Will the Autumn Budget signal tax rises?

The new Chancellor, Rachel Reeves, reported on 29 July that the Treasury’s public spending audit has identified a ￡22 billion overspend in the public finances. Even with announced spending cuts, this could pave the way for taxes to rise in her first budget as Chancellor on 30 October.

Labour pledged in their manifesto not to increase the rates of income tax, national insurance, VAT or corporation tax. These taxes together account for around 75% of the total tax take.

The Government is likely to proceed with applying VAT to private school fees, abolishing the current tax regime applicable to non-UK domiciled individuals and subjecting private equity managers’ carried interest to income tax rather than capital gains tax (CGT). These measures, even combined with the effect of fiscal drag arising from continuing tax threshold freezes, are unlikely to raise sufficient to close the funding gap.

Restricted by the pre-election pledges, other possible measures the Chancellor could introduce to increase revenue include:

• Abolishing or reducing tax reliefs relating to inheritance tax (IHT) and CGT
• Increasing the CGT rate
• Reforming pension tax rules including limiting tax relief available on contributions.

A general reform of capital taxes, which were not mentioned in Labour’s manifesto, including CGT and IHT may also be on the cards.

Using tax reliefs currently available?

At the moment, gifts of business interests or agricultural assets can qualify for IHT reliefs. These mean that there may be no immediate IHT charge on a gift of them to a trust. Trusts are often used if the aim is to retain a measure of control and achieve some asset protection.

Currently, unrealised capital gains on assets being transferred into trust and on gifts of qualifying business interests more generally can be deferred. There is then no CGT charge on the gift. The gains only become chargeable on any later disposal of the asset.

Historically taxpayers may not have been keen to make lifetime gifts of assets because, on death, IHT reliefs could apply so as to effectively exempt them from IHT and unrealised capital gains would be wiped out due to the general CGT rebasing of assets on death. ?It would now be sensible to consider whether gifts should be made before the coming Budget in order to ‘bank’ the tax reliefs whilst they are still available.

Taking action now is particularly advisable if the future plan is to sell a currently relieved business or if an asset is likely to grow significantly in value. In these cases there could be a substantial amount subject to tax on death if lifetime gifts are not made. The owner may want to make use of trusts to protect some of the eventual value for the family. Where relief from IHT is available for business or agricultural interests, more value (effectively unlimited) can be transferred to a trust without immediate tax charges.?

With attractive tax reliefs currently available, but vulnerable to change, taking tax and estate planning advice on the options available should be a priority.

Eamonn Daly is a partner at Meridian with over 30 years’ experience in private client work.? A Chartered Tax Adviser, he is a full member of the Society of Trust and Estate Practitioners (STEP) and holds the STEP Advanced Certificate in Family Business Advising.

This information does not represent legal or tax advice. Seek appropriate legal or tax advice about the topics covered, specific to individual circumstances, before taking or refraining from any action