Pre-Budget considerations in a nutshell

Inheritance Tax (IHT)

The current rate of IHT is 40% on death for estates with a value above the nil rate band, which is £325k, and increased to £500k if you are passing on your main residence to your children.

• It has been suggested that the Government may look to abolish the IHT nil-rate band.
  This would be an administrative burden for taxpayers that would otherwise fall outside of the IHT net.
• Under the current rules, individuals can plan for IHT by making unlimited gifts under the seven year ‘Potentially Exempt Transfer’ rule. Another relatively simple revenue earner could be to introduce a cap on gifts during lifetime and on death – a system used in the US.
• Valuable reliefs for business property and agricultural property, which offer up to 100% relief from IHT on certain qualifying assets, could also be targeted.

How likely is it? – High

Whether reliefs are abolished or cut, the above would be reasonably simple to impose if deemed necessary. Although IHT reform is not straightforward, the Office of Tax Simplification have been commissioned several times to look at IHT (and Capital Gains Tax), so while changes may not have been adopted to date, much work has already been done.

What can you do to plan?

If you are planning to make a gift to a child or grandchild in the coming year(s), it may be prudent to think about doing this now and before the Autumn Budget on 30 October if you can.

Capital Gains Tax (CGT)

CGT is payable on profits realised on the sale of chargeable assets such as shares and real estate. The current top rate for most assets is 20%. To improve the ‘tax take’ the Government could increase the rate of CGT to 25%-30%, or possibly go as high as aligning to Income Tax.

• The Government could also look to target CGT reliefs and exemptions, such as the exemption for wine and classic cars, and it could also apply a tax on lottery winnings which are currently tax-free.
• Labour stated in its manifesto that it would close the ‘loophole’ of ‘carried interest’- this relates to the fact that carried interest is seen typically as a capital asset, attracting Capital Gains Tax at 28% as opposed to Income Tax at up to 45%.

How likely is it? – Very high

The ‘broadest shoulders’ are more likely to pay CGT, and it is therefore an easy tax for a Labour Government to target and a rate change would be the simplest approach.

What can you do to plan?

• Subject to investment strategy, where assets are held standing at a capital gain, you may wish to realise gains ahead of the Autumn Budget, when CGT is 20%.
• If property is being disposed of (including gifted) it is important to remember that the date of disposal for Capital Gains Tax purposes is the date of contract (exchange) and not the completion date. Sellers may, where they have sufficient influence, want to try to accelerate exchange of contracts to before Budget Day.

Pensions Tax Relief

The Government could reduce the tax relief for higher (40%) and additional rate (45%) taxpayers.

How likely is it? – Medium

While limiting pensions tax relief is an attractive option to raise tax revenue, the Government has also indicated it wants to use pension savings for investment in national infrastructure, and therefore reducing the incentive to save into your pension would go against that objective. There can also be unintended consequences for those still on final salary pensions.

What can you do to plan?

•  If you are planning to make a personal pension contribution in the current tax year, you should do this before the Autumn Budget to lock-in the tax relief under the current rules.
• Making a pension contribution under salary sacrifice is more beneficial as you can save the National Insurance, but your employer will need to have everything set up for you to do this in time.
• You should also review any unused carry forward allowances you have from the previous three tax years to maximise any pensions contributions now.
• You can find out more about how the Autumn Budget may impact pensions.

Stamp Duty Land Tax

Stamp Duty Land Tax (SDLT) rates have never been higher, with a top rate for a UK resident individual purchasing a second property of 15%; if you’re an overseas buyer, that top rate increases to 17% and the Labour Party proposed a further 1% increase in their General Election manifesto.

How likely is it? – Very low

With SDLT rates being so high, further increases could adversely impact the housing market. It is also unlikely, in the current climate, that the Government will want to reduce SDLT rates for lower value house purchases, and so we shouldn’t be overly optimistic around any giveaways.

What can you do to plan?

• The best answer here might be to do nothing and wait to see what announcements, if any, the Government may decide to make.
• We could all be taken by surprise if the Government decides that it needs to give more support to first time buyers, although a fairly generous regime already exists here.

Dividend Tax

Dividend income is taxed at slightly lower rates than the main rates of Income Tax – 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. In addition, dividends do not attract National Insurance, in the same way as a salary or profits from your self-employment.

To simplify the personal tax system, the dividend tax rates could be aligned to the normal Income Tax rates of 20%, 40% and 45% and the £500 dividend allowance be abolished.

How likely is it? – Medium

This would be a relatively easy win for the Government and presented as simplification to the tax system and targeted at investors who hold share portfolios – arguably seen as those with the ‘broadest shoulders’. However, changes to the dividend tax regime would also hit private business owners who receive dividends from their company, and so would be against the Government’s pro-business growth agenda.

Any change in rates is likely to be effective from 6 April as changing Income Tax rates mid-year is highly complex.

What can you do to plan?

• Make sure you maximise your ISA contributions across your family, and hold such dividend paying shares in your ISA. This would mean such dividend income is not taxed on you.
• The current annual ISA limit is £20,000 per adult and income producing assets held outside the ISA would be taxed on you personally.
• Other planning options could include using offshore bonds and family investment companies, to hold income producing assets in a lower tax environment.

Income Tax

The Government have pledged not to increase Income Tax, National Insurance, VAT or Corporation Tax, so they have their hands tied on one of their biggest tax levers.

How likely is it? – Very low

The Government have effectively ruled out increases to Income Tax, but they could be tempted to introduce a new rate for very high earners or change some of the limited reliefs and exemptions that exist in the Income Tax system to raise tax revenue.

What can you do to plan?

Make sure you do all the basic tax planning options that are available, such as maximising contributions to your pension and ISA and transferring income producing assets to a lower earning spouse

For more adventurous planning, you might consider investments in the Enterprise Investment Scheme and Venture Capital Trusts, which carry 30% Income Tax credits, but these are traditionally higher risk investments, and it will be important to take the right investment advice beforehand.

Non-Domiciled Individuals

The abolition of the non-dom tax regime was announced in Spring 2024 by the former Government. The changes are summarised here.

They did not pass this into law before the election but the Labour Government has stated that it will implement most of the changes. However, it has been noted:

• The restriction of only 50% of foreign income being subject to tax in 2025/26 will not be implemented
• The rate and number of years which apply to remittances post 5 April 2025 of previously untaxed income and gains may change from the proposed 12% and the 2025/26 and 2026/27 tax years
• The date individuals can rebase non-UK assets for capital gains may change from the proposed April 2019 date

The Government has also indicated that transitional arrangements will be put in place for the taxation of existing ‘excluded property trusts’.

How likely is it?- It is happening

The changes are due to take effect from 6 April 2025.

What can you do to plan?

• There is a lack of detail on what the final rules will be, and it is unlikely that the Government will clarify certain aspects before the Autumn Budget – and legislation may take some months to draft.
• Potential planning will depend on individual circumstances. However, non-domiciled individuals should consider their potential impact before Budget day and secure appropriate advisers as soon as possible as they will be in high demand.

Would you like to know more?

It is clear significant reforms are on the horizon. If you would like to discuss the above and how it may impact you, please get in touch with your usual Blick Rothenberg contact.