, or restricted.
Business Asset Disposal Relief (BADR), formerly Entrepreneurs’ Relief, which gives the 10% CGT rate, had the lifetime limit reduced to £1m a few years ago. This could be reduced further, or the qualifying conditions tightened.
The annual exemption has already been cut to £3,000 so most gains will now attract tax, but this could potentially be reduced yet further.
Inheritance Tax
The current rate is usually 40% and this rate could rise. The Nil Rate Band, within which the IHT rate is 0%, has been frozen at £325,000 for some time and to at least April 2028, so this could be frozen for longer, or even reduced.
As well as increasing the rates, there are a number of reliefs currently available which could be withdrawn or reduced.
Business Property Relief (BPR) and Agricultural Property Relief (APR) are valuable reliefs that can take the value of qualifying assets out of IHT entirely, both for lifetime gifting or on death. While it is probably unlikely that the reliefs would be abolished entirely, there could potentially be lifetime limits imposed, the qualifying criteria tightened, or the scope reduced. For example, at present AIM shares qualify for BPR if held for two years. This could go, as could the chance of obtaining APR on a farmhouse.
Lifetime gifting, in particular, has a number of reliefs that are at risk of being withdrawn or changed.
At present, if you make gifts out of “excess income” (i.e. annual income that you do not need and do not spend), the gifts leave your estate immediately. This could be withdrawn.
There are also various annual amounts that you are able to give and they are treated as leaving your estate immediately. While the amounts have not been increased for many years, and so the value eroded over time, these could just be removed entirely.
For most other gifts, known as “Potentially Exempt Transfers” or “PETs” for short, these fall outside of your estate after seven years. During that period, if you die, the tax tapers from 40% down to 0% in year 7. This has long been criticised for adding complexity to IHT, so a withdrawal and replacement by, say, an annual allowance where anything over that would crystallise a tax charge, could be badged as “simplification”.
The scope of IHT could be extended. At the moment, the value of a pension fund sits outside on an individual’s estate on death for IHT purposes. This could be changed so that IHT becomes payable on pension assets.
The interaction between IHT and CGT may also be changed. At the moment, there is a CGT uplift on death, meaning that all assets are inherited at their market value at the date of death, even if no IHT has been paid on that value – for example, if the asset qualifies for APR or BPR. If the asset is subsequently sold, CGT is only payable on the increase in value since it was inherited, the increase in value while it was owned by the deceased having been wiped out. This provision could be removed so that once inherited, if the asset is sold, the Capital Gains Tax would be due on the gain since the original purchase.
The IHT-take could also be increased by certain measures that are not directly related to tax rates or allowances. For example, at present, if a Will has not been drafted in a particularly tax-efficient manner, a Deed of Variation can be entered into which effectively re-writes the Will to achieve a more desirable tax outcome for the estate. For years it has been expected that the ability to do this will be withdrawn.
And what of the other taxes…
It should be noted that, while the Government has committed to not increasing income tax and National Insurance rates, this does not prevent an extension of the freezing of the tax bands – which means effectively a rise in tax. One income tax rate that could potentially see an increase is that on dividends, which are currently taxed at lower rates than other income sources, across all the tax rate bands. There may be a levelling up of dividends so that they are taxed at similar rates to other income, or even making dividends paid by owner-managed businesses subject to National Insurance.
The removal of higher rate income tax relief on pensions, or even the removal of all tax relief on pensions and the pension then being tax free on eventual receipt, could bring in short-term revenue gains for the Government.
There could also be a tightening up of the rules and the removal of certain reliefs, such as the abolition of the Furnished Holiday Let rules which has recently been confirmed will go ahead from April 25. While there was also a commitment not to raise VAT rates, it had already been announced that there will be VAT on private school fees from January 25, so we may see more in the way of this sort of change.
So what should people do now? If you were thinking of making any gifts or selling an asset, or making other significant changes to your financial position, it would seem sensible to consider making these before 30 October. However, you must seek the appropriate specialist advice from your tax and financial or investment advisor beforehand. With so much uncertainty, flexibility will be key, so you should revisit your affairs to ensure that they are structured in the most tax efficient and flexible way and that they still meet your overall objectives.
If you’d like to discuss any personal tax matter, please get in touch with me at suzy.harris-milnes@bhp.co.uk or another member of our Senior Private Client Team and we will be happy to talk through things with you.
