By Shailesh Patel FCA, Partner
With the next UK Budget scheduled for 30th October 2024, attention is sharply focused on the fiscal changes that may be introduced.
This Budget is particularly significant as it will be delivered under a new Labour Government, with Rachel Reeves as Chancellor. Amid warnings of “black holes” in the nation’s finances, many are anticipating tax rate increases and the removal of key reliefs.
Prime Minister Keir Starmer’s speech in late August, which alluded to a “painful” Budget, has reinforced expectations of tough measures. However, the exact form and scale of tax changes remain uncertain to some extent.
Having reviewed the latest discussions from accountants, think tanks, and research institutions, I have outlined what may be on the horizon. Given the potential for major changes, it’s essential to consider protective steps for your wealth and assets either before or shortly after the Budget. Here’s a summary of both confirmed and speculated changes.
What We Know Will Feature in the Budget
Labour has already confirmed several measures that will be legislated in this Budget:
Furnished Holiday Lets (FHLs)
In the Spring Budget, the Conservative Government, under Rishi Sunak, announced that from April 2025, the favourable tax regime for FHLs would be abolished. Currently, FHL owners enjoy several advantages, including:
Capital allowances: Owners can claim up to £1 million in capital expenditure via the Annual Investment Allowance (AIA).
Capital Gains Tax: FHL owners may qualify for Business Asset Disposal Relief (BADR), which offers a lower rate than Capital Gains Tax (CGT) if their activities are considered a business.
Financial costs: Mortgage interest and other expenses can be fully deducted from rental income, reducing taxable profits—a benefit not available to non-FHL rentals.
Relevant earnings: FHL income qualifies for relief at the owner’s highest rate of Income Tax, as it is treated as earned income.
Labour has confirmed its commitment to following through on these measures, as outlined in the previous Spring Budget.
Personal Tax Freeze
The previous Government also implemented a freeze on Income Tax and National Insurance rates until 2028, ensuring rates would neither rise nor fall during this period. Labour intends to maintain this freeze. While it might seem a positive move at first glance, the lack of threshold increases has resulted in fiscal drag. As incomes grow with inflation, more people are being drawn into higher tax brackets, effectively experiencing the same outcome as if thresholds were lowered.
Abolition of Non-Dom Status
Jeremy Hunt, the previous Chancellor, had announced the abolition of non-domicile status, alongside a phased-out remittance basis from April 2025. Labour intends to further strengthen these changes, replacing the transitional arrangements with a “modern scheme” aimed at individuals who genuinely reside in the UK for a short time. Additionally, they plan to end the use of offshore trusts for Inheritance Tax avoidance.
Speculations for the October Budget
In addition to confirmed measures, there is considerable speculation about further tax reforms that could emerge in Rachel Reeves’ first Budget. These speculations stem from Labour’s manifesto, recommendations from research bodies such as the Institute for Fiscal Studies (IFS), and rumours circulating within Whitehall.
Capital Gains Tax
A significant concern is the potential reform of CGT, with suggestions that rates could be aligned more closely with Income Tax. If this happens, it may be prudent to reassess your investment portfolio and consider disposing of assets while current rates still apply. Effective use of the annual CGT allowance (£3,000) is essential in mitigating tax liabilities, and advancing larger disposals could offer tax advantages.
There is also speculation that Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief, could be abolished. This relief currently allows eligible individuals to benefit from a 10% CGT rate on business or share sales, up to a lifetime limit of £1 million.
Pension Planning in Uncertain Times
Pension schemes are expected to come under greater scrutiny, with potential changes to the tax relief on contributions. It’s wise to review pension strategies to maximise benefits under the current regime. Labour may also reduce the annual allowance or other pension-related reliefs, which could impact tax-efficient retirement savings. Although a means-tested state pension has been mooted, many experts view this as a policy too complex to implement. Exploring alternative savings options like ISAs could provide valuable tax-free growth.
Additionally, the Government might abolish pension freedoms, which currently allow individuals over 55 to make tax-free withdrawals of up to 25% of their pension pot.
Estate Planning and Inheritance Tax
Inheritance Tax (IHT) is another area where reform could be forthcoming. Labour may revisit IHT thresholds and reliefs, potentially impacting estate planning strategies. Using trusts might become even more essential for managing assets and reducing IHT liabilities. Gifting during your lifetime remains a viable approach, allowing you to reduce the taxable value of your estate.
Making use of the annual gift allowance (£3,000) and gifting surplus income can help mitigate IHT exposure. It is also vital to ensure your Will reflects your current wishes and tax planning strategies.
Be Prepared
While the precise details of the Budget remain unclear until the Chancellor delivers her speech, the signals from recent months suggest the potential for substantial change. If you’re concerned about how these potential changes could impact your wealth or future plans, now is the time to act.
It’s advisable to consult a professional tax adviser to understand your options. Whether you need to amend estate plans, sell key assets such as your business, or take broader steps to shield your wealth from future tax increases, our experienced team is here to assist you. Contact us today for expert advice ahead of the October Budget.