Tax Alert: Prepare for Potential Tax Changes

With the arrival of a new Government and The Chancellor set to unveil her inaugural Budget on 30^th October, I wanted to write to bring your attention to some potential decisions that might impact you.

I believe this will be the most important budget in our lifetime, because of the tax hikes pending and your wealth being greater than ever before.

New Chancellor Rachel Reeves recently highlighted a £22 billion “black hole” in the UK’s public finances which she feels needs urgent attention. Tackling this issue will almost certainly require tax increases but the pre-election manifesto commitments made by Labour have significantly limited their options, making this task both challenging and complex, but not unfeasible.

I’ll highlight some strategies the Government might employ to raise the £22 billion needed, whether through new taxes or by increasing existing ones. My aim is to give you a clearer picture of what you could expect on budget day, and the potential impact on your household, without delving into the political or economic debates about the necessity or appeal of these tax hikes.

During the election, Labour ruled out raising Income Tax, National Insurance, VAT, or Corporation Tax. They’ve also pledged to reform business rates, which makes any increase there unlikely.

Finding £22 billion is difficult, especially since Council Tax and fuel duties, significant contributors, are politically sensitive to increase.

Labour has already confirmed VAT will apply to private school fees from January 2025, which is estimated to raise £1 billion annually. Please note, this change was brought into immediate effect, so offering to pay next term’s fees now will not avoid the increase.

One potential solution some are discussing is radical tax reform, such as replacing Business Rates, Stamp Duty Land Tax, and Council Tax with a Land Value Tax. This would mean most people pay roughly the same, but those owning valuable land would pay more.

Without radical reform, the Government will need to find smaller tax increases in various areas.

Here are some ideas, in rough order of likelihood:

Stealth Taxes – £5 billion+

• Although increases to headline rates of Income Tax and National Insurance were ruled out, they did not rule out extending the current freeze on the various thresholds and allowances applicable to these taxes.
• Sometimes referred to as ‘stealth tax’, this has the effect of bringing more people into paying tax at higher rates as their earnings increase, but the allowances and thresholds do not.

Pension Tax Relief – £3-15 billion

• Currently, pension contributions are fully tax-deductible. Limiting relief to 30% or the Basic Rate of 20% could raise significant amounts, although it might lead high earners to shift investments elsewhere, creating complex effects (similar to the tax paradox, which can see reductions in tax rates causing an increase in total tax receipts).
• In 2016, before she was shadow chancellor, Rachel Reeves suggested introducing a flat rate relief of 33%. Although not in the manifesto, this makes us think it’s high on her agenda.
• If you think this may affect you, because you pay into a pension and you’re a Higher Rate taxpayer, you could consider fully funding your pension allowance before the budget, if your personal circumstances allow.

Limiting Inheritance Tax Reliefs – £2 billion

• Reforming tax loopholes, such as those offered to AIM (Alternative Investment Market) stocks or foreign companies, could raise over £2 billion.
• Currently, investments are fully chargeable to Inheritance Tax, but if you hold AIM shares for more than two years these are exempt from Inheritance Tax.  Lexington has never liked AIM share investments, so few of our clients will be affected by this.

Pensions Inheritance Tax Reform – £1 billion

• If you die before the age of 75 with a Personal Pension, the pension is inherited tax free to whoever receives it (either by lump sum, or income), while those who inherit a Personal Pension from someone who is 75 or older will pay Income Tax on the money they drawdown.
• Equalising this, so all pensions inherited are taxable, could raise about £1 billion.

Increase Capital Gains Tax – £1-2 billion

• The most widely discussed tax change is CGT (Capital Gains Tax).  A modest increase in CGT could raise up to £2 billion.
• The most common views are to equalise the rates of Capital Gains Tax, currently 10% and 20%, to those of Income Tax, which are currently 20%, 40% and 45%.

Eliminate Stamp Duty Loophole for Enveloped Commercial Property – £1 billion+

• Enveloped commercial property refers to a commercial property that is owned through a company or a trust, rather than being held directly by an individual. This practice is often used for various strategic and tax-related reasons.
• Applying 5% SDLT (Stamp Duty Land Tax) to the sale of high-value commercial properties held in single-purpose companies could raise over £1 billion.

Increase ATED – £200 million+

• Some homes, typically high value homes, are owned via a single-purpose company.  The benefit is that when the house is sold the shares are sold and the purchaser will pay 0.5% Stamp Duty on the shares, rather than the much higher SDLT (Stamp Duty Land Tax) rates on homes.
• A previous government introduced an Annual Tax on Enveloped Dwellings which was introduced to discourage individuals from using single-purpose companies to hold residential property to evade stamp duty.
• The rate of tax has been set very low by previous Governments so this could quite easily be raised significantly and is unlikely to affect any Labour supporters.

Increase Inheritance Tax on Trusts – £500 million

• Currently, trusts pay a tax of 6% every 10 years on the value of the trust over the trust’s Nil Rate Band, which is often £325,000.  Raising the 10-year charge on trusts from 6% to 9% could bring in over £500 million.

Reverse the Fuel Duty Rise Cancellation – £3 billion

• Reinstating the scheduled rise in fuel duty could easily raise £3 billion but would affect median and lower-income individuals.

Abolish Business Asset Disposal Relief – £1.5 billion

• When a privately owned trading company is sold, shareholders can pay a lower Capital Gains Tax rate of 10% on the first £1m, this is called BADR (Business Asset Disposal Relief), which replaced Entrepreneurs Relief.  This Capital Gains Tax relief is widely used, and its abolition could raise £1.5 billion.

Council Tax Increases for Valuable Property – £1-5 billion

• Uncapping council tax, so that it reflects property values more accurately, could raise several billion pounds.

Increase Vehicle Excise Duty – £200 million+

• A modest increase in VED could raise up to £1 billion, although it would impact median and lower-income individuals.

End the Pension Tax-Free Lump Sum – £5.5 billion

• Limiting the tax-free lump sum benefit to £100,000 could raise £5.5 billion, but Labour seems to have ruled this out.
• Tax-free cash on pensions has already been limited to £268,275, so this is unlikely to be restricted further.

Tax Gambling Winnings – £1-3 billion

• Taxing gambling winnings could raise £1-3 billion, but if winnings were taxed, would there be a need to account for gambling losses?

Cap Tax Relief on ISAs – up to £5 billion

• Capping ISA tax relief could save up to £5 billion, but this would be seen as unfair to those who have relied on these schemes.

Reduce the VAT Registration Threshold – £3 billion

• Lowering the current threshold of £90,000 could raise at least £3 billion and potentially boost economic growth, although it would be unpopular with small businesses.

Raise the Top Rate of Income Tax – <£1 billion

• Increasing the top rate to 50% might raise some revenue but would be more symbolic than fiscally impactful.
• Former Labour Chancellor Gordon Brown introduced a 50% Income Tax rate in 2010 and it was in place until 2013, when the Conservatives reduced this to 45%.

Conclusion

Implementing a combination of these measures could potentially raise the £22 billion needed, and only Rachel Reeves will know for certain what she will do.

As always, these discussions underscore the importance of strategic financial planning and staying informed about potential changes that could impact your financial future. If you have any questions or need further advice, don’t hesitate to get in touch.

Warren Shute CFP