Our October Budget Predictions

“Those with the broadest shoulders should bear the heavier burden”- Keir Starmer, PM

The general election in July of this year gave us a new Government – and one with a strong majority of seats, insofar as it should be easy to have any major changes pushed through.

Whilst Rachel Reeves has said there will be no changes to income tax, National Insurance, Corporation Tax and VAT, she has remained tight-lipped regarding whether any other changes may be brought in – but by process of elimination, this leaves Capital Gains Tax (CGT), Inheritance Tax (IHT) and taxes related to pensions up for reform.

A summary of these potential changes, mostly made by the Institute of Fiscal Studies (IFS) is set out below.

Capital gains tax (CGT)

• CGT rates are currently at the rate of 20 per cent / 24 per cent for non-residential property / residential property capital gains, or 10 per cent / 18 per cent insofar as the basic rate bands for income tax are available.
• The current income tax rates are 20 per cent / 40 per cent / 45 per cent as a basic / higher / additional rate taxpayer.
• There is speculation for CGT rates should be aligned with income tax rates.
• Pre-2008, CGT rates were aligned with income tax but benefitted from taper relief, which reduced the capital gain the longer the relevant asset was held (so an inflation-related relief in a sense). This then reduced the effective tax rate applied to the capital gain.
• If CGT rates were once again aligned with income tax, we would hope for a similar relief to be reintroduced.
• The IFS also recommended the CGT-free uplift on death be removed (with death possibly being treated as a notional market value CGT disposal).
• Comparing the UK’s CGT collection to G7 members, the UK government has the second lowest collection from CGT – and CGT is also a tax paid by the few. A change to the CGT rates would have little impact on Joe Bloggs on the street and should be an easy reform to get over the line.
• Whilst any increase to CGT rates may distort asset holders’ decisions when / if to dispose of assets that give rise to a CGT, previous estimations in a 2020 report by the (now disbanded) office of tax simplification suggested the additional CGT collection may be as much as £14 billion per year.

Inheritance tax (IHT)

• Whilst often viewed as the UK’s most hated tax, it’s estimated that only around 4 per cent of estates are charged to IHT on death. IHT is, therefore, another tax only paid by the few and a number of ways to reform the tax were also recommended in the IFS’ September 2023 report.
• Business relief (BR) and agricultural relief (AR) allow certain qualifying business and agricultural assets to be bequeathed IHT-free. The IFS report recommended either abolishing these reliefs or capping the reliefs to £1 million per married couple.
• HMRC estimates the “cost” of the current AR / BR rules is around £1.6 billion per year.
• Lifetime gifts currently form part of the transferor’s estates for seven years following death (with taper relief reducing the IHT due on lifetime gifts where the transferor survives for more than three years but less than seven). The IFS suggested abolishing this regime and charging lifetime gifts to IHT irrespective of whether the transferor survives for more than seven years.

Pension pots

• Income tax relief costs the exchequer £66 billion per year (in 2023 and with half of that benefiting higher- and additional- rate taxpayers) in exchange for income tax collected on pensions paid of £22 billion, a difference of around £44 billion. It’s been estimated that a blend of the below reforms may rise up to £10 billion per year.

Contributions to and payments from pensions

• Pension members are able to obtain tax relief on pension contributions at their effective rate of income tax (being 20 per cent / 40 per cent / 45 per cent as a basic / higher / additional rate taxpayer), subject to the £60,000 annual allowance (or £10,000 for those with incomes over £260,000).
• To restrict tax relief on pension contributions, the IFS has suggested a single flat rate of tax relief for individual and employer contributions and to levy employee national insurance contributions on employer contributions.
• Under current rules and on extracting monies from a pension (at the appropriate age), pension members can access 25 per cent of their pension pot income tax-free. Proposals have been made to reduce this income tax-free limit.
• Whilst the pension lifetime allowance was also abolished with effect from 6 April 2024 as announced in the 2023 Budget, Labour did suggest at the time that they would reinstate a lifetime allowance which would then restrict the amount of value pension savers can save into a pension.

Pensions on death

• Pension pots are currently outside the scope of IHT. One of the recommendations made by the IFS was to include part of the value of pension pots on death to be charged to IHT.
• Currently where pension pots are bequeathed on the death of the original pension member aged 75 or over, the legatee pension member is charged to income tax at their marginal rate of 20 per cent/ 40 per cent/ 45 per cent as a basic / higher / additional rate taxpayer at the time they drawdown the benefits from the pension. Where the original pension member passes away before age 75 and under current rules, the legatee pension member is not charged to income tax on drawdown of benefits the pension funds.
• The IFS recommended in their report that this regime be abolished insofar as the legatee pension member is charged income tax on receiving the bequeathed pension benefits regardless of the age of the original pension member at their death.

Summary

Keir Starmer has insisted some difficult choices have to be made, things will get worse before they get better and that those with the broadest shoulders should bear the heavier burden.

To avoid a repeat of the Truss-Kwarteng Budget, the current duo needs to be cautious with any changes to not rock the economy (and upset the anticipated trend of reduction in the Bank of England interest base rate).

By implementing proposals made by the IFS, a lot of leg work into how new changes impact the economy have already been made.

Whilst it is difficult to second-guess changes that may be made, Rachel Reeves has quantified the “blackhole” to recover (before considering any cuts on public spending) – and the total estimated potential tax revenue collections if all the above was considered is £3.6 billion more than the hole she is trying to plug as summarised below:

Final thoughts

The purpose of APR / BPR is to ensure SME businesses (the backbone of the UK economy) and farmland (which contributes towards food security in times of uncertainty in international politics) can continue uninterrupted on the passing of a business or farm ownership.

Given the modest “cost” of these reliefs to the Government, it would perhaps make sense to allow these reliefs to continue to be available, especially as the £22 billion blackhole could be plugged with reform to CGT and pension relief.

What should you do?

Whilst any planning should not be undertaken where the tax tail is wagging the dog, it may be recommended to consider the following:

• To avoid any increase to CGT rates, you could consider accelerating the disposal of assets on the open market or to third parties. If it is not possible to accelerate these disposals in the short term, you could consider a disposal of the relevant assets by way of gift to a family trust to crystallise a CGT disposal (although you may then have a CGT liability without cash from a sale to fund the CGT liability and this may have wider IHT implications).
• To consider making other lifetime gifts to family members and / or a trust for their benefit to accelerate succession planning to bank the BR / AR currently available.
• To make use of the current pensions annual allowance (current year and brought forward allowances where possible) subject to your level of relevant current year income.

These recommendations are, however, subject to the introduction of any anti-forestalling rules where the Government does introduce changes (and which may then apply retrospectively in certain circumstances).

If you have any questions or require further advice, then please contact your usual Smailes Goldie contact.