The Chancellor of the Exchequer, Rachel Reeves, will deliver the Labour Government’s first Budget Statement on 30 October 2024.
Since entering office in July, the Chancellor has cautioned that tough decisions will need to be made to balance the books, but particular emphasis has been placed on this in recent weeks after comments that the Treasury’s finances are in a worse state than the Labour Party anticipated when entering office.
It is likely that this Budget will mark a major overhaul of elements of the UK tax regime that will impact wealthy individuals.
What changes have been confirmed so far?
The short answer is, not many.
A long-standing commitment of the Labour Party has been to remove the VAT exemption enjoyed by private schools. This change has already been confirmed by the Government as effective on fees paid after 29 July 2024, for the school term starting in January 2025.
It has also been confirmed that the Government will alter the UK tax treatment of non-domiciled individuals, removing what they deem to be “preferential tax treatment based on domicile status” from 6 April 2025 and thereafter introducing “an internationally competitive residence-based regime”. This would include Inheritance Tax (IHT) being subject to a new residence-based system (rather than domicile based) from 6 April 2025. The proposed changes will also mean that the beneficial status of Excluded Property Trusts, which allow non-domiciled individual to keep foreign assets out of the scope of UK IHT, will be lost.
What else is likely to change?
The Government has said it will not increase taxes on “working people”, which (in line with their manifesto) should mean no increases in Income Tax, National Insurance or VAT. However, the manifesto was notably silent on ruling out changes to Capital Gains Tax (CGT), IHT and Pension Tax Relief. Most commentators and tax practitioners are assuming that these taxes are the likely target of significant changes, given the limited avenues for generating additional tax revenue.
Capital Gains Tax
CGT is charged on the profit made from selling an asset (above the annual tax-free allowance - a modest £3,000 for individuals or £1,500 for Trusts). Commonly, such a taxable event arises from the sale of a second property or listed/private company shares (that are not held in a tax efficient wrapper, like an ISA or PEP).
CGT rates are currently between 10% and 24%, depending on the type of asset sold and whether the seller is a basic or high-rate taxpayer. However, it has been widely speculated that the Government may align CGT rates with Income Tax rates. Currently the highest CGT rate is 24% compared to the top UK income tax rate of 45%, or, in Scotland, 47%. The CGT tax-free allowance may also be further reduced (or removed entirely). It is also possible that the Government could target other forms of CGT relief, including certain forms of ‘holdover relief’ and the availability of a tax-free uplift of unrealised gains on death.
Even if CGT rates are not aligned with those of UK income tax rates in the Budget, it is widely anticipated that CGT rates will be increased on 30 October.
Inheritance Tax
Commonly known as a ‘death duty’, the standard IHT rate of 40% is charged on the part of a deceased individual’s estate that is above the nil rate threshold (currently £325,000 per individual). Other exemptions can often be applied to reduce an estate’s exposure to IHT, such as the residence nil rate band and spousal exemption (among other asset specific reliefs). Inheritance Tax is also charged at lower rates on assets held in Trusts that fall under the Relevant Property Regime rules, subject to available reliefs.
It is possible that the Labour Government may increase the overall rate of IHT, set multiple rates or limit the current reliefs available. They may also look to restrict the current gifting rules (known as potentially exempt transfers), which allow gifts to be treated as outwith a deceased’s estate for IHT purposes if made more than seven years before death. Many other countries operate a less generous gifting system where gift taxes are applicable after a certain level of gifting.
Some of the current reliefs the Government may look to restrict are those available on certain business assets and agricultural land. The Government may also look to end the ability to pass on pension pots free of tax on death. Indeed, in a report published by the Institute for Fiscal Studies in April 2024, it was argued that the Government could raise significant additional IHT revenue by making some of these changes.
With less than 5% of estates paying IHT in the tax year 2023-24, any changes to increase IHT revenue may be viewed by the Chancellor as politically palatable to the wider electorate.
Pension Tax Relief
The Government may also make changes to the rules on pension tax relief, although any changes would likely be highly contentious.
Currently, savers receive pension tax relief at their marginal income tax rate. There is speculation that the Chancellor may consider introducing a flat rate of pension tax relief or restrict the relief available to high-rate taxpayers on pension contributions.
Change on the horizon
With a little over a month until the Budget, we can only speculate for now about what changes may be introduced. Although no-one has a crystal ball, if the tone of comments from the Government are to be taken seriously, it is highly likely that there will be some significant changes in the UK tax landscape come 30 October.
If you have any queries regarding how the Budget in October may impact you, our expert Private Client Team would be delighted to provide you with guidance and assistance. Contact us on 03330 430150.
