You have undoubtedly seen in the press that the new Government will be announcing their first Budget on 30 October 2024. Whilst the Government have confirmed their pledge not to increase income tax, VAT, or National Insurance contributions, the current budget deficit means changes to Capital Gains Tax (CGT) and Inheritance Tax (IHT) are likely. There is also speculation from various sources suggesting that the Government will restrict tax relief on private pension contributions. We understand you may be concerned about the upcoming Budget and how it may impact your personal tax affairs, so we have summarised the main potential personal tax changes which could be introduced.
Pensions
Currently, pension contributions receive full relief from income tax whether you are paying tax at the basic, higher, or additional rate. There is one idea that the Government is considering a flat 30% rate of pension tax relief proposed by Treasury officials, which has previously been endorsed by Rachel Reeves, or relief may be capped at 20% being the current basic rate of relief.
For higher earners, it may be worth considering topping up pension contributions ahead of any possible changes.
The Government may also revise the entitlement to a pension tax-free lump sum. Currently, pensioners can draw 25% of their pension pot tax free up to a maximum of £268,000. There are discussions that the Government might reduce the amount eligible for tax relief or scrap the benefit entirely. If you are considering withdrawing tax-free cash from your pension pot it may be appropriate to do so ahead of the budget.
Other changes may include bringing private pensions within the scope of IHT as they are currently exempt. We do not know how such a proposal will interact with income tax charges and it is possible that some pensions will be subject to both IHT and income tax.
We would recommend that you take independent financial planning advice before making any decisions on your pension contributions or withdrawing funds; any action should be part of your overall financial plan and should not be merely based on the tax reliefs.
Inheritance Tax
Agricultural and business property currently have favourable IHT treatment, attracting relief of either 50% or 100% of the value of the assets. The Government might scrap these reliefs or make them less generous, particularly for certain types of assets or investments.
These types of IHT reliefs are also being considered alongside CGT changes as there are concerns that beneficiaries get a “double benefit” from asset revaluation on death (as there may be no IHT or CGT due). The value of an asset is typically uplifted to its market value when it passes down to a beneficiary therefore reducing the amount liable to CGT. There is talk that the Government is considering reforming the rules to eliminate this loophole.
The current regime for potentially exempt transfers or PETs could also be impacted. Currently, gifts made to individuals in lifetime and over seven years before a person’s death are exempt from IHT. There are thoughts that the length of time, or the amount that can be gifted in lifetime, may be reviewed to make the position less beneficial.
There are also discussions that the government may cut or lower the residential nil rate band which currently allows homeowners to extend their nil rate band by up to £175,000, or £350,000 if they are a couple, if they leave their main home to their children.
Please see our article Is Inheritance Tax vulnerable to change following the General Election? – PEM for further comments.
Capital Gains Tax
CGT is currently charged at 10% at the basic rate and 20% the higher rate. These rates increase to 18% and 24% respectively for residential property disposals. The Government might equalise the rates of CGT with income tax, which is currently charged at 20%, 40%, or 45% depending on the level of your income. The Government may also look to reduce the tax-free threshold further.
Alternatively, or perhaps in addition to a change in tax rates, the Government could scrap certain CGT reliefs such as Business Asset Disposal Relief (BADR). BADR allows business owners selling their business to benefit from the lowest CGT rate of 10% on the first £1 million of their chargeable gains during their lifetime regardless of their tax band.
The Government have also announced they will look to review how private equity carried interest is taxed. Currently, this is treated as a capital gain and taxed at 18%/28%.
Please see our article Is Capital Gains Tax vulnerable to change following the UK General Election? – PEM for further comments.
Other taxes
Although the Government have said they will not change the main rate of VAT they have announced plans to charge VAT on private schools. We hope to hear more about Labour’s plans and whether prepayments of fees will be subject to VAT. Draft legislation currently suggests VAT will be charged on fees paid before 29 July 2024 if they relate to terms starting after January 2025.
Labour have confirmed that the first-time buyer stamp duty exemption threshold is due to decrease from £425,000 to £300,000 from 1 April 2025. They have also announced that they intend to increase the SDLT surcharge on overseas nationals buying UK residential property from 2% to 3%.
What now?
Of course, there is no guarantee regarding what changes may be introduced in the Budget and the above information is based on what we have heard to date. However, I am sure you are aware of Keir Starmer’s comments recently that the budget will be “painful” and that “those with the broadest shoulders should bear the heavier burden”. With this in mind, it is likely that the new Government will be introducing tax changes. Therefore, it is sensible for you to consider your current position and if it is appropriate to carry out any planning ahead of the Budget.
On Friday 1 November 2024, our tax specialists will share their perspectives and review the impact of the Autumn Budget for individuals and businesses. Book your place at our 2024 Autumn Budget Seminar.
If you’d like to discuss any concerns you may have on the potential changes, how these may impact you and what actions you may want to take, please contact us.
This article was correct at time of publication.
