Menzies expert asks will the Chancellors ‘painful’ Autumn Budget strike the right balance?

With a recent change in Government promising to fill the tax gap, the Prime Minister has warned the budget will be “painful”.

So, what might the new Labour Government announce as part of the “painful” budget, and will it strike the right balance between remaining optimistic while attempting to resolve the current economic position?

With a manifesto to not increase the taxes on “working people”, many have started to read between the lines as to which taxes may be subject to changes in order to raise Government revenue.

It is widely expected that we will see significant changes in the attempt to fill the “£22 billion black hole” that has recently been described by the Chancellor.

Having ruled out adjustments to the rates of the UK’s major taxes (Income tax, NIC, Corporation Tax and VAT), this leaves Capital Gains Tax, Inheritance Tax and Stamp Duty Land Tax all still as viable areas which could see big changes.

Capital Gains Tax

It is widely expected that we will see an increase to Capital Gains Tax rates, particularly on residential property. Currently the residential rate of 24% is at an all-time low, so we are seeing a lot of pressure for transactions going through at the moment to happen before the Budget date as many are concerned rates may increase with immediate effect.

We are hopeful that any drastic changes will have a transition period before they come in and are then introduced from 5^th April 2025. We predict the rates will increase, perhaps to 30% for residential property. If this area is targeted, we may see the introduction of a top rate for gains above a certain threshold or even an alignment with income tax rates.

We may see the removal of the Capital Gains Tax annual allowance and this being combined with the personal allowance for income tax. This would mean that higher earners would receive no annual allowance for CGT, nor any personal allowance due to tapering.

Business asset disposal relief is not an area we feel is likely to be targeted, as the lifetime allowance has been reduced to £1M in recent years from £10M. Perhaps we may see restrictions to the tax relief for principal private residences, removing or reducing the relief available for very high net worth individuals, or on large properties.

Another possible area of target may be triggering capital gains tax on death. This has been a controversial area for many years, that all Estates are re-based at the probate value on date of death for capital gains tax purposes, even if the Estate does not pay any Inheritance tax.

We may see the removal of this uplift, particularly for Estates which do not pay any Inheritance Tax, perhaps looking at calculating CGT first and then levying IHT on the value remaining.  In reality, this may just be a practical nightmare and is not likely to be a popular move. It is often very difficult to unravel historic acquisition costs, capital costs etc and this would have an added layer of complication if it became necessary to locate this after a taxpayer has passed away.

Inheritance Tax, or intro of wealth tax

Inheritance tax is often referred to as a “voluntary tax” with lots of planning options available. Although the nil rate bands have not been increased for several years, the number of Estates paying inheritance tax has steadily grown, this is still an area we think is likely to see some change.

Currently the gifting provisions are very generous and have no limit, particularly for the ‘Gifts out of income’ provisions and Potentially Exempt Transfers. We think there may be an introduction of a lifetime limit for gifting, or even a removal of the ‘Gifts out of Income’ provisions. This would restrict the availability of inheritance tax planning but would still leave some options available such as the use of trusts which is also capped at the value of the nil rate band every 7 years, after which a lifetime IHT charge is triggered.

There may also be a simplification of the rules surrounding gifting, such as the removal of taper relief. This would likely lead to an increase in tax revenue as many more potentially exempt transfers would be caught and taxable fully.

Could we see an introduction of some form of Wealth tax? There are no discussions in point but a system similar to that operating in France or Switzerland could be adopted. This is likely to be difficult to implement and would not be a popular move, we therefore think it is more likely that we will see changes to the existing inheritance tax regime and simplification of this. This may be achieved by introducing progressive bands of IHT starting at say 25% and perhaps rising to 50% for the largest estates.

We think we are likely to see the rules relating to business relief and agricultural property relief tightened to either cap or restrict the relief or make conditions more difficult to achieve to qualify for the relief. For example, business relief may be removed for AIM shares, which currently qualify after being held for 2 years. Less active farmers may also be removed from benefitting from agricultural property relief.

Pensions

We expect to see some changes to pensions and the tax position on these. It may be the case that we see the removal of IHT protections for pensions so that they do not pass tax free and are counted as part of the death Estate.  We also expect the removal of the current rule allowing a pension to be drawn down tax free to beneficiaries if the holder dies before age 75, so that all drawdowns on death will be taxable.

Several clients are becoming concerned that we will see the removal of the tax-free lump sum on reaching pension age. We feel this would be a harsh change particularly as people save throughout their lives to set aside for their pensions. We would hope that any change would be transitioned in gradually and perhaps if this was changed that there would be a reduction to the amount of tax free cash rather than a removal altogether.

Taxpayers receive higher rate relief when contributing to their pension fund, could we see this removed and a restriction so that all taxpayers only receive basic rate relief when making contributions? Whilst this could be introduced, we question if this is an indirect way of increasing taxes for “working people” albeit just targeted at higher earners.

Residency / Domicile changes

We are anticipating some further detail on the removal of non-domicile status and the remittance basis regime. Having initially been announced at the last budget by the Conservatives in attempt to bring voters back on board, we expect to hear some further detail. We expect the detail released in the Autumn budget may be more stringent than the initial changes, perhaps reducing the opportunities to plan ahead for those currently in the UK with non-domicile status.

We also predict that we will see changes to the taxation for non-UK residents, perhaps increasing the capital gains tax rates for overseas residents selling UK properties. This may discourage those overseas residents from buying UK property, potentially freeing up housing.

Other potential changes

Reading between the lines, the government are not looking to increase taxes for “working people”, so we might see a complete ‘shake up’ to the current income tax system with a new classification of income that is deemed “unearned” or passive income.

For example, there may be a different rate for income tax on investment income or even rental income. “This could take any form but perhaps we may see a “super threshold” (i.e. not for “working people”) We don’t think that this is likely, but there is a possibility that with a new government we could see a real transformation to the system we are used to.

We are expecting to see further changes announced removing the tax benefits for furnished holiday lets, such as the removal of preferential treatment for loan interest and removing the availability of business asset disposal relief on qualifying holiday lets.

The government has already spoken of its intention to reform the taxation of private carried interest. Currently carried interest on managed investment funds is classified as a capital gain, we expect this will be reclassified and taxed as income. Although if capital gains tax rates increase to align with income tax, this may no longer be relevant. In reality the sums we see do not tend make up a substantial proportion of investment fund income however this potential change does make sense given that this is underlying interest which in all other circumstances is treated as income.