The personal tax trap – Preparing for the next Budget

We now have a date for the next Budget – 30^th October 2024. The run-up to this important fiscal event for the UK is always closely watched, but never more so this time around.

With a new Labour Government in power, a new Chancellor in Rachel Reeves and a warning of “black holes” in the nation’s finances, many experts are anticipating increases in tax rates and the removal of key reliefs.

This has only been reinforced by the Prime Minister’s speech at the end of August which warned of a “painful” Budget ahead.

However, what form of taxation will be affected and by how much remains unknown – to a degree.

We have looked over the rumblings that have been taking place and their various reports from other accountants, think tanks and research houses to see what the Budget may hold.

Given the potential for seismic change, it may be necessary to take steps either before or shortly after the Budget to protect your wealth and assets, so it is important you understand what is being proposed and speculated on.

What we know will feature in the Budget

There are several things that Labour has already indicated that they will proceed with and legislate for in the Budget.

Furnished Holiday Lets – The former Conservative Government under Rishi Sunak announced that from April 2025, the favourable tax rules related to Furnished Holiday Let (FHL) relief would be abolished.

We have covered this topic in more depth in one of our recent articles, so please click here to read more on FHLs and how they’re changing.

Personal tax freeze – Similarly, the former Government had set out a tax freeze on Income Tax and National Insurance until 2028, which would ensure that tax rates didn’t increase or decrease during this period. Labour has confirmed that they will retain this pledge.

This may at first seem like a positive step for many taxpayers as Income Tax thresholds won’t decrease, which would result in more of your money being taxed.

However, the fact that they aren’t increasing means that many taxpayers are feeling the impact of fiscal drag as their incomes grow with inflation. This is effectively having the same impact as thresholds for basic, higher and additional tax being reduced.

Non-dom status abolished – Before the election, in the Spring Budget, the former Chancellor Jeremy Hunt announced the abolition of non-dom status in the UK and the eventual removal of the remittance basis through a transitional process.

The new Government is committed to strengthening its plans by introducing a “modern scheme” designed only for those “genuinely in the country for a short period.”

Labour’s plans will not retain the transitional arrangements set to be in place from April 2025, and they have confirmed their intention to end the use of offshore trusts to avoid Inheritance Tax.

What is being speculated on for the October Budget

Beyond what we already know, there are several other areas of taxation that many fear may become targets for Rachel Reeves in her first Budget later this year.

These predominantly come from recommendations from research bodies, such as the Institute for Fiscal Studies (IFS), Labour’s manifesto pledges or rumours within Whitehall.

Capital Gains Tax – A significant concern lies in the forthcoming reforms to Capital Gains Tax (CGT). The Government has signalled its intention to potentially align CGT rates more closely with Income Tax rates, making it imperative to reassess your investment portfolio and shareholdings.

This shift could influence the timing of your asset disposals, offering an opportunity to capitalise on existing rates before any alterations are implemented.

Effective utilisation of your annual CGT allowance (£3,000) is crucial in mitigating your tax liabilities.

Furthermore, advancing any substantial disposals might prove advantageous should these reforms come to fruition.

As an aside to this, it is rumoured that Business Asset Disposal Relief (BADR) could also be abolished in the Budget. For those eligible, this relief – formerly known as Entrepreneurs’ Relief – cuts the rate of CGT to 10 per cent for gains made from the sale of a business or shareholding up to a lifetime allowance of £1 million.

Pension planning in an unstable time – Pension schemes are also under increasing scrutiny, with potential changes to the tax relief on pension contributions looming.

It is prudent to review your pension strategies to maximise benefits under the current regime.

The new Government may also consider reducing the annual allowance and various other allowances on pension contributions, which would significantly impact the tax-efficient savings potential for retirement.

Although the introduction of means-tested state pensions has been suggested, many experts deem it an impractical policy due to the substantial legislative and administrative challenges it would entail.

In light of this, exploring alternative tax-efficient retirement savings vehicles, such as ISAs, could offer additional tax-free growth opportunities.

For those with considerable pension assets, establishing a Family Investment Company (FIC) may present a beneficial strategy.

FICs provide a flexible structure for wealth management and offer potential tax advantages for intergenerational wealth transfer.

In addition to these issues, it has been suggested that the Government may abolish the pension freedoms that allow those over the age of 55 to make tax-free withdrawals of up to 25 per cent of their pension pot.

Estate planning and Inheritance Tax – Inheritance Tax (IHT) is another area poised for potential reform. The new Government may choose to re-evaluate IHT thresholds and reliefs, which could necessitate a revision of your estate planning strategies.

The use of trusts may become increasingly vital in managing and protecting assets, potentially reducing your IHT liabilities and ensuring that wealth is transferred in accordance with your intentions.

Gifting assets during your lifetime remains a viable strategy to reduce the taxable value of your estate.

Utilising the annual gift allowance (£3,000) and making regular gifts out of surplus income can significantly minimise IHT exposure.

Additionally, it is essential to review your Will to ensure it accurately reflects your current wishes and tax planning strategies.

Be prepared

While nothing is entirely certain until the Chancellor speaks, the rumblings from the last few months certainly suggest the potential for substantial change in October.

If you are concerned that your wealth or plans for the future may be put at risk by the upcoming Budget, it is important that you plan ahead.

Now is the time to engage with a professional tax adviser to understand your options should you need to amend plans for your estate, sell important assets, such as your business, or simply take wider steps to protect your wealth from future increases in taxation.

Speak to our experienced team today for advice ahead of the October Budget, we are here and ready to assist you.

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