Ahead of Labour’s Autumn Budget 2024, Chris Riley, Partner and Head of Tax shares his predictions.
It has become an increasing problem on Budget Day in recent years for me to find a new way of writing the foreword to our publication to state that “not very much happened”. This is unlikely to be the case on 30 October as the new Labour Government and subsequent apparent discovery of a “black hole” in the countries’ finances means that all tax commentators anticipate significant change this autumn. Indeed, even before the announcement of the scrapping of the winter fuel allowance for many pensioners, my Tax Partners and I had already described the forthcoming as a once-in-a-generation event.
Therefore, in light of ours, and the media’s speculation on areas for change, we look at what we believe could be expected from the inaugural Labour Budget.
Business Taxation
Generally, I think this will be the area of least potential change. With the Corporation Tax rate relatively high by recent historic standards, and the commitment by the Government to stability and a five year roadmap for Corporation Tax, which has yet to be released.
There have been rumours of an increase in employers National Insurance, but this does not feel the right time with a relatively flat economy, and the general consensus that the burden of employers NICs are indirectly paid by workers, through reduced wage growth. Of potential niche interest (as only the largest groups are in scope), there may be technical adjustments to the basis of the Domestic Minimum Tax which took effect on 1 January 2024, as complexities in the regime come to light.
Income Tax
Aside from potential changes to Carried Interest rules which are considered under Capital Gains Tax, I don’t foresee significant changes for Income Tax for groups other than non-doms, where a removal of the regime with less transitional benefits than previously proposed by the Conservatives is almost certain.
General increases are of course ruled out through the manifesto. We may see some assistance to pensioners through increased age-related Personal Allowances to counter the negative impact of the removal of Winter fuel allowance – and this was of course a Conservative Party pledge, however, this would not benefit the very poorest pensioners where the impact is more strongly felt.
Pensions
This is an area that does seem a likely candidate for change. A return to the Pension Lifetime allowance (which was only abolished from 6 April 2024 under the previous government) is quite possible. Bolder moves such as capping tax-free lump sums, and scrapping higher rate relief but potentially increasing the level of basic “in fund” relief are also possible, but I suspect this would more likely form the basis of an announcement into the taxation of pensions as a whole – of which the proposal to reinstate some form of lifetime allowance would form a part.
Capital Gains Tax
In some ways, the “big one” for our business clients and it has the potential to be just that, but with a caveat. As a profession we have been predicting wholesale changes to the regime for so long, without significant changes taking place. Therefore, there is a possibility that major changes may arise.
The key issue here is that although a lot of attention is paid to the difference with the Income Tax rate and the wide-ranging reliefs available, the general base of potential CGT payers is low, and even when such reliefs are withdrawn, the effect on the revenues raised is not significant overall. Considering many of the predictions made, I would rate the probability as follows.
- Increasing the rate of CGT generally – possible, but with corresponding reliefs for long held assets
- Changes to the Carried Interest Rules to bring more gains into Income Tax – probable, this was a manifesto commitment
- Scrapping Business Asset Taper Relief – possible, but expect some other relief that looks similar in order to maintain the “pro-business” commitment
- Ending uprating of CGT base cost for assets on which Inheritance Tax was not paid – probable as part of IHT reform.
If significant changes are made to the CGT regime, I suspect, as do many, that they will not take immediate effect from Budget Day.
I only remember two significant CGT changes taking immediate effect; the replacement of Entrepreneurs Relief of £10m with BADR of £1m lifetime allowance in 2020, and the introduction of the 28% higher rate on certain gains in 2010). However, other previous changes (such as the introduction, and subsequent scrapping of Taper Relief) both gave significant lead times to introduction, not least because the impact of a forward announcement increases CGT revenues as people sell assets that they would not otherwise dispose of to “lock in” the lower rate/relief.
In addition, there is the fairness question of shock announcements which impact genuine non-tax motivated sales which cannot “get over the line” before Budget Day.
Inheritance Tax
The tax that only 5% of people pay, but 95% of people worry about has been under constant discussion in the past year, with the overweight “fear factor” being the reason that many speculate that there will not be fundamental changes to the core areas of this tax (the rate, the exempt threshold or the residence nil-rate band).
However, this does not rule out changes that will impact those who genuinely are in scope. The manifesto did refer to end of the use of offshore trusts for IHT purposes, but given previous restrictions in this area, this is more likely to target non-doms. It should be noted that the use of offshore trusts more generally (such as for employee share schemes) was also under scrutiny by the Treasury before the election was called.
Some changes do appear likely in respect of Business Property Relief, the most valuable of the IHT exemptions. As noted above, the uprating of Capital Gains Base Cost on untaxed inheritances due to this relief seems likely to end. However, I am concerned (as are many) regarding the potential removal of the relief from shares listed on AIM. While the relief may no longer seem appropriate from a fairness perspective, the removal of the relief could see a significant impact on the companies listed on that market, at a time when the future of UK listings is already under the microscope. If relief is to be removed, a phased approach (possibly over a long timeframe) would seem appropriate.
Finally, in this area there has been widespread speculation of change to the rules regarding IHT on gifts, potentially extending the 7 year window to 10 years, or even taxing such gifts in real time. There is also speculation that the exemption in respect of Gifts out of Income will be removed.
However, such changes in all of these areas would be necessarily complex, and potentially ripe for avoidance opportunities, and therefore with respect to large IHT changes, I see these as more likely to be in the form of consultation announcements, rather than “big bang” immediate changes.
VAT and other Indirect taxes
Beyond the obvious (VAT on private school fees as already announced), there has been very little chatter around indirect taxes. Increasing the rate is blocked by the manifesto, reducing it would cost the government far too much. Some targeted reductions by reclassifying individual products at lower rates (see the “Tampon Tax”) cannot be ruled out, but it is generally accepted that such cuts benefit the manufacturer, not the consumer.
Reference has been made that fuel duty will go up, but on the back of a cost of living crisis this would seem politically problematic (and just increases the future problem of how to deal with the tax impact of moving to electric vehicles).
Business Rates are agreed by all parties to be long due for reform, but every time a plan is considered, it falls into the “too difficult” pile. Therefore I would not be surprised to see another round of “fudges” to assist retail and hospitality businesses with reform kicked further into the long grass.
Therefore, on the basis that a stopped clock is right at least once, I will again predict that the hidden tax that no-one talks about but nearly everyone pays – Insurance Premium Tax – will finally increase from 12% to align more closely with the VAT rate. It’ll happen one day…
Summary
Overall, it is clear from the signposting in recent weeks that something(s) big will happen in the Budget, however it is simply not clear what, with many potential measures noted above giving scope to raise millions, not billions. In trying to close a £20bn gap, some changes will fall on spending decisions, but some must fall on taxation and having boxed in the largest levers with manifesto commitments, the Chancellor is left with a range of options, all of which carry political risk.
As to be expected, we are never certain on what is to come out of a Budget announcement, especially one so highly anticipated. My colleague Stephen Kenny will set his views on what may be possible in the coming days, and the risks that may arise (spoiler – everything is uncertain and there is a risk you could make things worse…).
