Keir Starmer’s speech on Tuesday will have caused alarm for many taxpayers and business owners – it contained a clear warning that the Autumn Budget will be painful for many, especially those with ‘the broadest shoulders’ (which arguably seems to include a lot of middle-income earners these days).
Whilst Labour has ruled out rises in Income Tax, NIC or VAT in the short term, that still leaves plenty of scope for raising revenue through Capital Gains Tax (CGT) or Inheritance Tax – as well as making other changes right across the tax system.
Some taxpayers – including many of our clients – are now wondering if they should take action before the Budget on 30 October 2024.
Let’s consider some ideas…
Capital Gains Tax
Speculation about an increase in CGT rates, perhaps coupled with a reduction in available reliefs, is widespread.
It may be worth considering crystallising gains now whilst the existing rates (up to 20 per cent or 24 per cent for residential property) remain at relatively low levels.
Investors with share portfolios might be thinking about ‘rebasing’ their holdings right now, though care must be taken not to be caught out by the share matching rules – this planning does not work if within 30 days of a disposal the same shares are reacquired.
It might also be worth thinking about consolidating capital losses where these can be relieved against future gains – the savings that might be realised could increase if CGT rates go up this autumn.
Pensions
Many commentators think that existing pensions rules could be changed – possibly limiting the amount of Income Tax relief that is available on personal pension contributions.
The existing relief is very valuable, particularly for higher rate taxpayers – but very expensive for the Treasury.
And whilst Labour recently rejected the idea of reinstating the (much maligned) Lifetime Allowance, a U-turn on this cannot be ruled out.
Taxpayers might consider maximising contributions now whilst the current rules on Income Tax relief remain in force.
Contributions to a child or grandchild’s pension (of up to £2,880 net per tax year) can also attract a measure of tax relief under current rules so this may also be worth a closer look.
Could the 25 per cent tax free lump sum be targeted for reform?
Those who may be in a position to do so now, or in the near future, might wish to think carefully about the timing of any withdrawal(s).
A downside of accelerating any drawdown may be that once the cash is no longer in a pension, if it is invested, then income and gains on the investment may be taxed.
Could the Annual Allowance be reduced from £60k back to £40k (or some other, lower amount)?
This is possible, but perhaps unlikely to take effect before next April.
But some taxpayers will be tempted to take full advantage now, while the allowance remains (for most) at £60k.
Employers
A further increase in Corporation Tax this time looks reasonably unlikely (though nothing can be ruled out altogether).
Many companies are already dealing with the impact of the increase in the main rate from 19 per cent to 25 per cent which took effect in April 2023.
Owner-managed businesses should of course continue to review all options to maximise profits and growth.
In a tax context this could include
- Reviewing existing remuneration/ profit extraction arrangements to ensure they remain optimal, pre- and post- Budget.
- Considering employing family members within the business
- Reviewing the approach to distributing profits among family members.
Company directors who are interested in optimising remuneration arrangements for employees may wish to look again at the benefits of tax-advantaged share schemes such as EMI share options.
Inheritance Tax
A lot of commentators think that the government has IHT in its crosshairs.
Personally, I think some of the speculation (for example about abolishing Business Relief or Agricultural Relief) is probably going to be wide of the mark, but other reforms (such as reducing the Nil Rate Band or perhaps extending the ‘seven-year’ rule on gifting to a longer timeframe) could be on the cards.
Taxpayers should therefore consider what action might be taken now on the IHT planning front.
Those who are in the fortunate position of being able to gift assets to children or grandchildren might consider accelerating any gifting plans in the hope that any changes to the rules in October do not have retrospective effect.
Under the current system, gifts to individuals are not brought back into the donor’s estate (for IHT purposes) provided they survive seven years from the date of the gift.
Taxpayers should also remember that the rules on ‘gifts out of normal income’ provide an incredibly generous tax break and it isn’t known whether the government might seek to change or abolish this rule in the autumn.
Taking out an insurance policy to shield against the impacts of an unexpected IHT liability will also be on the minds of some families.
Savings
Tax-efficient savings ‘vehicles’ are in renewed focus for those with significant personal savings.
For example, income and gains within an ISA are not subject to Income Tax or CGT.
If tax rates go up in October or next spring, then the savings that can be achieved through tax-efficient vehicles and investing will also increase.
Plenty of investors will routinely sell shares in their general portfolio and re-invest the proceeds into an ISA (‘bed and ISA’), to maximise the use of the annual £20k allowance.
Using a spouse’s ISA allowance, as well as one’s own, may also be relevant, though of course this does raise questions about loss of control.
Give it all away?
Finally, if you would rather direct some of your wealth to charity (rather than to the Government) then remember that there are some tax breaks available to help you.
I’m not aware of any moves by the government to change these – it’s pretty unlikely they would – so these points are worth thinking about at any time, really!
Donations to charity under the Gift Aid scheme attract income tax relief.
Broadly, the charity reclaims 25p from HMRC for every qualifying £1 received.
Donors who are higher rate taxpayers can claim relief for the difference between the basic rate and the higher rate on their Self-Assessment tax return.
Donations of land, property or shares to a charity attract both Income Tax relief (by deducting the value of the donation against taxable income) and CGT relief.
And finally assets left to a charity in a will are not subject to IHT (and if at least 10 per cent of the estate is left to charity then the rate of IHT on the remaining estate is reduced from 40 per cent to 36 per cent).
Whilst changes in the UK tax system rarely (if ever) have any retrospective effect, they sometimes do have immediate effect (with ‘anti forestalling’ measures also popular these days).
So, it would be wise to consider whether any appropriate tax planning action should be taken before 30 October 2024 rolls around.
