When Labour came to power in 1997, it was to the booming sound of D:Ream. Things can only get better. Now, Keir Starmer and the Labour leadership repeat at every opportunity that “things will get worse before they get better,” and those with the “broadest shoulders” will have to bear the brunt of the tax increase.
This message is clearly getting through to the public, prompting the most questions I have had in recent years in the lead-up to a Budget of what people can do to protect their position before the end of October. Chris Riley, Partner and Head of Tax has set out his Budget predictions.
This article looks at what you can do before the Budget and what you need to consider. Whilst none of us have a crystal ball, based on our experience of previous changes to tax legislation and expected changes this time, we can help you plan – even if all the details aren’t known.
There are certain changes that we absolutely know are coming; the removal of the non-dom regime and the remittance basis, and changes to the treatment of carried Interest. These have been the subject of speculation for months and are well-covered in previous articles.
So what else is likely to change? Two things:
- Capital Gains Tax rates are to increase and align with income tax
- Inheritance Tax – A low-take tax, which, in practice, few are subject to, is a deeply unpopular tax with the public. However, it seems a too tempting target for Labour to ignore.
I also think there is a chance that the government will look to change the rules around pension tax relief and dividend tax.
What to do now
For any pre-Budget planning, it’s important to consider when these changes will take effect. Will it be the day of the Budget, April 2025, or further into the future? It is important that any planning can be completed before the changes come into effect.
To avoid an increase in capital gains, a disposal or transfer of the asset is likely to be required. For capital gains tax, the point of disposal is when there is an unconditional contract for disposal.
Normally, when selling a property, the date of disposal for capital gains tax is the date of exchange rather than completion. But if you are selling a business, there are likely to be conditions in the contract that need to be satisfied, and the transaction date for CGT will be when this has happened. For example, if a transaction requires regulatory approval, the date of disposal will be when regulatory approval is granted. It is important to consider if this can be achieved before the change in rate.
The commercial perspective
It’s also important to consider the wider commercial picture. Whilst I expect the headline rate of CGT to increase, I also expect some measure of relief for people selling businesses. It’s possible that forcing through a transaction earlier may be at a lower value than can be achieved in the future, possibly at a similar CGT rate. Further, a lot of people are looking to “lock in” the current CGT rate by having a transaction that will trigger CGT but is going to trigger a dry tax charge. Before undertaking such a transaction, it’s important to consider all the commercial aspects – including how the tax charge would be funded and what would happen if the value drops in the future.
Investment assets
One area we are seeing people keen to lock in the CGT is on investment assets, often by transferring shares or investments to their children.
Transferring second properties to children is a very popular pre-Budget planning tool as it crystalises the CGT rate of 24% on the property. However, people need to be aware of a number of factors when making such a transfer. For example, if there is a mortgage or debt on the property, it will trigger Stamp Duty.
This is also seen as an attractive option as it also avoids a potential change to the Inheritance Tax rules (IHT). However, there are a number of anti-avoidance rules for IHT that need to be considered, such as the Gift with Reservation of Benefit rules and Pre-Owned Assets Rules. These can keep the value of the assets within the donor’s estate for IHT if they continue to use/enjoy the property.
Start simple
When looking at any tax planning, we generally recommend starting with the easiest options; the same applies before the Budget. Make sure that, where possible, your investments are in tax-efficient wrappers, such as ISAs, and that you’ve maximised your pension contributions. If you are planning to make gifts to a child or grandchild, consider whether you can do this before the Budget.
Once these easy wins have been achieved, you can move on to the more complex planning. Over the past few months, I’ve had a lot of conversations with clients about leaving the UK and moving to low-tax jurisdictions. While this is one of the more extreme tax planning tools, it is the right answer for some people. By becoming non-resident, individuals are likely to avoid the worst of the expected tax increases, provided they can take the necessary steps to achieve non-residence.
If you would like to discuss the impact of the Budget on your personal tax situation, please get in touch with Stephen Kenny.
