As the Autumn Budget approaches, and with the Government making statements like “those with the broadest shoulders should bear the heavier burden,” it is highly likely that there will be tax increases and possible that reliefs will be abolished.
The news & media channels are making lots of noise trying to predict which taxes are going to be increased from inheritance tax (IHT) to capital gains tax (CGT), and pensions tax relief which is always talked about before a Budget. The Labour Manifesto, and the new Government has confirmed that income tax, national insurance and VAT (apart from private school fees) are protected, but everything else we are told is a fair game. The Chancellor is remaining very tight lipped about the matter, other than stating that corporation tax rates will remain as they are for this Parliament.
What areas could be targeted and for those who have the scope/opportunity, what planning can be taken pre-Budget, if you are concerned about changes and willing to take a gamble on what could be announced:
Inheritance tax
Inheritance tax (‘IHT’) raises £7.7bn (less than 1% of total tax receipts) and only 4% of estates have a tax bill. However, it is on the increase, in the main due to the increase in property values. Areas the Government may look at are:
- To abolish the IHT nil-rate band (the amount on which you don’t pay IHT). which is currently £325k, and instead having an allowance of £500k if you are passing on your main residence to your children. All other assets chargeable to IHT.
- Individuals can plan for IHT by making unlimited gifts under the 7-year “potentially exempt transfer rule” – the Government could introduce a cap on gifts during lifetime and on death, which is a system used in the US.
- Business Property Relief and Agricultural Property Relief, which are the main IHT reliefs and offer up to 100% relief from IHT on certain qualifying assets, could be abolished or restricted.
- Pensions which are currently exempt from IHT, could become a taxable asset for IHT.
Planning - If you are planning to make a gift to a child or grandchild, you should think about doing this now and before the Autumn Budget if possible.
Capital gains tax
Capital gains tax (“CGT”) is less than 2% of total tax take and is the most talked about tax expected to increase in the Budget. The Government could:
- Increase the rate of CGT to 30% or go as high as aligning to income tax.
- Increase the rate of CGT on passive assets (rental properties, shares, etc.) keeping the current rates for non-passive assets, business assets, to support entrepreneurial growth.
- Target some of the reliefs for CGT, for example business asset disposal relief (10% tax rate formerly known as entrepreneurs’ relief).
- Target CGT exempt assets, such that they are chargeable for CGT, for example wine and classic cars, which are now seen as investment assets.
Planning - If you hold listed shares standing at a capital gain, you may want to sell these shares before the Autumn Budget, but you will need to watch the ‘bed and breakfasting rules’ which mean that you must wait 30 days before acquiring the exact same share or same class of a specific fund. If you are in the process of selling a property, the date of taxation for CGT is exchange of contract, so push the transaction to exchange of contracts before the Budget.
Pensions tax relief
Pensions tax relief (the relief paid for by the Government on personal pension contributions), to encourage people to save for their retirement could be reduced for higher and additional rate taxpayers, replaced with a 30% flat rate of tax.
Planning - If you are planning to make a personal pension contribution in the current tax year, if possible, you should do this before the Autumn Budget to lock-in the tax relief under the current rules. You should also review any unused carry forward allowances you have from the previous three tax years to maximise any pensions contributions now.
Dividend Income Tax
Although income tax is protected, 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 employment or 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 abolished.
Planning - Maximise your ISA contributions across your family, and hold such dividend paying shares in your ISA, so that dividend income is not taxed on you. Other planning options can include using offshore bonds and family investment companies, to hold income producing assets in a lower tax environment.
Tax planning should not be looked at in isolation, and not just to second guess a Budget. When dealing with investments, independent financial advice should be taken to understand and support the decisions being made. Consideration also must be given to personal income requirements now and later in life.
A drastic planning action is to leave the UK and become non-UK resident, moving to a low tax jurisdiction country, Dubai being popular, but Italy is offering a low tax regime for those who can afford an annual charge of €200,000. It is reported that a significant number of individuals have already taken this step, liquidating their UK assets.
Should you need to discuss anything in this article or regarding the Budget in general, please do not hesitate to contact one of the team.
