Its a pretty low bar, but I can’t remember a Budget as highly anticipated as this one.
Some factions of our media seem to have, to put it politely, lost the plot - engaging in increasingly fevered hysteria about just how bad we are all going to get it.
Here she comes, Comrade Rachel - the Grim Reaper of number eleven, ready to swing her scythe at the wealthy of Britain. Turning them upside down and shaking out their pockets in an attempt to fill up the government coffers.
We still have five weeks to go too - God help us. Expect the rhetoric to only become more unhinged.
In an effort to a) bring some common sense to the discussion and b) to ensure that I look thoroughly stupid in a month’s time I thought it was a decent time to recap what is and isn’t on the table, and look at the odds of some of what has been mooted being introduced.
As ever, none of the following constitutes formal tax advice. If you have any queries about your situation please consult a regulated adviser.
I have written in the past about the dangers of trying to “front run” changes to the tax rules, and this remains my stance. Doing something significant and irreversible on the basis of what a politician says they might do, is a road to ruin.
What changes have already been announced?
The highest profile change made so far, or the one that seems to have wound the most people up anyway, is the introduction of VAT on private school fees. From 1st January 2025 VAT will be applied to fees, with any payments made in advance of this date taxed as of the 29th July 2024.
The government have also confirmed that it will proceed with the Conservatives’ plans to abolish the furnished holiday lettings regime with effect from April 2025. At present, property owners who rent out holiday lets benefit from some (quite chunky) tax exemptions versus “regular” landlords. These exemptions are being removed.
What has been ruled out?
Labour have explicitly ruled out inflicting taxes on “working people”, which presumably is short hand for employees.
There will be no changes made to income tax, (employee) national insurance or VAT. Rachel Reeves has already previously ruled out raising Corporation Tax - but that was before the infamous £22bn “black hole” was discovered.
What might be coming down the pipe then?
This being the case we are then left with a number of contenders for what could be coming and there is a recurring theme here - greater taxation of those whose wealth comes from assets rather than “earned” income (human capital).
Raising Capital Gains Tax (CGT) rates
Don’t forget that it was the Tories who reduced the annual tax free CGT allowance from £12,300 a couple of years ago to £3,000 today. This reduced allowance, combined with the reduction of Business Asset Disposal Relief on the sale of a trading business, means that the main option left to squeeze CGT further is through an increase to the rates payable.
At present, CGT on the sale of shares is 10% for basic rate taxpayers and 20% for higher rate taxpayers. Basic rate taxpayers pay 18% on the sale of a rental property and higher rate taxpayers pay 24%.
All of these rates could increase, with some commentators suggesting that rates could rise to match income tax rates (20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers).
I would be surprised if there was full alignment - I would expect that landlords will remain subject to higher rates than for other assets. We have a shortage of property available to younger buyers (who tend to vote Labour), and disincentivising casual landlords from taking on second or third properties is one way to try and free up some supply.
It looks very likely that there will be some change to the rates payable on CGT, but my hunch is that these will not come in until the end of the tax year.
First off, making changes to the rules halfway through the tax year would mean an administrative headache for HMRC1. Second, if the government announced that CGT rates were going to go up as of the 5th April next year, we would likely see a spike in tax receipts as people sell assets to take advantage of the lower rate ahead of time. Early in a term, surely a new government would welcome such a boost?
Likelihood: 9/10. Looks nailed on, but my guess (and it is a guess) is that this won’t “kick in” until the end of this tax year.
A reduction of the ISA allowance
Thanks to Jonny Raymond who sent me this report from the Resolution Foundation, which highlights that in tax year 2020/21 only 7% of ISA holders maxed out their ISA allowance of £20,000.
These people are, by definition, wealthier - and therefore retaining the ISA allowance at its current level primarily benefits those with “the broadest shoulders”. Put another way, reducing the annual allowance wouldn’t hurt the savers that the ISA was originally designed to help.
Torsten Bell, formerly the Chief Executive of the Resolution Foundation is now the Labour MP for Swansea West and as such potentially has the influence to make such a move possible.
Likelihood: 7/10. I haven’t seen this discussed much, if at all. There is usually a surprise at a Budget and this could be the left field shout this time around.
Applying Inheritance Tax to pension savings
For the well-off, over the past few decades pensions have morphed from being a savings vehicle for retirement to a method of inter-generational wealth transfer.
Income tax relief on contributions, growth free from capital gains and income tax, the ability to withdraw 25% tax free and inheritance tax relief on assets held within a pension. The rules around pensions are currently very generous, and the inheritance tax relief in this context looks a bit exposed.
It is estimated that there is between £600-£700 billion in defined contribution pensions. Not all of these would incur an inheritance tax liability of course, but penalising the ones that do would seem to align with Labour’s objectives.
Likelihood: 7/10. I think this is likely - planning opportunities in advance are limited, we will have to wait and see.
Removing the CGT uplift on death
At the moment, when someone dies any gain that they hold on an asset is “wiped out” and the cost is uplifted to match the value as at the date of death.
Doing this means that assets which are already potentially subject to inheritance tax at 40% are not additional subject to Capital Gains Tax. CGT is only payable when someone sells an asset, but some estates may be forced sellers of holdings in order to raise funds to pay inheritance tax.
Likelihood 3/10. I actually think this would be grossly unfair, and result in some estates paying an effective “death tax” of 60% plus.
Raising Dividend Tax rates
Dividend income is currently taxed less aggressively than “regular” income, but this must be placed into the context that dividends are paid out from businesses net of (after) corporation tax.
Making changes in this area might make sense to a Labour government, but I don’t think that they would be raised across the board. There may be some kind of carve out for small business owners (he says, in hope).
Likelihood 5/10. Coin flip.
Removing the entitlement to “Tax Free Cash” from pensions
Since the removal of the Lifetime Allowance, the Lump Sum Allowance has been introduced in its stead - pension savers can now withdraw 25% of their pension tax free, up to a limit of £268,275. Because the tax free amount has been changed to a flat figure rather than a percentage, the suggestion is that this amount will be reduced or removed altogether.
Pensions have been held up as a target for Chancellors seemingly forever, and the pensions rules have been messed about with so much now that pension legislation represents a quagmire. The government need to be very careful about changing the rules significantly yet again, we have a large and growing issue in the UK regarding how we are going to pay for our aging population in the future. Incentivising individual accountability for our future financial security is crucial in addressing this.
I think that Labour choosing to completely remove the ability to take 25% from a pension tax free is very unlikely. As Tom McPhail highlights in this thread - “tax free cash” entitlement is one of the few aspects of pensions saving that is relatively well understood. Messing about with it would get negative traction. Lots of folks in their early fifties, who have spent their working careers working under one set of rules would be disproportionately affected at the point of leaving the workforce.
Likelihood: 4/10. A reduction looks likelier than a full removal to me, and would incentivise workers to stay in the workforce for longer. A full removal would be too drastic.
A “Wealth Tax”
Some of the usual suspects have been suggesting that the government could even impose a broad “wealth tax” - perhaps 1% of an individual’s wealth as a one off, or recurring redistribution of wealth across the country.
While this makes for an attention grabbing headline, I just think that it would be completely unworkable. Imagine how much admin would be involved establishing the fair value for properties, land and private businesses around the country. It would be a nightmare.
Likelihood: 1/10. Not going to happen (famous last words…).
We undoubtedly have economic issues as a country that need addressing, and Labour have a large mandate. But my gut instinct is that what ends up being introduced will be less severe than feared.
I don’t think that it is controversial to say that this doesn’t appear to be the most “left leaning” of Labour governments, and the private sector look best placed to address some of the major problems that we have as a country - providing investment, generating growth, sparking productivity. Seriously alienating private enterprise this early in a term would be short sighted.
As we all know, the media are in the engagement business and fear focusses the mind. A lot of what we are bombarded with day to day demands that we “do something”, when in reality the best decisions are made slowly after full interrogation of the facts. Good financial management demands consideration, not reaction to a headline.
The tax landscape will change, investment markets will change - and not always in our favour. When events are out of our control, the one thing that we can always control is our reaction.
Have a great weekend.
Can I ask a favour? I am thinking of putting on a post Budget webinar on Thursday 31st October to summarise the key takeaways and any planning opportunities that crop up.
But before I sign up to a late night on the 30th getting prepped, I’d like to establish whether there is actually any demand. If you could let me know if you would be keen by answering the below poll, that would be very helpful.
And if you have any questions, chuck them into the comments or drop me an email at david@beechgrovefinancialplanning.co.uk.
Although there is precedent for this - George Osborne raised the CGT rate payable by higher rate taxpayers half way through tax year in 2010.
Great summary David. I pretty much agree all you say. Let’s see! Suffice to say, I feel we need to find a greater balance of tax between those who have and those who haven’t…
What a treat to be name-checked. Very good Dave and little to disagree with in here.