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News & Insight • Market Insights
18 July 2024 | Rob Hodgson
Vermeer Financial Planning
Whilst Rachel Reeves prepares to deliver her first budget this autumn, private client advisers and journalists will continue to speculate on the many possible incoming announcements. Immediate tax changes may be unlikely, but the Labour party’s landslide victory in the recent UK election could result in significant tax changes. Although the Labour manifesto was relatively light on detail, in her first speech as Chancellor of the Exchequer, Rachel Reeves announced a full review of the state of public finances. Clear messaging around her desire to increase tax revenue leads to questions about where the extra tax will come from, and who is likely to pay more.
Income Tax
Labour has pledged not to raise income tax; however thresholds will still remain frozen until April 2028. This will result in more people paying more tax as their incomes rise and a greater proportion will fall into higher tax bands. We would advise clients to review their income strategies, ensuring that they are aware of all annual allowances and available tax wrappers. Pension contributions and charitable donations can be used to help manage a client’s tax bracket and we are proactively considering this for many individuals.
VAT
Labour’s plan to levy 20% VAT on private school fees has already created far more controversy than any other policy the party campaigned on. Experts have warned that implementing the tax could be “phenomenally complicated” and we are aware that many law firms are working hard to interpret the practical application. Furthermore, we are also seeing unintended effects on house prices in attractive school catchment areas.
Capital Gains Tax (CGT)
During the election campaign Sir Keir Starmer guaranteed that, under a Labour government, people selling their main home would not pay CGT. Rachel Reeves has said that they have “no plans” to increase CGT receipts by aligning rates with income tax, as had been widely speculated, but we will be watching this very closely and do believe that an increase is possible. Furthermore, the allowances that clients are able to offset against capital gains have reduced drastically over the past few years, from £12,300 to £3,000. We believe the Government would signpost any changes in order to provide time to make sales ahead of new rules. If clients have accumulated large gains with a view to potential crystallisation, having that conversation sooner rather than later would be sensible.
A common demand from Labour’s high-tax advocates is for CGT to be chargeable on death in addition to inheritance tax. Under current rules, assets held at death attract an uplift to market value for CGT purposes, effectively extinguishing the previous gains.
Inheritance Tax (IHT)
There has been significant speculation around possible amendments to the current IHT regime and we expect to see a formal consultation in the autumn. IHT is unpopular among the British public so Labour will want to move cautiously ahead of any changes. We have already seen the tightening of rules relating to the use of offshore trusts for "non-doms" (which describes a UK resident whose permanent home - or domicile - for tax purposes is outside the UK).
Some commentators have spoken of an eventual increase in the headline rate of IHT (currently at 40%, with various reliefs available) but we feel this is unlikely. There has been mention of amendments to some of these reliefs and the rules relating to lifetime gifts, something we will be monitoring closely. If clients have been giving thought to generational planning, we would advise opening up those conversations sooner to consider the current options available, of which there are many.
Pensions
Labour have promised a “pension review” to consider the necessary steps to improve security in retirement, close the pensions gender gap, and increase productive investment in UK markets. Messaging around pensions appears to have softened slightly compared to the months immediately leading into the election. The Labour party has backtracked on its plans to bring back the lifetime allowance (LTA), which is a welcome move for those with larger pension pots.
The broader system of pension tax relief could be part of the review. The current system of relief on pension contributions is based on an individual’s tax rate of 20%, 40% or 45%, whereby a £100 contribution for a 45% taxpayer effectively only costs £55. Rumours about reform usually revolve around the introduction of a flat rate regardless of income tax band. Practitioners have said this would be complicated, expensive and take time to roll out, but we will be monitoring developments on this topic.
We expect Labour will explore the various elements of tax treatment of pension pots on death, pre and post age 75. The current ‘IHT free’ treatment of pensions looks to be generous and ripe for review. Many clients will have viewed their pension assets as a core part of their estate planning, which certainly requires proactive ongoing conversations.
Wealth Tax
There has been commentary within the media about possible wealth taxes during Labour’s term but there have been very few clues as to what that might look like if Labour decided to give this more serious thought. We believe this is unlikely when the cost of implementation and sheer practical difficulty of administering a wealth tax is considered.
Summary
Whilst all of the above are considerations for private clients, we can never predict the ‘unknown unknowns’ and therefore, as always, recommend that clients have a full review of their arrangements to ensure a robust financial plan is in place, where we can prepare for various scenarios.
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