Episode 6 – Budget predictions round up: CGT, IHT and pensions

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Hello and welcome to the sixth episode of our First 100 Days

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in Office podcast series, where we delve into the Labour Party's policies

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and how they could impact sectors, businesses and individuals.

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We began this podcast series way back at the beginning of summer

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in early July, just after the general election,

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and now we're just a few days out from Labour's first autumn Budget,

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described by the Prime Minister himself as a painful one, with Labour needing

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to make difficult decisions if they are to close the 222 billion debt gap.

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Today we're going to discuss the changes Labour could make

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to personal business taxation, some of which has been touted

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for quite some time, including Capital Gains Tax, Inheritance Tax,

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pensions and other bits that have come as a surprise along the way,

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including National Insurance charges on employer pension contributions.

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There's a lot to unpick, so let's get started.

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I’m Paul Barham, Private Client Tax Partner.

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Today I'm joined by Zoe Davies, Private Client Tax Partner,

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Ian Goodwin, Employment Tax Partner, and James Robinson,  a Financial Planning Director.

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So if I come to you first and we discuss the impact

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of Capital Gains Tax changes on business owners in the last episode,

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but how could changes to Capital Gains Tax impact and individuals wider estate?

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Thanks, Paul.

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So Capital Gains Tax is applied on the sale of a chargeable asset

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that has increased in value since it was purchased.

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The amount that you pay depends on what you're selling

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and the income tax band that you fall into.

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There have been rumours

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that the government could raise CGT in line with Income Tax.

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However, the Prime Minister has said that raising CGT to 39% is wide of the mark.

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My interpretation of that is that any rate increases will be far more modest.

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It's worth noting that Capital Gains Tax applied to

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the sale of a property is slightly higher, and capital gains tax on other assets.

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So the government could choose to bring this in, along with other rates

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in terms of an individual's estate.

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Currently, there's a Capital Gains Tax uplift

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that's applied to assets passed down following death.

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This means that the current market value is applied to the asset when it's passed

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on, with only Capital Gains Tax applied to any increase in value from the date

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that the assets are later disposed of.

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Effectively, assets that have substantially increased in value

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since acquisition that passed on on debt can reset their Capital Gains

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Tax exposure.

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This can save substantial amounts of Capital Gains Tax, and is often

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the reason why it may not be tax efficient to pass on assets during lifetime,

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especially where they qualify for relief from Inheritance Tax.

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There has been speculation that Labour could remove the Capital Gains

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Tax uplift that's available on death for assets

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that also qualify for relief from Inheritance Tax, including business

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property, agricultural property or assets that are transferred to a spouse.

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As the base cost uplift is intended

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to avoid a double tax charge to Inheritance Tax and Capital Gains Tax.

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At the same time, there's no obvious reason to provide an uplift,

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and any such change would affect numerous estate plans seeking to rely on them.

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With most tax changes taking effect from the start of the tax year.

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Announcing a change in Capital Gains

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Tax rates in advance will impact the market, with investors

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keen to crystallise gains ahead of the 5th of April 25.

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It therefore seems likely that an increase

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would take immediate effect to avoid any panic selling. Zoe.

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Thank you.

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It is certainly a lot of speculation around changes to Capital Gains Tax.

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And I think you're right,

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it does feel more like a question of how much and when, rather than if.

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Another point that

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we've seen lots of attention in the media over the last few months

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have been the conversation about residency and people moving overseas to mitigate

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the impact of those Capital Gains Tax changes.

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It's not a new concept, and Capital Gains

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Tax has a residency based test to it.

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And we advise on it quite regularly.

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I often find that clients explore the possibility of relocating

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as particularly when they're looking to sell a business.

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But that usually decide against it.

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The lifestyle impact usually means that it's not worth pursuing.

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That said, there are certainly lots of clients

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who are considering moving overseas.

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As a consequence of that, the potential for CGT rates to increase

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and those that seem to be able to make that transition

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and manage that balance of that, how they spend their,

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life, manage their personal obligations and their business obligations

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seem to be able to do so with more ease

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if they are used to living their, life

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and spending their time across several countries already.

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It's also worth noting that the UK has some very clear rules

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in its domestic legislation about how to become non-resident.

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They often require spending a lot of time outside of the UK,

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and that differs depending on personal circumstances.

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So being able to manage that plan in a realistic way

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is really important, particularly if you look at the anti-avoidance rules

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that come alongside these conditions.

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There's also been discussion recently about the idea of an exit tax,

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which is something that which

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a number of other countries have within their tax legislation.

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It's not clear if that would be implemented.

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And recently

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headlines have suggested that Rate Tories is distancing herself from the idea.

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Zoe, if I keep with, you for a moment,

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another area of concern for many is the potential changes to Inheritance Tax.

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The number of estates now paying in her successors

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increased considerably due to inflation and frozen thresholds.

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What changes do you think we could see in inheritance tax in the upcoming budget?

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Thanks, Paul.

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And it's no surprise that changes to Inheritance Tax might worry people.

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We don't expect that the 40% headline rate of inheritance tax will change,

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and we don't expect the limits,

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which are known as no rate bands, to decrease either.

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However, we do think that the government may look to tighten rules on gifting money

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away, perhaps by taxing gifts over a certain size

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or by introducing a lifetime limit of gifts.

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Some other areas that the government could look at are

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removing business relief on, ehm assets, limiting agricultural property

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relief and tightening the criteria for business relief.

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To apply.

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Given the uncertainty over how the government might look to change

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Inheritance Tax legislation, and given that the planning

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typically involves significant decisions that impact an individual's long term

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financial position, we are being cautious about undertaking planning in this area

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currently, where individuals have planned to make certain gifts

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we're discussing with them whether such gifts

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should be made over the coming months.

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But from a business perspective, Inheritance Tax business relief

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shares in an unlisted company, such as those in

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Enterprise Investment schemes, aim and package products

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are designed to mitigate IHT and we may well see the government tighten these up.

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In any event,

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I often find a review of succession plans doesn't happen as often

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as it ideally should, which is really on any life event within the family.

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Births, marriages, divorce and every five years is failsafe.

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Really.

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So with whatever's announced, this should be a good prompt

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to ensure affairs are in order and tax efficient.

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Zoe. Thank you.

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If I go to my list of popular topics that have been discussed

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in the run up to the budget, then, pensions is next on it.

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James, if we come to you next, I feel like we'll see some further changes.

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Given that Labour has reneged on their plans to reintroduce lifetime

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allowance.

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Perhaps you could explain a little bit more about what they might be.

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Yeah, you’re

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right, Paul, that,

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working the starting point for a lot of clients over the last year

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or so has been to worry about the readjust the lifetime announced,

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because the starting point when it was announced by the

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conservative government was the Labour said they would introduce it.

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However, since getting into power, Labour have said that they're not really

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looking forward looking to to reintroduce that.

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However, there are four particular rumoured areas of change,

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so I'll just run through those as quickly as I can.

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The first is whether a flat rate of tax

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relief is applied on on pension contributions,

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as opposed to the current regime where you get tax relief

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for your marginal rate so you can get anywhere between 20 and up

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to 60% tax relief on some contributions, and whether they replace that

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with a rate of, say, 20% or 30%, something like that.

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That's one that's been discussed

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for a number of years, and it feels quite unlikely,

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really, just because of how difficult it would be to implement.

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So Steve Webb, the previous,

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a previous pensions minister, said he even looked at it in the past,

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when he was in his role and that it was just too complicated to implement

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between all the different contribution methods and pension structures.

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So all of the for that feels very unlikely.

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The three

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possibly more

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likely areas are, reconsidering the likes of,

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the annual allowance for for pension contributions, the lump sum allowance,

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which is how much tax free cash you can take from, pensions

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and then taxation of pension benefits on death.

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So I'll run through each of those.

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So the annual allowance is the is the annual limit

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on, pension benefits that can be built up while receiving tax relief?

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It's changed quite a lot over the few years, the last few years.

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And the, the current standard annual allowance is 60,000,

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but this can be reduced for high earners

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and it's changed quite a few times of said.

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So we've seen anything from £4000 to

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£60,000 is an annual allowance over the last few years.

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And if the government is looking to reduce the limit, it's

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admittedly fairly generous in relation to previous years £60,000.

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So they could be looking at reducing that somewhat.

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And maybe do they

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reduce that back to a say 40,000 limit they had a couple of years ago?

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The challenge they've got is when they reduce the standing allowance,

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they bring a lot of senior doctors back into scope of paying this tax charge,

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which does sometimes mean that they then decide to retire

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rather than keep working in the NHS.

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So whatever decisions they've got to make on the taxation perspective,

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they've also got to balance politically with how they look after the NHS as well.

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With whatever mandate they set out.

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Secondly, I said the lump sum allowance could potentially be looked at.

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So the lump sum allowance is the lifetime limit on how much tax free cash can be

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paid from a pension currently set to £268,275.

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The reason that such an odd figure is it used to be set

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to 25% of the previous lifetime allowance.

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It's no longer linked to anything, and so the government could reduce that figure.

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And we've even seen the likes of the the IFS, the Institute for Fiscal Studies

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recommend the government should consider reducing this allowance,

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but it is seen as quite an unpopular move in the pensions markets.

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As a result of these rumours, we've seen, we've had a surge in conversations

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with clients where they're asking about

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whether they should take their tax free cash ahead of the budget's

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focus.

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When you look at how previous reductions, the long term allowance came through,

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and therefore how previous reductions in tax free cash amounts came through.

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At the same time, remember that 25% linked to the lifetime allowance?

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They also brought in, transitional protections

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for anyone with pensions and tax free cash above those, newly

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set limits, including Labour government, when when they did it previously.

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So we'd hope that if they did reduce the amount

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of tax free cash that that's possible take over someone's lifetime.

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If someone already has a pension in excess of that new limits,

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then there should be hopefully some form of transitional protection

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to protect their old amount.

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They could have had before legislation change.

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Just as ever.

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Note that our crystal ball is is just as accurate as anyone else's on a

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topic like this.

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Finally, what does feel a little bit

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too good to be true at the moment is the taxation of pension death benefits.

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Currently, it's possible for a beneficiary to receive a pension fund of pretty

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much any level without any immediate death taxes being levied.

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And when they removed the lifetime allowance, it was with,

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a trade off of saying, well, we won't tax you during your lifetime

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if you've got a large pension, but we will tax it on death.

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With how the changes have come through, it's now possible for beneficiaries

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to effectively, indefinitely defer when they do pay

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that that tax charge by choosing when they when they take income from that pension.

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You of course need to have the right options

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within the original pension to allow this sort of flexibility.

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But given the growing level of pension wealth being stored away

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and the rhetoric and the landscape of the current government

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of needing to raise funds, it wouldn't be surprising to me if this is

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if a different view is taken, they look to apply a tax charge on death

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rather than when someone comes to come to draw from the pensions.

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Obviously, anyone that thinks that could be affected

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by any of this should to check what their pension schemes allow.

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Firstly, and take appropriate advice.

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If you are considering tax free cash ahead of the budget

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by the time this podcast comes out, I fear it may be too late, but

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it's worthwhile making sure that whenever you do anything

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around this, consider the other taxes involved as well.

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And just as Zoe's been talking about inheritance tax earlier, by taking tax

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free cash, you could just be increasing your inheritance tax liability.

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So really do think carefully about it,

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James.

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Thank you. And I'm up bringing you in here.

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One rumour that's been gaining some traction is the possibility

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of National Insurance being charged to an employer.

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Pension contributions.

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I know you've been looking at this quite closely, so could you

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perhaps explain a little bit more about how these proposed changes

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might come in and the impact he would have on employers?

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Of course.

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Thank you, Paul, and thank you, James, for earlier.

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I think it's quite out that this budget is at Halloween

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because some of the changes that are,

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kind of speculated and rumoured are quite scary, actually.

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And this definitely is the case for employers.

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Now, the things we're seeing mooted at the moment relate

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to employer national insurance, on employer

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pension contributions, potential rises of employer National Insurance

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and potential rises of apprenticeship levy,

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which is now known as a growth and skills levy.

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Let me start with employer National Insurance on employer

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pension contributions.

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Quite a mouthful to say, you'll admit.

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But what we are seeing there is at the moment

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when an employer makes a pension contribution,

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there's no national insurance that the employer has to pay on that.

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And the government seems to be thinking about this

00:14:20:04 - 00:14:23:10
based on all the speculation rumour front pages we are seeing.

00:14:24:03 - 00:14:27:03
This comes with lots of potential issues.

00:14:27:06 - 00:14:29:10
And we've looked into it to quite a degree.

00:14:29:10 - 00:14:31:07
Rarely here as well.

00:14:31:07 - 00:14:34:01
So at the moment, if you're if you're paying an employer

00:14:34:01 - 00:14:37:20
pension contribution, no national insurance is paid by the employer on that.

00:14:38:09 - 00:14:41:04
Say we're going to put employer National Insurance on employer

00:14:41:04 - 00:14:42:14
pension contributions.

00:14:42:14 - 00:14:45:14
That would be a significant cost to the public sector,

00:14:45:14 - 00:14:48:14
given that their pensions schemes are typically defined benefit

00:14:48:14 - 00:14:52:07
career average schemes in upwards of 2030 40%.

00:14:52:07 - 00:14:54:12
Employer contributions are going in.

00:14:54:12 - 00:14:58:04
So that could potentially widen this black hole that is being talked about,

00:14:58:16 - 00:15:01:05
where they look to carve out the public sector

00:15:01:05 - 00:15:02:19
that could cause some issues as well.

00:15:02:19 - 00:15:06:11
From a finance and equality perspective with private sector schemes

00:15:06:15 - 00:15:10:16
where employers will have a lot more cost to support, particularly given

00:15:10:16 - 00:15:14:18
that national minimum wage is likely to increase the national minimum wage, i.e.

00:15:14:18 - 00:15:17:23
the National Living wage, which is, potentially going to go

00:15:17:23 - 00:15:21:20
from the £11.44 to something in the region of £12 will apply

00:15:21:20 - 00:15:25:21
not just from those 21 and over, but those that are 18 and over.

00:15:26:08 - 00:15:28:01
From the new tax year as well.

00:15:28:01 - 00:15:30:11
So there's those costs to think about.

00:15:30:11 - 00:15:33:21
One thing that I've been really looking at here has been salary sacrifice.

00:15:34:16 - 00:15:37:09
Now at the moment that helps a lot of individuals

00:15:37:09 - 00:15:40:18
and organisations reduce cost, increase net pay.

00:15:41:03 - 00:15:45:00
Where that happens will see net pay reduce, which will potentially

00:15:45:02 - 00:15:48:02
go against one of the manifestos from the election.

00:15:48:10 - 00:15:52:01
So there's a few things to think about that separately.

00:15:52:01 - 00:15:55:00
There's also some more complex areas to think about.

00:15:55:00 - 00:15:58:03
What happens when you're putting in, contributions

00:15:58:03 - 00:16:02:05
from earlier periods, that, that weren't recognised at the time.

00:16:02:11 - 00:16:05:02
Will they need to have employer National Insurance?

00:16:05:02 - 00:16:06:22
What happens if there's other discrepancies

00:16:06:22 - 00:16:09:14
or pension scheme expenses that needs to be reported?

00:16:09:14 - 00:16:12:04
Will they have employer national insurance on say,

00:16:12:04 - 00:16:14:13
and when I get into the payroll technicalities

00:16:14:13 - 00:16:16:17
and what they are we actually playing paying

00:16:16:17 - 00:16:20:02
employer national insurance on these employer pension contributions.

00:16:20:18 - 00:16:23:11
These are the date they're paid across the the pension scheme is that date

00:16:23:11 - 00:16:25:00
they recognise on the payslip.

00:16:25:00 - 00:16:28:12
There'll be lots of unanswered questions there and certainly a need

00:16:29:04 - 00:16:32:16
to consult on it with wide audience to make sure

00:16:32:16 - 00:16:35:01
that if they were going to introduce something like this,

00:16:35:01 - 00:16:37:20
it was done as effectively as it can be,

00:16:37:20 - 00:16:42:05
I would say, pausing there, that in increasing employer

00:16:42:05 - 00:16:46:09
national Insurance generally, or increasing the apprenticeship levy i.e.

00:16:46:09 - 00:16:47:18
the growth and skills levy

00:16:47:18 - 00:16:50:11
would potentially be an easier move for the government to do given

00:16:50:11 - 00:16:55:06
it would take less consultation and it's already built into payrolls, etc.

00:16:55:08 - 00:16:59:00
so increasing the percentage wouldn't make a huge difference there.

00:16:59:05 - 00:17:02:06
But looking at employer National Insurance, on employer pension

00:17:02:06 - 00:17:05:14
contributions would certainly need a lot of information

00:17:05:14 - 00:17:09:00
to be reviewed and a lot of devil to be looked at in the detail.

00:17:10:00 - 00:17:11:01
And thank you.

00:17:11:01 - 00:17:12:17
It does seem that if they were to introduce

00:17:12:17 - 00:17:14:15
National Insurance on employer contributions,

00:17:14:15 - 00:17:18:10
it would have a significant impact on a number of employer related areas.

00:17:19:09 - 00:17:21:05
We've recorded nearly all of these podcasts

00:17:21:05 - 00:17:24:22
and still yet to talk through a number of points that have been talked

00:17:24:22 - 00:17:27:22
about quite a lot over the last 2 or 3 months.

00:17:28:04 - 00:17:31:13
There were a few items that Labour have confirmed are going

00:17:31:13 - 00:17:35:04
to take place in terms of changes or new proposals,

00:17:35:16 - 00:17:40:12
and some of those were previously announced by the conservatives

00:17:40:12 - 00:17:43:12
and they've just confirmed they are to go ahead with them,

00:17:44:01 - 00:17:46:12
just to sort of pull together a few of the other points

00:17:46:12 - 00:17:49:09
we've not had a chance to discuss in any detail today.

00:17:49:09 - 00:17:53:08
We know that several changes around Non-Doms and the way in which

00:17:53:08 - 00:17:58:03
they are tax some proposals for the new SIC regime remain probable.

00:17:58:04 - 00:18:01:10
Labour are likely to alter some of the proposals

00:18:01:15 - 00:18:04:07
announced by the conservatives earlier in the year.

00:18:05:17 - 00:18:08:23
VAT and private school fees is coming and will be applied from the 1st

00:18:08:23 - 00:18:12:15
of January 2025, and any payments made in advance of this date

00:18:12:15 - 00:18:16:13
in respect of the January terms are expected to attract VAT.

00:18:17:16 - 00:18:20:00
Labour has confirmed that it will go ahead with the plans

00:18:20:00 - 00:18:23:00
to abolish the furnished holiday lets regime,

00:18:23:00 - 00:18:26:00
with effect from April 25th,

00:18:26:02 - 00:18:28:01
and of course they are intending

00:18:28:01 - 00:18:31:05
to close down on tax loopholes so the government will increase

00:18:31:05 - 00:18:35:09
HMRC resources in a bid to identify and increase tax revenue.

00:18:35:17 - 00:18:38:12
Having an additional 5000 staff to bolster

00:18:38:12 - 00:18:41:12
the management and scrutiny of tax compliance.

00:18:41:15 - 00:18:44:11
What's not yet evident is which sectors

00:18:44:11 - 00:18:47:11
and which areas of risk they won't know.

00:18:47:11 - 00:18:48:12
From experience.

00:18:48:12 - 00:18:51:16
We think HMRC will seek to undertake a greater number of audits

00:18:51:16 - 00:18:55:11
concerning employer compliance, National Minimum Wage, B8

00:18:55:20 - 00:19:00:04
and focus scrutiny on Ir35 and research and development.

00:19:00:18 - 00:19:04:03
In short, if an organisation has not had a review for the past five years,

00:19:04:03 - 00:19:05:02
then it's pretty safe

00:19:05:02 - 00:19:08:02
to assume there should be expecting one in the not too distant future.

00:19:10:07 - 00:19:13:04
Just to wrap up, thank you all for joining me today.

00:19:13:04 - 00:19:15:03
Thank you to the panel for spending some time

00:19:15:03 - 00:19:18:20
to share their thoughts on where we think things might change in the Budget

00:19:19:10 - 00:19:21:22
if the rumour mill is to be believed, and we could certainly see

00:19:21:22 - 00:19:24:22
some significant changes.

00:19:25:08 - 00:19:28:00
Thank you very much for listening to today's podcast.

00:19:28:00 - 00:19:31:23
As always, if you have any concerns about how you could be impacted by the changes

00:19:31:23 - 00:19:35:18
announced in the budget, then by all means get in touch via our website.

00:19:37:04 - 00:19:40:22
All that remains for me to say is that we hope you enjoyed the podcast today.

00:19:40:22 - 00:19:45:06
Please, of course, remember to like, subscribe and  leave a review after listening.