91探花

It already feels like the general election was a long time ago, and the new government has been busy setting out its policy priorities. However, one area where it has been relatively quiet so far, is in relation to tax changes.

This has left plenty of room for speculation, with some commentators anticipating that Labour will need to raise large amounts of tax to meet its spending pledges, as well as the apparently unfunded spending commitments Rachel Reeves claims it has inherited. This is causing concern for some taxpayers, so it’s worth standing back to consider what might happen, particularly in those areas where there have been persistent rumours of impending changes, such as capital gains tax (CGT), inheritance tax (IHT) and pensions.

Capital gains tax changes

CGT rates could be increased to match income tax rates. This was the case for many years prior to 2008, so it is not an outlandish idea in principle.

If CGT rates do go up, we would expect some form of relief to allow for the effect of inflation. However, given that CGT typically accounts for less than 2% of total UK tax revenues, any changes might have minimal impact and may not appeal to a government trying to promote stability and confidence.

Individuals who are concerned about CGT could consider advancing disposals of assets, if appropriate, to utilise current reliefs and potentially lower rates of tax. This can provide certainty, but at the cost of bringing forward the date when tax is due.

Inheritance tax changes

There has been speculation about Labour making changes to IHT, including withdrawing business and agricultural reliefs, and introducing alternative gift taxes.

The withdrawal of business and agricultural IHT reliefs would have significant implications for family businesses, particularly those in the agricultural sector, potentially forcing business disposals and breaking up farms into less commercially viable acreage. The hope is that Labour listens to the many voices warning about such consequences in any changes it makes.

A more likely target could be the IHT relief applying to shares quoted on the Alternative Investment Market (AIM), some of which are treated as unlisted shares and can qualify for 100% business relief after the minimum two-year holding period. The economic logic of exempting such investments from IHT is much less clear, but withdrawing relief could result in a significant fall in share prices for companies whose appeal in part lies in their IHT treatment. It would be an odd move for a government aiming for growth to hamper entrepreneurial companies in this way, but it would not be a surprise to see the conditions for relief at least being tightened up.

To plan for mitigating the impact of potential IHT changes, individuals may want to consider giving assets away now. Gifts of qualifying business assets made today can be free from immediate IHT and CGT charges if the right steps are taken, and families thinking about generational transfers may wish to act quickly to avoid uncertainty.

Pensions changes

Currently, many pensioners are able to withdraw 25% of the value of their pension plan tax-free, up to a maximum sum of £268,275. Funds remaining in the pension plan on death are generally exempt from IHT. 

We think it unlikely that any government would risk alienating current and future pensioners by removing the 25% tax free allowance altogether. Individuals old enough to draw their pension (generally over age 55, rising to 57 from 2028) might consider withdrawing funds now if this is a concern, but should bear in mind that by doing so the tax-free investment roll-up and IHT protection on those funds would be lost. 

The removal of IHT reliefs from pensions would be similarly unpopular, but is harder to plan around. Making withdrawals above the 25% tax-free pension lump sum limit incurs an immediate income tax charge, and it is not possible for an individual to give away the benefit of their pension to another person during their lifetime. This is an area where it is best to try not to worry – remember, the main purpose of a pension is to provide for the individual’s retirement, not their grandchildren.

Don’t panic

To sum up, it’s likely that most of the speculation about the more radical potential tax changes will not come to fruition – at least not in the short term. Individuals worried about the impact of potential changes can take actions now to protect their financial position, but these generally come with a cost, so it’s important to balance the pros and cons. With a Budget scheduled for 30 October, those wishing to act before changes are made should try to move quickly, but it may be better to wait and see.

For more information, please get in touch with Andrew Robins or your usual 91探花contact.