Predicting the Future – Autumn Budget 2024

Whilst the new Labour government have assured us that they will not be making adjustments to VAT, income tax or employee’s NIC, the upcoming budget is causing a lot of unrest among investors and those with potential inheritance tax (IHT) liabilities.

We know that changes are inevitable and that taxes will rise but how will the current government achieve it and who will be affected most?

Below is a summary of what might be in store on 30 October 2024:

  • Capital Gains Tax (CGT)
    • Current rates of CGT are 18% and 24% for second properties and 10% and 20% for other assets. An increase in these rates is possible, perhaps in line with income tax rates, but in the past higher rates of CGT have been mitigated with indexation relief and taper relief to reflect assets which have been held for longer periods of time rather than short term investments.
    • Typically assets held for trading purposes obtain more advantageous tax treatment than those held purely for investment purposes.
  • Pensions
    • Currently individuals can contribute £60,000 per annum into their pension and there is also the ability to carry forward previous years’ unused allowance. Tax relief and a government top up mean that annual contributions can be a great tax planning tool.
    • Pension pots can be accessed from the age of 55 and a 25% tax free lump sum can be drawn down (maximum £268,275).
    • Pension pots which are correctly structured fall outside the estate for IHT purposes and some pots are never accessed to allow wealth to be passed tax free to the next generation.
    • The annual allowance for pension contributions has been decreased significantly over the past 15 years, from £255,000 in 2010 to the current limit of £60,000, so is unlikely to drop further. Especially as the past introduction of auto-enrollment for employees was to encourage individuals was to save for their own future.
    • Is it possible however that the exemption from IHT and the tax free 25% lump sum could be targeted on 30 October.
  • Inheritance Tax
    • It is highly speculated that IHT will see some changes from the upcoming budget but what will be changed is still unclear.
    • Whilst an increase of the current rate of tax of 40% is possible it is considered unlikely.
    • Under current rules a lifetime gift is ignored for IHT purposes after 7 years. So if you make a gift today and survive 7 years no IHT is due. This time period could be extended.
    • At present beneficiaries inherit assets at the market value at the date of death and therefore benefit from the uplift in value from the date the donor obtained the asset until the date of death. This tax free CGT uplift could be removed for certain assets.
    • The maximum rate Business Property Relief (BPR) is 100% and has no upper limit. It is possible that the rate of relief will be reduced or that an upper limit will be applied – £1m in line with Business Asset Disposal Relief?
    • 100% Agricultural Property Relief is available to those who have actively farmed their land for 2 years prior to death or it was farmed by someone else for 7 years prior to death. Some have speculated that this relief may be restricted only to active farmers.
    • 100% BPR is available for shares listed on the AIM market which have been held for 2 years. Is investment in the AIM market an IHT tax planning tool or is it being exploited to avoid IHT? It is possible that this relief may be restricted or removed but this has raised concern that the removal of the relief could stifle the market and reduce investment in younger companies.
    • As mentioned above the IHT benefit of pensions may be limited or removed completely. This could generate significant taxes for the government.

Whilst we do not know exactly what changes the government will make we do know that tax rates will not be getting lower. So what should you do?

Any changes announced on 30 October 2024 will likely not come into effect until at least 6 April 2025 so this should allow for those affected to undertake tax planning discussions and take steps to mitigate tax liabilities.

Whilst it is unlikely that tax changes will come into effect from 30 October we would recommend taking precautionary steps if transactions are already in place:

  • If you are currently in the process of selling assets then this should be completed before 30 October if possible to avoid higher rates of CGT
  • If you are considering making a lifetime gift this should be done before 30 October to avoid the potential increase of the “7 year clock”
  • If you are due to access your pension then this should be discussed now to avail of the 25% tax free lump sum

Whilst we encourage bringing forward any plans which are already in progress we do not recommend rushing to make changes based on predictions and rumors. For example if you have an IHT tax free pension pot which you do not plan to access and rush to withdraw the tax free lump sum, if the rules do not change you have moved cash from an IHT tax free position into your taxable estate. Both legal and financial advice should always be sought in advance.

The upcoming budget has raised more queries and uncertainty with our clients than any budget in recent years.

If you have any queries or wish to discuss your personal circumstances in more detail please do not hesitate to contact us, pre or post 30 October 2024.

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