There has been much rhetoric from the government about the ‘£22bn black hole in the public finances’ that they allege was inherited from the outgoing Conservative government, alongside warnings that this Budget will be ‘painful’ and hard decisions will have to be made. This in turn has led to considerable speculation about what measures Rachel Reeves will put in place to balance tax increases with spending cuts whilst boosting the economy and still squaring their pledges not to increase taxes for the ‘working people’.
The Chancellor has ruled out increases to personal taxes of income tax, employee national insurance, and VAT. This leaves her with options which include capital gains tax, inheritance tax, pension tax relief, and employer national insurance.
Let’s have a brief look at some, but not all, of these speculations:
Capital Gains Tax
The personal annual allowance for capital gains tax was already severely reduced by the last Conservative government, so other possible changes could include:
- Reducing exemptions such as removing or setting a ceiling, on private residence relief.
- Introducing it as disposal on death, so it is charged in addition to inheritance tax.
- Increasing the rate, either to a higher flat rate, or bringing it in line with income tax rates as it has been in the past, so higher rate income tax payers pay higher rates of capital gains tax.
Rate changes may trigger off a selling off of assets if any increase is effective from April 2025, which in turn could also impact on the market conditions short term, but equally as it is a transaction-based tax any increases could be immediate.
Inheritance Tax
The last major changes to inheritance tax came when the promise of increasing the exemption to £1M resulted in the introduction of Residence Nil Rate Band (RNRB). The RNRB specifically benefits those leaving the family home to direct descendants, but only for civil partners or married couples do their inheritance tax exemptions (Nil Rate Band of £325,000 each) and their RNRB exemptions total the promised £1M. For those who were cohabiting, single or divorced, the total benefit is £500,000.
The Nil rate band has not increased since 2009, so revenue from inheritance tax has been on the increase but studies show that only around 4% of estates pay inheritance tax.
Changes could include:
- Removing the inheritance tax exemption for pensions passing on death, currently used as an important tax planning tool on passing wealth to your loved ones.
- Changes to Business Property Relief (BPR) commonly relied upon by business owners of small to medium privately owned companies in passing down their shares on death.
- Changes to Agricultural Property Relief (APR) – this works in a similar way to BPR, but in those passing down farming businesses on death.
- Introducing increasing rates in relation to the value of the estate, thereby taxing the largest estates more.
- Keeping the NRB frozen.
Changes to APR and BPR are of particular concern as this will impact on the viability of those businesses after the death of a major shareholder or business owner, which in turn may cause loss of jobs.
Pension Tax Relief
Changes could include:
- Reducing or removing the tax-free cash lump sum that can be taken from pension pots currently set at 25%.
- Removing the inheritance tax exemption for pensions passing on death, as mentioned above.
Employer National Insurance
One of the most widely expected changes is an increase in the employer’s national insurance contributions. However, this could reduce the incentive for employers to offer salary sacrifice, thereby resulting in some employees moving into a higher tax bracket if employers abandoned the scheme. It is also probable that employers will look at ways to pass this on this cost, such as by way of freezing recruitment, reducing staffing levels and lower pay increases and benefits.
How can Hanne & Co help?
It’s not long now until the Chancellor puts us out of our misery and enlightens us with what she actually has in store – perhaps even surprising us.
Whatever happens on the 30th October, if you would like help navigating how Budget changes impact your finances and tax planning, please contact our experienced team at Hanne & Co – we’d love to discuss this further with you and help you plan for a strong future.
Contact our property team today to discuss any of the above in more detail by submitting the form below.
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