Potential Tax Reforms: The upcoming Autumn Budget may introduce significant changes to Capital Gains Tax, Inheritance Tax and pension taxation to address a £22 billion shortfall.
Possible changes: Capital Gains Tax increases, removal of Inheritance Tax reliefs and reduced pension tax benefits.
Planning steps: Strategies such as crystallising gains, accelerating asset sales, early gifting, and maximising pension contributions before potential tax changes take effect can be considered.
The upcoming Autumn Budget on 30 October presents significant financial challenges in an attempt to raise tax revenue, with the Labour government’s commitment to avoiding increases in income tax, national insurance, VAT and corporate tax rates.
Given this, there are key areas that could see reforms in an effort to address the supposed £22 billion shortfall in the Treasury’s coffers. Three notable personal taxes - Capital Gains Tax (CGT), Inheritance Tax (IHT), and pension taxation - may be subject to changes, and individuals should consider strategic planning in advance.
CGT is currently applied at various rates, ranging from 10% to 28%, based on the individual’s marginal rate of tax and the type of asset being disposed of.
In 2022/23, CGT generated £14.4 billion, representing less than 2% of overall tax revenue. Given the government’s need to raise funds, CGT reforms could include:
Increased CGT rates, potentially aligning with income tax rates (40% or 45%). However, this may drive behavioural changes that adversely impact economic growth, such as asset retention or individuals moving abroad and it could necessitate reintroducing indexation relief to reflect inflation-adjusted gains.
Removal of CGT rebasing on death, meaning inherited assets would not benefit from a CGT uplift, especially if they are exempt from inheritance tax. In its January 2020 report on inheritance tax reform, the All-Party Parliamentary Group identified this as a potential area for legislative change.
Reduction or removal of Business Asset Disposal Relief (BADR) or Investors Relief, both of which currently offer a 10% CGT rate for qualifying business disposals. The removal of these reliefs could limit their attractiveness but may not generate significant additional revenue.
Crystallising gains: Individuals with embedded gains in investment portfolios may consider crystallising these gains before any rate increases.
Accelerating asset sales: If practical, bringing forward business transactions, property sales or gifting could lock in current CGT rates before potential increases. In doing so, individuals need to have clarity on their existing balance sheet and cash flow needs before proceeding with gifting assets.
Non-residency considerations: Those already considering leaving the UK could become non-resident before disposing of assets embedded with gains.
However, CGT is still payable on UK property and land regardless of the individual’s country of residency. In addition, temporary non-resident legislation could result in any disposals during a period of non-residency becoming liable to UK tax if the individual becomes a UK resident again within five years.
Tax-efficient investments: Utilising Enterprise Investment Schemes (EIS) or Seed Enterprise Investment Schemes (SEIS) could defer CGT liabilities.
IHT is charged at 40% on estates above the nil-rate band (£325,000) and can also apply to lifetime gifts and trusts. It is forecast to raise £7.5 billion in 2024/25. Spouses can inherit their deceased spouses unused nil rate band meaning IHT would only then be payable on the estate in excess of a combined nil rate band of £650,000.
Potential changes include:
Restrictions or removal of business or agricultural property relief; APR and BPR are designed to promote the continuity of family businesses. Removing or limiting these reliefs could hurt multi-generational businesses.
Introduction of a gift tax, replacing the current exemption for potentially exempt transfers (gifts made within seven years before death).
Removal of the residence nil-rate band, simplifying IHT calculations and potentially raising additional revenue. This relief reportedly cost the Government £1.8 billion a year.
Domicile rule changes already proposed by the Government could see residency, rather than domicile, becoming the determinant for IHT liability on worldwide assets for UK residents.
Early gifting: Individuals already planning to make gifts should consider bringing forward these transfers before potential changes. As previously mentioned, reviewing own balance sheet and cash flow needs would be essential before making any gifts.
Agricultural or business property planning: Businesses may need to evaluate succession plans in light of potential restrictions or changes introduced in the budget to existing tax reliefs.
Pension nominations: Whilst not specifically related to the budget, reviewing and updating pension death benefit nominations may ensure that assets outside of the estate are directed according to personal wishes.
Pensions currently offer significant tax relief on contributions, costing the government £27 billion in 2022/23. With recent reforms removing the lifetime allowance, several areas of pension taxation could be targeted for changes:
Reduced tax relief on contributions, particularly for higher earners, which could discourage pension savings. If pension income continues to be taxed, this may result in double taxation for some individuals.
Removal or reduction of tax-free lump sums, currently set at 25% of pension funds, could increase government revenue but significantly reduce the attractiveness of pensions as a tax-efficient savings vehicle. Additionally, it would be necessary to navigate the differences between defined benefit and defined contribution pensions to ensure consistency in any legislative changes.
Introduction of IHT on pensions, which could result in a 20% tax charge on pension funds after death.
Advance pension contributions: High earners with predictable income could consider maximising contributions before the budget to lock in current tax reliefs.
Tax-free cash allowances: It is essential to avoid making any hasty decisions regarding the withdrawal of tax-free lump sums. Historically, pension changes have included transitional arrangements to protect individuals adversely affected by the legislative change.
Pensions remain highly tax-efficient vehicles and are currently excluded from the estate for inheritance tax purposes. Individuals should seek specific advice to review their own situations before making any decisions.
Review pension beneficiary nominations: Ensuring that pension death benefit nominations are up to date can optimise estate planning and minimise tax liabilities.
The upcoming budget poses several potential tax changes, especially in CGT, IHT and pensions. Individuals should consider pre-emptive planning, particularly where they have substantial assets or investment portfolios that may be affected by increased rates or changes in tax relief. Seeking tailored financial advice is crucial to ensuring that any actions taken ahead of the budget are appropriate and align with long-term financial goals.
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