Consider your options before the tax hikes

The government has said it will have to increase taxes at the budget in October. Rachel Reeves is now serving as the Labour Chancellor of the Exchequer, being the first woman ever to take on the role. She has disclosed that the government has a £22bn hole to fill in the public finances.

Reeves has, however, ruled out raising taxes on working people, and this supposedly includes VAT (with the school fees exception), income tax and employees’ national insurance.

Keir Starmer made a speech on 27 August on fixing the foundations of our country.

He said: “We have to take action and do things differently. I won’t shy away from making unpopular decisions now. There’s a budget coming in October and it’s going to be painful.”

So which taxes or specific areas within the tax system do we envisage could be targeted at the upcoming budget?

Rumours are referring to a potential stealth tax, increases to both capital gains tax (CGT) and inheritance tax (IHT) and a possible reduction in pension tax relief. So potentially quite dramatic proposals and changes coming our way.

There are also the new rules on domicile, or abolishment of the concept which Labour will take forward and finalise, after the Conservatives made this announcement in their 2024 budget.

Taking each of the above in turn, a stealth tax is a means of raising revenue and does not tend to be directly labelled as a tax.

An obvious solution for the Chancellor would be to focus on tax thresholds – the amount of money one can earn before tax starts to be paid.

Various thresholds are currently frozen on income tax and national insurance until 2028. Labour could extend the freeze beyond 2028.

Calculations indicate that the current freeze could generate around £40bn of revenue by 2028. Therefore, could this be enough?

CGT: this currently starts at a rate of 10% (18% on residential property and carried interest) on gains above £3,000 per person per year. The £3,000 annual exemption was significantly eroded down to this level over recent years by the Conservative government and the result of this, coupled with the erosion of the dividend allowance which is now £500, is that millions of additional taxpayers are being brought within the self-assessment system, many without realising until the HMRC penalty notices land through their door!

This mainly affects pensioners whose annual dividend/investment income and minimal capital gains were previously covered by the automatic exemptions with this no longer being the case due to the reduced allowances.

CGT then rises to 20% on any amount above the basic rate tax band, 24% on residential property and 28% on carried interest. CGT rates are substantially lower than income tax rates. This arguably benefits the wealthier so could the Chancellor impose a higher CGT effect on business owners?

But surely Labour needs to support businesses, and hitting them with increased CGT could affect the government’s wider plans to grow the economy.

IHT: other tax thresholds are also frozen until 2028, including the IHT nil rate band and the residence nil rate band.

IHT receipts for the government are dramatically increasing, now raising more than £7bn annually.

The freezing of the IHT thresholds is bringing more estates within the scope of the tax, with a main contributing factor being the increase in property prices.

There is much that owners and families can be doing generally in terms of IHT planning and passing assets down to younger generations, to plan against a 40% charge on death. Professional advice should be sought and ongoing reviews are essential.

Trusts and family investment companies can be efficient vehicles worth considering, although given timescales between now and the budget, and this level of uncertainty that we are faced with, it is advisable to wait for the new rules and legislation before undertaking any detailed planning and restructuring.

Business relief and agricultural property relief could also be at risk of being attacked in the budget. The former is a real concern for business owners of private companies which may currently qualify for 100% relief from IHT against the full company value.

This enables the business to be passed on without a penal IHT charge on death. If this relief is removed or restricted, this could lead to an even wider pool of assets falling within the scope of IHT on death. This could be detrimental for UK business and growth and could drive away entrepreneurs from the UK – but let’s hope not.

If company shares are valued and subject to an IHT charge on death, this is what is known as a ‘dry’ tax charge, i.e. no liquid cash with which to pay the tax as the value is locked within the shares.

In my opinion, this could be adverse and damaging for the UK economy, given that we rely so extensively on owner managed businesses to create jobs and given that jobs are essentially created by people, not by government, despite their claims.

It is this group of entrepreneurial people that the UK may risk driving away – and therefore will the introduction of higher taxes hinder the UK’s overall economic growth?

This also links into the wider proposals and new policy due to come into force in April 2025 in relation to domicile and UK resident non-domiciled individuals (non-doms), many of whom contribute to the UK economy and are also of an entrepreneurial spirit.

Non-doms who are UK resident are likely to face increased IHT charges. It would seem that Labour is strengthening the original proposals set out by the Conservatives in the March 2024 budget with a new residence-based regime.

Full details of the precise forthcoming regime will not be available until the autumn budget, but we understand that the plan is to replace the current domicile-based IHT system with a new residence-based system as soon as 6 April 2025, based on whether the non-dom has been UK resident for the last 10 years.

The remittance basis (for foreign income and gains) for non-doms will also be replaced with a residence-based system.

The new regime will be available for up to four years starting from 6 April 2025, or the first tax year in which the individual becomes UK resident if later.

The understanding is that, during these four years, foreign income and gains will not be subject to UK tax and can be brought into the UK.

There will be transitional provisions for current non-doms and specific rules will be required for offshore trusts and their settlors.

And last but by no means least...

Pensions: further changes and reforms are expected in relation to the taxation of pensions.

Just as people were starting to get their heads around the myriads of pension rules and changes that we have endured in recent years, it looks like more changes are on their way.

Currently, when contributions are made to pension pots, subject to certain conditions, tax relief is available which effectively increases the amount going into the pension fund.

Currently, basic rate savers can receive relief at 20% and higher rate taxpayers receive relief at 40%/45%.

The speculation is that a flat rate of pension tax relief could be introduced. The system would therefore be less generous for higher earners, but it has been suggested that this could raise billions for the government.

However, some opponents say this could discourage saving for the future and could be complex to implement.

It is therefore essential at this time to find the right balance between minimising any potential tax impact of these proposed changes on you, your business and your family, whilst being mindful of the lack of time between now and the budget, and the associated risks of undertaking any planning given the uncertainties.