As we move towards the end of the year, all eyes are on the upcoming Autumn Budget from the Labour government. The Prime Minister's speech on 27 August described what would be a 'painful' Budget due to a '£20bn black hole' in public finances, sparking speculation about the potential tax changes that could affect your finances. While we can't predict exactly what the Chancellor will announce, we can plan ahead for what could be coming.
With possible hikes in capital gains tax and changes to various regime's, we highlight the areas you should be paying attention to as the Autumn Budget approaches.
Capital Gains Tax: Potential increases?
One of the focus areas of concern is capital gains tax (CGT). CGT is currently lower than income tax for many taxpayers, making it a potential target for reform.
There have been rumours of the Labour government aligning CGT rates more closely with income tax rates, which could result in significant increases in percentage point terms, especially for higher-rate taxpayers. The maximum current CGT rate is 28% for residential property, or 20% for any other assets, whereas income tax can be up to 45%.
Given the statistics show that a higher CGT rate doesn't generally raise overall tax take, it would seem unlikely they would be aligned with income tax but perhaps a small uptick in the rate to say 25% or 30% may be more likely.
If you're planning on selling assets like property, shares, or a business in the short term, it would be worth considering triggering a disposal now – this doesn't necessarily have to be to a third party in case that doesn't happen in time. Instead, to trigger a disposal, you could transfer the asset to a trust or company that you control. By taking action now, you could lock in the current, lower CGT rates. There will be other tax and practical implications of doing this and so you should ensure you take appropriate advice.
Many commentators would also say that the best time to raise CGT rates is tomorrow, as that will increase tax take today by generating activity, so you should carefully consider crystalising gains to beat a hike which may never come, unless it fits in with your overall plan and strategy.
For listed investments, one option might be to simply sell holdings standing at a gain before the Budget to ensure that the current rates are locked in. If you then waited to reinvest and the rate did not increase, no tax would be triggered if you simply repurchased the same holdings within 30 days of the sale. Of course, the tax position needs to be weighed against the transaction costs and risk of market movements in the interim.
Pensions – what could change?
Contributions: Will the limits change?
Pensions are one of the most tax-efficient ways to save for the future, but there have been murmurs about potential changes to the annual allowance for pension contributions. Currently, individuals can contribute up to £60,000 per year into their pension and receive tax relief, but this cap could be reduced.
If you're approaching retirement or looking to maximise your savings, it might be worth boosting your pension contributions before the Budget is announced. By taking advantage of the current limits, you can maximise the tax relief you receive, which could be particularly valuable if the annual allowance is cut. This happened back in 2015 and those who contributed before Budget day benefitted from two allowances in that tax year. While this is unlikely to happen again due to aligned input periods, it does show that the rules can change with effect from that day.
Additionally, higher earners should watch out for potential changes to the tapered annual allowance. Currently, those earning over £260,000 see their annual allowance reduced, and this threshold could be tightened further, reducing the amount they can contribute tax-efficiently.
What else could change with pensions?
Below are several other changes that have been rumoured:
- The IHT exemption that currently applies to pensions – This could potentially change but it would mean a big change. If this does happen, many will re-visit their general funding and IHT planning positions.
- Pre / post 75 rules - If you pass away before 75, your pension fund can pass completely tax-free to your heirs, whereas after 75, it's liable to income tax when they draw out from the fund. Perhaps the rules may be aligned in some way and possibly linked to the IHT position above to make things simpler but again if this changes then many will re-visit and adapt their current plans.
- The Lifetime Allowance – The standard lifetime allowance was abolished from 6 April 2024 by the former Conservative government. Initially Labour stated they would re-introduce the allowance, however they appear to have back tracked on this, presumably due to the other provisions being introduced along with the fact that many affected by this are NHS doctors.
- The tax relief which applies to pension contributions – Currently higher rate or additional rate taxpayers obtain tax relief at 40% or 45% respectively. This could be capped at a lower rate. This would be very unfair given tax relief should apply at your marginal rate of tax on your income and you would expect it would further restrict productivity and growth because of this. To limit any possible impact, we would suggest you make your current year (and unused prior year allowances, if available) contributions before the Budget.
- The tax-free lump sum - Currently you can generally withdraw up to 25% of your fund tax-free on retirement, up to £268,275, subject to any transitional rules which may apply to you. This limit could be reduced to a lower round sum number. This would be particularly unfair as people will have saved all their lives on the basis that they would get this. If you are concerned about this impacting you in the short term, you may wish to consider withdrawing the funds now, if possible, but only subject to your overall financial and tax position, as there would be some downsides to withdrawing the funds now.
- Salary sacrifice schemes and NIC savings – Employees obtain a national insurance contribution saving when they make contributions through an employer salary sacrifice pension scheme. This is not the same for a typical relief at source scheme. The mismatch has always seemed somewhat unfair and may be an easy fix for the government to change it one way or the other. You may wish to accelerate contributions if you think this will be an issue for you.
Inheritance tax
There has been speculation about a number of possible changes. Whilst we expect any significant reform to be unlikely, they may make a few adjustments to the current rules now with promises for consultation and wider changes to follow later.
What could possibly change?
- There is speculation that the chancellor might increase the IHT rates (currently it's 40% for Estates and lifetime gifts where the donor does not survive seven years from making the gift, and 20% for lifetime gifts into trusts) to generate more revenue.
- The tax-free limits - the nil rate band (£325K exemption for estates) and the main residence nil rate band (£175K additional exemption for passing your home to your direct descendants) could be combined for simplicity. They might also retain the taper reducing the allowances for estates of £2M gross value in some way to avoid being seen to be giving away to the wealthier.
- Currently lifetime gifts are generally uncapped other than if you pass away within 7 years they remain taxable. Could gifts over a certain amount per year, or maybe an amount over your lifetime, be immediately taxable instead? It would be a stark change and hopefully unlikely as you would expect it would mean less people would pass down wealth earlier and so less money would move around the economy. If you were planning on making lifetime gifts, then we would suggest you strongly consider making the gift before the Budget to be certain of the tax implications.
- You can currently obtain business relief on certain assets, exempting them from IHT. It has been said recently that these rules are too generous. Many rumours are around restricting relief on the size of the company and a certain holding percentage of the company. The government should carefully consider the implications of such a change as this would impact investment in UK businesses.
Non-doms
In our last update here, we covered the Labour policy summary released over the summer. Since then, there has been a lot of speculation about possibly scaling back some of the proposed changes given the uncertainty about how much money the policy will generate, or indeed, cost, given that behavioural impact is hard to predict. We will write further on this subject once more information is released but if you are a potentially affected non-dom, then you should seek urgent advice if you haven't done so already.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
