How am I affected?
What could you do before Labour announces changes to tax legislation on Wednesday 30th October (tomorrow)?
Previously, some changes to tax legislation have started immediately after the Autumn Budget, whereas others have taken effect from 1st January or 6th April the following calendar year.
We’ll be running a lunchtime Q&A on 4th November, where we’ll be covering all of these points to make sure you’re correctly informed and in a timely manner. Here’s a link to attend (26 people have already registered):
Here’s a brief breakdown of what you could do with the current tax legislation before next Wednesday 30th October to save yourself paying tax:
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Have time for more? Below is recap of what we’ve been discussing on Instagram this October:
How might Pension Legislation Change?
Labour’s manifesto commits them to ‘undertake a review of the pension landscape’, which suggests there will be no immediate changes to the annual allowance or the availability of tax relief. But we know that pensions are always seen as a low hanging fruit, at least to the think tanks and the commentators, so there’s speculation this will continue to be rife as always.
The most asked question we are facing is with regards to the removal or restriction of Tax Free Cash. This may be due to a report by the Fabian Society where they suggest restricting to ￡100,000 for those with pots of ￡400,000 or more - detail that was covered extensively in the press. This hasn’t come from the Government and we have seen direct comments from Labour stating they don't intend to change tax free cash on pensions.
Taking tax free cash “just in case” is not something we actively suggest clients do because of wider impacts on their estate and later life planning, including but not limited to inheritance tax implications. It's worth noting that Pension Commencement Lump Sum (PCLS) is already capped by the Lump Sum Allowance. Getting rid of it entirely would be difficult, as it has been built into the pension promise for such a long time.
Even when Labour originally brought in the Lifetime Allowance (LTA) in 2006, PCLS was capped at ￡375,000 for most, unless you were already entitled to more. Therefore, retrospective cancellation of benefits seems something unlikely to happen. It' also safe to say it wouldn’t raise that much either in the short term and would remove capital available for spending, which isn’t good for the economy.
Again, there's talk of flat rate tax relief, spurred on by think tanks. Rachel Reeves has stated in interviews recently that there’s no plan to curb tax relief or for an immediate reinstatement of the Lifetime Allowance. Stability and certainty is stated as the reasons for this change in stance.
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What about Capital Gains Tax?
Given the warnings of tax increases likely in the Budget, by both the Prime Minister and the Chancellor, together with the government’s self-imposed limitations in relation to tax increases for “working people” (in effect ruling out increases to income tax, NIC and VAT), conjecture and concern is understandably rife in relation to what changes to Capital Gains Tax (CGT) might be introduced.
Capital Gains Tax is the favourite tip for those predicting where the Autumn Budget increases will fall. Its pundit popularity comes despite the fact that HMRC’s own ready reckoner suggests a substantial increase in the tax rates would lead to a fall in receipts. There were only about 350,000 individuals who realised enough gain in 2022/23 to face a CGT bill, with less than 2% of that select population accounting for 57% of the ￡13.6bn paid.
HMRC’s stance is that higher CGT rates would mean individuals would more frequently choose to keep their gains unrealised, although it is not a view shared by some think tanks.
The CGT speculation has meant that one particular question is increasingly being asked ..namely Can CGT be changed mid-year?
The precedent of a new chancellor making an in-year change to CGT rates in their post-election premiere already exists. In his 22 June 2010 Budget, George Osborne raised the CGT rate for those paying more than the basic rate of income tax from 18% to 28% for disposals from 23 June 2010. By 2010 Budget changes usually took effect from the start of Budget Day, so it is unclear why there was a one-day delay – although it is also clear that many took advantage of the brief window. At the time CGT was not seen as likely to rise.
For individuals and trusts, CGT is generally accounted for on a tax year basis, so a mid-year change causes none of the disruption that would be associated with income tax (or NIC) mid-year tweaks. Even residential property sales have a 60-day period for reporting/payment (although this special treatment did not exist in 2010).
The one question mark over an in-year change is, ironically, whether more tax might be raised by deferring the change to 6 April 2025. The heightened CGT receipts following the OTS reports on CGT reform are a lesson here – CGT liabilities in 2022/23 were less than in the two previous tax years, when the spectre of OTS-inspired reform existed. If the Chancellor wants money ASAP, a deferral could well deliver more in the short term. This may already be happening - there was a report in the Financial Times of a selling ‘frenzy’.
With this in mind and only where you are already planning to make a disposal in 2024/25, you may wish to consider bringing the disposal forward. ‘Don’t let the tax tail wag the investment dog’ is advice often applied when considering tax-incentivised investments. It is equally for tax-incentivised dis-investments.
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If capital gains (and/or dividends) are also more harshly treated, then as well as considering the obvious tax wrappers of pensions and ISAs, there could be a stronger tax-based case for considering the tax deferment and tax management benefits of investment bonds going forward. As ever though, the appropriateness of wrappers (or combinations of wrappers) for individual investors will depend on the facts of each case and so advice is essential.
Business Asset Disposal Relief
One of the major sources of Capital Gains Tax, which we discussed last week, is the sale of business assets.
Currently up to ￡1m of gains from the disposal of an interest in a qualifying business would be taxed at the lower rate of 10%.
While this could be in the firing line, this is not thought to be a major target given the generally accepted importance of encouraging small business.
Having said that, as for investments generally, if a sale is going to take place anyway, one could look to ensure that the sale is executed sooner rather than later.
Bringing forward such a sale of a private trading business will, however, in most cases be materially harder than disposing of an 'arm's length' investment. Especially the case now that the Budget is only two weeks away.
Inheritance Tax
Some have shown recent concern and speculation for whether there will instead be a change to inheritance tax (IHT). This is despite the fact inheritance tax is not a major contributor to overall tax revenue.
Inheritance tax is projected to yield ￡7.5 billion in the 2024/25 tax year and ￡7.7bn in the 2025/26, meaning that in total it raises about as much as 1p on the basic rate of income tax.
A recent paper from the Institute for Fiscal Studies is a good summary of the areas that could provide extra revenue, such as proposals to scrap business relief entirely for AIM shares, cap the two inheritance reliefs to a transferable amount of ￡500,000 per person, and bringing pension death benefits within the ambit of inheritance tax.
More radical reform, such as a switch to taxing recipients rather than donors, could raise more money, but would involve a major legislative overhaul. This may not be seen as the right time for this kind of radical change.
Should you be concerned with any of the points we are highlighting here in the lead up to 30th October, you can speak with your adviser.
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Investments
For those with unused allowances and those for whom ISA contributions would be appropriate and affordable in 2024/25, consider bringing these forward and investing before the budget. This proactive measure ensures you fully utilize existing allowances and protect yourself against potential changes announced on 30th October.
Similarly, if you hold investments within a tax wrapper, such as an Investment Bond, and were contemplating encashing some of these, bringing this action forward while current tax legislation remains in effect could be beneficial.
A Wealth Tax?
With the government’s self-imposed constraints in relation to income tax, National Insurance Contributions and Value Added Tax (VAT), and the potential limitations on the amounts that could be collected from inheritance tax and capital gains tax increases, its unsurprising that there is some concern over the potential introduction of a separate ‘Wealth Tax’.
A wealth tax remains a difficult tax to create from scratch for a variety of reasons - not least of all challenges in relation to asset valuation and liquidity to pay the tax - and the Labour Party have not expressed any indication that this is part of their plans.
While we can never be certain about what might be in the Budget and especially this year, most expect Wealth Tax to remain on the sidelines, despite the latest rumblings. More likely is higher taxes on capital in the form of Capital Gains Tax and Inheritance Tax, which has been widely forecast. Indirect wealth tax on residential property, through a reform of council tax, is a possibility. Again, that would require considerable work (and cost).
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