We are now eight weeks into a new Labour Government and it remains a hot topic of conversation. Somewhat unsurprisingly Rachel Reeves, the new Chancellor, has already told us that the finances are in a worse state than they initially thought and we should brace ourselves for tax rises with Keir Starmer now on record suggesting the upcoming Autumn Statement will be painful.
We are fielding a lot of questions about what exactly this means and whether people should be taking action ahead of any announcement. With this in mind, we have put together our thoughts based on everyone we have spoken to in the profession and everything we have read.
It is worth noting that the purpose of this article is not to be political in any way, shape, or form but more an attempt to show that we are not turning a blind eye to what could be a very important Autumn Statement for us and our clients.
Starting with what we know. Labour made it very clear that they did not intend to touch Income Tax, National Insurance, or VAT in their manifesto. These three taxes make up roughly two-thirds of the total tax intake so Labour has limited room for manoeuvre going forward.
The Government could therefore focus on, most likely, three core areas; Capital Gains Tax, Inheritance Tax, and Pension Legislation.
Starting with Capital Gains Tax (CGT), there are a few different options. These include, but are not limited to increasing the underlying tax rates, removing or reducing the annual exemption, or getting rid of the £1m business asset disposal relief limit. The latter of these would be contradictory to the pro-growth agenda that Labour is touting so removing an annual exemption could be on the cards but this is already down to just £3,000 per person, per annum. Removing this, at the current rate of CGT would mean a maximum additional tax take of £600 per person.
If both of these were left untouched, they could also look at the underlying tax rates but, by how much and when? There are rumours of bringing CGT rates in line with income tax but this would still leave the question of when to bring it in. A mid-year tax rise would be very complicated and very unusual but not completely impossible. The main issue is that if they announce it and wait until the end of the tax year, they risk the overall revenues being reduced by people crystalising gains before the end of the tax year at the current rates.
Inheritance Tax (IHT) also has a few different routes that Labour could choose to go down. There are several IHT allowances that an individual has available to them but mainly a Nil Rate Band of £325,000 and a Residence Nil Rate Band of £175,000. The Residence Nil Rate Band is currently tiered down if an estate totals more than £2m. Either of these allowances could be looked at, the Residence Nil Rate Band could well be abolished or even the estate size for tiering of the Band could be reduced. With IHT currently at 40%, the abolishing of the Residence Nil Rate Band for a couple with an estate over £1m would see an extra £140,000 per couple potentially paid to HMRC.
One aspect of IHT that is discussed a lot in our industry is Business Relief. In summary, if you hold assets that qualify for Business Relief for more than two years before passing away, these assets are charged at 0% rather than 40%. This is a relief that benefits business owners in the UK who may wish to keep the business in the family but it also significantly increases investment into small and medium-sized businesses in the UK. These businesses are key to the growth of the UK economy so any change in this legislation would be contradictory to the pro-growth rhetoric of Labour.
Last but not least, pensions. We would be very surprised if pensions were left completely untouched by Rachel Reeves but there are numerous aspects of pensions which could, or could not be reviewed.
Firstly, to tie it into the previous point, pensions currently sit out with a person’s estate and therefore do not qualify for IHT. Whilst this could be looked at, the underlying issue here is that all pensions are technically held under trust arrangements. As a result of this, the attempt to make pensions qualify for IHT would mean an unwinding of Trust Laws that underpin several other key UK laws. For this reason, we would be surprised if this was the route the government went down.
The next element of pensions is tax relief for contributions. Currently, subject to allowances not being exceeded, a person can claim 100% tax relief on personal pension contributions. Automatic relief at source is provided at 20% but anyone who pays tax at a higher rate can also reclaim the difference through HMRC. There is commentary about this being changed. This is broadly down to the fact that Rachel Reeves has previously pushed for a flat rate of pension tax relief to be introduced when George Osborne was chancellor. She argued for a flat rate of 33%. The reason is twofold, one it encourages lower earners, those paying tax at 21%, or less, to pay more into pensions as the benefit is greatly increased. These lower earners are predicted to rely more heavily on the state in retirement so encouraging them to pay more into pensions should, in theory, reduce the overall burden on the state in the future. Secondly, it reduces the tax relief being paid to higher-rate taxpayers, those for whom pensions are an incredibly useful tax planning tool and who are more likely to have the capital to be able to fund pensions.
Greater minds than us are probably weighing up what the difference would be between the cost of providing lower taxpayers a greater amount of tax relief and the benefit of not funding 100% tax relief for higher taxpayers. The other main issue here is it could put a significant spanner in the works for the government’s ongoing efforts to resolve public sector pay disputes.
Labour announced that they would not re-introduce the Lifetime Allowance so this leaves them with the Annual Allowance, currently £60,000, to potentially look at reducing. We are aware of advisers out there who are encouraging clients to utilise the full allowance before the Autumn Statement. We are pretty sure they won’t cut a contribution year in half and alter the allowance overnight so this might be a bit over the top. That being said, you are never going to penalised for proactive planning so this is an action that could be looked at before 30th October. Feel free to get in touch if this is something you wish to consider.
Lastly, could they review the ability to draw 25% of your pension tax-free?
This would be a monumental shift and one that would likely cause the most uproar. It would also be very unusual for a piece of pension legislation such as this to be brought in without some form of transitional arrangements. They could look at removing it but only for those from a certain age downwards or they could look to introduce a form of protection so those closest to retirement can retain their current benefits but not accumulate anymore. Or they could reduce the 25% rate down rather than completely remove it.
This is probably the area we are getting most questions about but we do not believe there is enough evidence out there to suggest taking action on the off chance it is announced. There is considerable commentary that suggests it is highly unlikely to be abolished entirely and we don’t believe if it was brought in, it would be brought in overnight and therefore there would be time for action if required.
The other core element is what would one do with funds if they did draw them? They would go from an environment that is currently free of Inheritance tax to one that is not and equally, you would be taking them from an environment that is free of capital gains and dividend tax, to an environment that is likely not.
In reality, having looked at the various predictions from experts and journalists, we don’t believe any action should be taken. We firmly believe there will be tax changes announced on the 30th October, and some of them are going to have to be quite hard-hitting, but, until we know what these are, we would simply be taking action off the back of a hunch and that is not how we recommend our clients approach their financial affairs.
The final point in all of this is that as we get closer and closer to the Autumn Statement, news outlets are going to get more and more excited and the noise levels will increase. We recommend that nobody gets carried away by any noise from the media and we will have our ears close to the ground. If at any point there is a genuine reason to take action, we will reach out as quickly as possible. We are also always at the end of the phone should you wish to discuss any of this further and feel free to pass this on to anyone else who may be starting to panic about what could, or could not, be announced.
