The first Budget of the new Government will take place on 30 October. Since coming into power in July, the manifesto commitment not to increase income tax, national insurance or VAT rates has been repeated, but alongside a narrative which is becoming increasingly focused on there being a hole in public finances which needs filling – so we can probably expect that measures will be announced to increase tax revenues from somewhere.
So, which taxes may see changes, and what might those changes be?
Pensions
Speculation around the removal of the higher rate income tax relief on pensions has preceded many Budgets in recent years, and this one is unlikely to be an exception. There has even been talk this time around of a possible removal of all tax relief on pensions and the pension then being tax free on eventual receipt. Whilst it seems unlikely that this would be brought in without a period of industry consultation first, nothing can be ruled out.
It is also possible that the favourable Inheritance tax (“IHT”) treatment currently afforded to pension funds may be removed. At the moment, the value of a pension fund sits outside of an individual’s estate on death for IHT purposes; this could be changed so that IHT becomes payable on pension assets.
IHT
Along with Capital Gains Tax (“CGT”), IHT was not the subject of any manifesto commitments not to increase rates, so the current rate of 40% could just be increased.
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. The additional £175,000 nil rate which can sometimes apply where there is residential property passing down through the generations may be removed, especially as the rules around it are complex so this could be badged as “simplification”.
Other “simplification” measures could also include a change in the rules on lifetime giving, which could, for example, see all the current rules replaced by an annual or lifetime allowance, where anything over that would crystallise a tax charge.
Business Property Relief (BPR) is currently a valuable IHT relief which can take the value of qualifying business assets out of IHT entirely, both for lifetime gifting or on death. Whilst it is probably unlikely that the relief would be abolished entirely, there could potentially be lifetime limits imposed, the qualifying criteria tightened, or the scope reduced.
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 BPR. The increase in value whilst it was owned by the deceased is wiped out. This provision could be removed so that once inherited, and if the asset is sold, the capital gains tax would be due on the gain since the original purchase.
CGT
The current rates of CGT range from 10% for business assets to 24% for residential property sales, with 20% applying to all other disposals made by higher rate taxpayers. These rates could simply be increased, or even be aligned with the income tax rates (currently up to 45%).
The 10% CGT rate on business assets applies where Business Asset Disposal Relief (BADR), formerly Entrepreneurs’ Relief, is available. The lifetime limit for this relief was reduced to £1m a few years ago, this could be reduced further, or the qualifying conditions tightened.
The CGT annual exemption has already been cut to £3,000 so most gains will now attract tax, but this could potentially be reduced yet further.
The various CGT reliefs currently available may be withdrawn, or the qualifying conditions may be tightened. One example is “holdover relief” on gifts of business assets or transfers into trust, which means the capital gain is deferred, and CGT is only payable by the recipient on an eventual sale. Another example is Rollover Relief, which enables the gains on the disposal of certain assets to be deferred into the purchase of replacement assets.
Income Tax and National Insurance
It should be noted that, whilst the Government has committed not to increase 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 which 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.
There could also be a tightening up the rules and removal of certain reliefs, such as with the abolition of the Furnished Holiday Let rules which it has recently been confirmed will go ahead from April 2025.
Whilst there was 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.
With so much uncertainty, flexibility will be key.
If you would like to discuss any personal tax matter, please do get in touch and one of our team will be happy to talk through things with you.
