The Labour Government is due to deliver its first Budget on 30th October with the Prime Minister warning that it will be “painful”. Although raising taxes on income, National Insurance and VAT has been ruled out, other taxes are said to be in the firing line.
We cannot say precisely what will be in the Budget until it is officially announced, but we can make some predictions on what might be included. Below we explain which of the main taxes could be targeted, what the current rules are and the changes being considered:
Capital Gains Tax (CGT)
When you sell a chargeable asset, you pay Capital Gains Tax on the gain you make on the sale.
A chargeable asset can be a property (not your main residence), personal possessions worth more than £6,000, stocks and shares (not in an ISA) and business assets. The gain is the difference between the value you paid for the asset and the value at which you sell the asset.
The amount of Capital Gains Tax you pay depends on your rate of income tax.
A basic rate taxpayer will pay 10% for gains on most assets and 18% on any property gains. A higher or additional rate taxpayer will pay 20% on most assets and 24% on property gains.
Each individual has an annual exemption of £3,000 (24/25) so if your gain is less than this amount, you will not pay CGT.
There is widespread speculation that Capital Gains Tax rates may be aligned with Income Tax rates, with recent media reports suggesting that they could rise as high as 39%. Currently, spouses can make transfers to each other without triggering CGT but the spousal exemption and the annual exemption of £3,000 may be abolished.
Other areas under discussion are changes to holdover relief and the CGT uplift on death which allows assets to be transferred on death without CGT being applied.
Inheritance Tax (IHT)
Each individual in the UK has an IHT allowance of £325,000 which is known as the nil-rate band. If the value of your estate on death is higher than the nil rate band, your estate will pay tax at 40% on the excess.
Among the options under consideration are raising the 40% rate or reducing the existing £325,000 nil rate band which would bring more estates into the IHT net. The current Residence Nil-Rate Band of £175,000, which allows relief for a residence passed to children on death, could potentially be reduced or removed.
The Government may also look to place restrictions on gifting, known as potentially exempt transfers. Currently, gifts are treated as being outside a deceased’s estate for IHT purposes, if they are made more than seven years before death. However, there is speculation that the seven year period may be extended to ten years or replaced by a lifetime limit.
Business Property Relief and Agricultural Property Relief are important and valuable reliefs from IHT. These reliefs allow certain business assets and agricultural property to be passed on free of inheritance tax. These could be eliminated entirely or caps placed on the amount of relief available, which would have significant implications for family owned businesses and farms.
Pension Tax Relief
Under current rules, savers can take a 25% tax-free lump sum out of their private pensions once they reach the age of 55 (rising to 57 in 2028). The maximum lump sum that can be withdrawn is £268,275. It has been reported that this sum may be reduced to £100,000 in the Budget.
If you have a private pension and you die before the age of 75, a lump sum death benefit may be payable to your beneficiaries. These death benefits usually fall outside a person’s estate, allowing the beneficiaries to receive them free of any inheritance tax. The upcoming Budget may reform the rules to make these benefits subject to inheritance tax.
The contents of this article are for the purpose of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.