On Wednesday 30 October, months of speculation and rumours are coming to an end.
The Chancellor of the Exchequer, Rachel Reeves, will deliver the first Autumn Budget of a Labour Government in almost 20 years.
It’s expected to be a big one, with plenty of changes to the taxes you pay and the laws you adhere to.
At our offices, the Scholes team have been discussing the potential announcements that could be made and their implications for our clients.
The speculation is that Rachel Reeves could make changes or alterations to the following issues:
- Capital Gains Tax – impacting transactions involving land and property, shares and other chargeable assets
- Inheritance Tax
- Pensions
- Corporation Tax
- CGT Business Asset Disposal Relief (BADR)
- Dividend Tax
- ISAs
- IHT Agricultural Relief
Remember, if you are affected by any of these, we strongly suggest you speak with a qualified tax adviser or accountant as soon as possible post-Budget.
With that being said, here are some of our final predictions and thoughts before the Budget is delivered.
Capital Gains Tax
One of the most hotly debated topics leading up to this Budget has been Capital Gains Tax (CGT).
Significant increases in CGT rates – potentially even an alignment with Income Tax rates -could lead to higher tax bills.
This would be a significant change, as it would increase the effective tax burden on those selling assets like shares, second homes, or other investments.
For those of you in the higher tax brackets, this could mean a jump from 20 per cent to as high as 40 or 45 per cent.
If this change is introduced, it may deter individuals from disposing of assets unless absolutely necessary, especially given the current economic climate.
Another rumour is the removal of the £3,000 CGT exemption, which would mean that more modest investors and property owners could also find themselves subject to taxation on smaller gains. It’s unlikely they will remove the exemption altogether, but a further reduction to around £1,500 is conceivable.
While this might seem insignificant to some, the accumulated impact on those relying on asset sales for income or future retirement plans would be a concern.
Additionally, there’s also been speculation about changes to the inheritance of assets, particularly around preventing the resetting of assets' market value at death.
If the current system, which allows for a ‘step up’ in value on death, were scrapped, it would mean that heirs could face much higher CGT liabilities if they eventually sell inherited assets.
This change would particularly affect those who have significant family wealth tied up in property or investments.
Inheritance Tax
Inheritance Tax (IHT) has long been a thorn in the side of many families, particularly those who have spent a lifetime building wealth only to have it taxed heavily upon death.
Some speculation suggests that this Budget may bring further IHT changes, with whispers of both an increase in the IHT rate and a lowering of the Nil Rate Band (NRB).
Currently, the NRB sits at £325,000, after which estates may be taxed at 40 per cent (an additional allowance may be available for the main residence).
Should this threshold be reduced, more estates would fall into the taxable bracket, capturing families who may not consider themselves 'wealthy' but are asset-rich, often due to rising property prices.
Speak to a tax adviser about the potential routes for reducing your IHT liabilities, especially if changes are made in the Budget.
Pensions
Pensions have always been an area that governments love to tinker with, and we think this Budget will be no different.
One of the biggest potential changes being floated is a shift to a flat rate of pension tax relief, possibly around 30 to 33 per cent, rather than the current system of marginal tax relief.
While this may benefit basic rate taxpayers, it would certainly reduce the advantages enjoyed by higher earners, who currently receive relief at 40 or 45 per cent.
This could discourage those higher up the income scale from contributing as much to their pensions, instead opting for alternative investment vehicles.
In recent days, however, there have been signals that the move to a flat rate of relief may be off the table, due to concerns about the impact on public sector workers.
Another area of concern is the potential reduction or capping of the 25 per cent tax-free lump sum that retirees can currently withdraw from their pensions.
For many, this lump sum is a crucial part of their retirement planning, often used to pay off mortgages or make significant purchases.
A reduction in this allowance would mean retirees face higher tax bills, which could force you to rethink your long-term financial planning.
Corporation Tax
Corporation Tax is another key area of speculation, particularly for businesses with profits over £250,000.
The Corporation Tax rate was increased to 25 per cent in April 2023, and there are concerns that further increases could be on the horizon.
While we think it’s unlikely that the rate will jump significantly again, any increase would place further pressure on businesses already grappling with inflation, rising energy costs, and a difficult economic climate.
For those of you with smaller businesses, any hike in Corporation Tax could be particularly damaging, especially when combined with potential changes to Business Asset Disposal Relief and Dividend Taxation (more on these below).
If you’re a business owner and you’re planning for growth, you may find yourself facing an increased tax burden, which could stifle your investment and expansion plans.
Again, speak to a tax adviser if you think this might affect you – we may be able to help.
CGT Business Asset Disposal Relief
Business Asset Disposal Relief, (formerly called Entrepreneurs' Relief), which offers a reduced 10 per cent tax rate on the sale of qualifying business assets, has long been seen to encourage entrepreneurship and support business owners when they sell up or retire.
However, there has been growing speculation that this relief could be abolished altogether, or at the very least restricted.
The abolition of this relief would mean that business owners face much higher tax bills upon selling their business, potentially paying up to 20 per cent or more in CGT.
For those looking to retire, this would significantly impact their retirement pot, as they would have less capital to reinvest or live off.
It could also make it harder for businesses to attract potential buyers, as the tax liabilities associated with selling a business would be much higher.
Dividend Taxation
Dividend Tax has already been a target in recent Budgets, with the dividend allowance slashed from £5,000 to just £500.
Further changes are rumoured in this Budget, including the possibility of increased tax rates on dividends.
This would make dividends a less attractive option for business owners and investors, especially those who rely on them for income.
A complete abolition of the dividend allowance may be on the cards although this is probably unlikely given the increased administrative burden it would place on HMRC and the small amount of additional revenue it would raise.
With both Corporation Tax and Dividend Tax potentially on the rise, the cumulative tax burden on business owners might lead you to rethink your remuneration strategies.
ISAs
There is growing speculation that the generous tax advantages offered by ISAs could be under review.
With the personal savings allowance and dividend allowance being reduced in recent years, there’s a possibility that the Chancellor might turn her attention to ISAs.
Potential changes could include capping the amount that can be saved tax-free, or even introducing tax on gains made within an ISA once they exceed a certain threshold.
Any changes to ISAs would likely have a significant impact on those who have used them as a long-term savings vehicle, particularly higher earners who have maxed out their annual allowances.
If you are approaching retirement, changes to ISA rules could force you to reconsider your financial strategy.
IHT Agricultural Relief
Agricultural Relief is another potential target for reform, with speculation that this relief could be reduced or scrapped altogether. We think it is unlikely to be scrapped altogether but the government may be tempted to make it harder to access, and investments in areas such as woodlands could be impacted.
More wide-ranging reforms could potentially impact many of our farming and landowning clients, many of whom rely on this relief to pass on their land to future generations without incurring hefty IHT bills.
If Agricultural Relief is reduced, we could see a rise in the forced sale of agricultural land as families struggle to meet the tax liabilities.
This would not only impact individual farming families but could also have wider implications for rural communities and the agricultural sector as a whole.
We will be offering tax advice and guidance to those affected in the coming months.
Our advice to you
Whether you’re a business owner worried about a Corporation Tax hike, thinking about selling assets that could be hit by higher Capital Gains Tax, or eyeing changes to your pension, now’s the time to get ahead of the curve.
Our advice is simple – don’t leave it to chance.
Speaking to a tax adviser or accountant sooner rather than later is your best bet.
These potential reforms could seriously impact your finances, and professional advice can help you understand exactly how.
Plus, an adviser can give you strategies to make sure you’re not caught out by any nasty surprises – whether that’s finding the best way to protect your assets, minimising your tax bill, or making sure you’re taking advantage of any reliefs still on the table.
A bit of planning now could save you a big headache (and a lot of money) later.
We’re here to help you navigate through these potential changes, so please get in touch and make sure you’re in the best possible position when the Chancellor makes her announcements on Wednesday!
Contact us via email: enquiries@scholesca.co.uk or give us a call on +44 (0) 1856 872983
