The upcoming Budget, set to be delivered by the Chancellor later this month, continues to dominate the news. No one at team Harbour Key has seen a run into a Budget like this before, so many clients wanting to act before the Budget, from selling their business, gifting property, leaving the UK etc.
It is understood that the Chancellor has made her choices following intense lobbying from various groups, from both sides, those wanting to raise taxes to pay for public services, those setting out the implications, or those groups who simply do not want tax increases. Rumours are that everything is in mix apart from those taxes protected in the Labour manifesto (income tax, national insurance, and VAT except private school fees), and has been considered, one minister describing it as having a list, and looking at what is the best of a worst job lot!
To give an indication of what the Chancellor and her team have to consider when looking at which taxes to raise, we have put together a summary below of the lobbying/arguments that have been put forward on a few areas.
BUSINESS PROPERTY RELIEF (“BPR”)
BPR is a relief that exempts certain qualifying assets from inheritance tax. One qualifying asset is Alternative Investment Market (“AIM”) listed shares (for example Fevertree & YouGov). The Institute for Fiscal Studies who have made the recommendation, estimates that scrapping BPR relief on AIM shares could generate £1.1bn for the Treasury.
However, if the relief is scrapped, it will impact the value of AIM shares significantly experts have predicted. Several companies listed on the market have written to the Chancellor, warning that the uncertainty surrounding the future of the tax relief is denting investor confidence, which has fallen by about 4% since the new Government took office, due to speculation that AIM shares will no longer qualify for the relief, or the relief is to be abolished. Experts believe a change will impact high-growth businesses and risk derailing the government's mission to grow the economy.
NON-UK DOMICILES
As part of its manifesto, Labour had always stated they would abolish the non-UK domiciles tax rules, and it could be said the last Government did most of the work, making the announcement in their March 24 Budget. It is predicted in abolishing the rules, the Government would raise £1bn.
On the flip side, although it is possible for non-UK domiciles to shelter income and gains from UK tax, in the main for a period of 15 years, they do pay UK taxes, and are the wealthiest individuals in the UK. A change in the rules is likely to mean (and some have already), will leave the UK, resulting in a reduced estimated income following the proposed changes, plus a loss of the taxes non-UK domiciles do pay. Andy Haldane, the Bank of England’s former chief economist, has said that the Government should be “a bit careful” on the changes, so it does not put investors off the UK. Highlighting that any changes might give overseas investors “cause for pause” before setting up businesses in the UK or investing. A study from Oxford Economics, which polled 72 non-UK domiciled, reported that nearly two thirds of non-UK domiciles are planning to leave the UK within the next two years following the March Budget announcement.
INCREASING CAPITAL GAINS TAX
It is understood, and highly tipped, that Capital Gains Tax (“CGT”) rates will be increased, and possible CGT reliefs, in particular Business Asset Disposal Relief (“BADR”) (10% tax rate on the sale of a qualifying asset, with a lifetime allowance of £1m) will be abolished.
However, some have flagged that if want to focus on economic growth and wealth creation, tax increases, particularly Capital Gains Tax, will impact the plan. British entrepreneurs have advised the Government about being too bullish with CGT. Sir Martin Sorrell cautioned that “increasing Capital Gains Tax, especially without index-linking or time apportionment, will drive entrepreneurs and business owners out of the UK.” Tech leaders, warning that a CGT increase could jeopardise the UK's tech ecosystem, pushing talent abroad. The tech sector, contributing over £150bn to the economy annually, is urging the Government to reconsider tax policies that could hinder growth.
The British Chamber of Commerce supported by BGF, the UK's leading private equity investor, have expressed concerns over potential cuts to investment if the Chancellor raises CGT. A survey of 58 companies revealed that 88% of executives view an increase in CGT as detrimental to entrepreneurship, with 74% anticipating a negative impact on their operations. Andy Gregory, BGF's chief executive, said: "What we're hearing of is an uncertain environment that business leaders are having to navigate," adding that this comes as they face "some very specific concerns that may, or may not, be contained in the Budget and could significantly impact growth prospects" for small and medium-sized enterprises. At Harbour Key, we have two examples of clients that we are working with, who have been told by potential investors, they are waiting for post Budget, before they make the decision to invest.
An increase in a tax rate, does not mean an increase in Treasury Revenue. HMRC issued a bulletin in June of the likely effect on tax take of raising tax rates in future years by varying amounts. HMRC’s figures indicate that raising the higher rate of Capital Gains Tax by 10% is likely to decrease the overall CGT take significantly in the near future. Individuals have flexibility as to when to trigger Capital Gains and, faced with higher rates, may wait for tax rates to come down.
A tax reduction can lead to a revenue increase for the Treasury. Only early days as only six months since the change, but antidotally it is noted that the reduction made by the last Government in the highest residential property CGT rate of 28% to 24% in April 2024, has apparently increased CGT take overall for the comparable period the year before - £854 million compared with the previous period of £778millon. (However, part of the increase could be caused by increase sales, with taxpayers concerned about CGT rate increases in the forthcoming Budget.
PENSION TAX FREE LUMP SUM
The Institute for Fiscal Studies has recommended a reduction to the amount that pensioners can withdraw from their pension tax-free. The Institute said there is a “strong case for reform,” highlighting that the system offers generous tax breaks to those with the biggest pensions. The Institute has also suggested that pensions should be subject to Inheritance Tax. At the moment, savers can usually take up to 25% of the amount built up in any private pension as a tax-free lump sum, up to £268,275. Limiting the benefit to a maximum withdrawal of £100,000 would potentially raise £5.5 billion.
It has been thought that the Chancellor, would restrict the tax relief on pension contributions, but recent rumours are this will now not take place. The Chancellor having been warned that adjusting tax reliefs for example a flat rate of relief of around 30%, would hit public sector workers too hard.
Experts have advised against making changes to pensions, as the legislation is complicated, and will take time to change. In addition, the Government wants to incentivise individuals to save for their retirement, so they become less of a burden on the state. Making changes to an individual’s retirement, and taking some of their pension in tax, is not a good message to encourage individual to save for the future.
The above highlights just a few areas of taxation being covered, and the difficulties around just looking at a tax increase in isolation. Until the Chancellor stands up to deliver, her speech on 30 October, we are all in the dark and will have to wait and see what happens, unless you are able to complete any planning pre-Budget.
