New Labour budget announced for October
With a new Labour Government installed on the 5th of July 2024, we take a look at what plans or surprises the new Chancellor of the Exchequer, Rachel Reeves, may have up her sleeve in the budget that has been announced for the end of October.
After being firmly installed as the first new government since 2010, the new MPs quickly filed into the house and prepared for the summer recess on 30th July!
A new Labour Budget has been announced for 30th October, leaving us with a long, hopefully lazy, summer to ponder on what measures they could bring in. They’re stating there is a ‘£20 billion black hole’ and they have ruled out tax rises in their manifesto in the following areas:
Income tax
National insurance
VAT
Applying capital gains tax to main residences
So, let’s have a look at what they could do to raise income into the national coffers to put towards mending some of our issues. I won’t be examining the political or fundraising benefits or otherwise, just what could happen and what we could do about it to adjust our investments to ensure they are still tax efficient. Furthermore, whether the administrative burden on HMRC and financial institutions is worthwhile or how to reduce that.
Possible changes in Labour's upcoming budget include...
Capital Gains Tax
Currently, capital gains are charged on gains made in the year of sale. There is a £3,000 annual exemption on which you don’t need to pay anything, then rates are charged at the amount below. Any gain is added to your income. The amount that still falls in the ‘basic rate’ income tax band (below £50,270) is charged at the basic rate. Anything falling above is charged at higher rate.
Rate | Property | All other Gains |
Basic rate | 18% | 10% |
Higher rate | 24% | 20% |
The exemption of £3,000 is very low. Imagine you have had some shares for 10 years and sell them, that could easily eclipse the £3,000. How likely is this money to be collected? Individuals are responsible for paying their taxes, but at such a low level lots of people that don’t do tax returns would likely have to pay. So perhaps this will just remain uncollected? Would it be worthwhile HMRC going after these people for such small amounts? I think, if there were an increase in rates, that this could see the annual exemption increase too. Two years ago it was £12,300, then became £6k and now £3k. Perhaps something will change there, in a positive sense.
It has been mooted that CGT rates could increase to be in line with income tax rates:
Rate | Potential New CGT rate? |
Basic rate | 20% |
Higher rate | 40% |
Managing Capital Gains
Currently, many will hold investments in General Investment Accounts. These receive no special tax treatment, but allow use of CGT exemption (£3k) and Dividend Allowance (£500) each year. As the CGT rates are currently 10% or 20% these are a good solution, as when you want to sell the highest tax would be 20%. Which for many of our clients is one of the lowest rates they would pay. An increase in rates would make these less attractive.
Obviously, this makes use of ISA and pension allowances even more important, as on those, there is no tax on growth. Assuming that is done, what else could be utilised?
1. Offshore Bonds
These defer tax on growth until the money is returned to the UK. This allows rebalancing of investments with no worries of capital gains tax and the benefit of ‘gross roll-up’ of interest, which is where no tax is applied so compound of interest is uninterrupted.
This means, there is no tax until you bring it back into the country, so is a lot easier to manage. ‘Gross roll-up’ means returns are likely to be higher and also you can have the best portfolio all the time, instead of not making changes due to fears of CGT. When returned to the country, it means that it will be taxed as income tax instead of CGT. But if the rates are the same, then there is no difference! However, if CGT rates have reduced again in future, it may be beneficial.
One disadvantage is that if the loss of the income tax personal allowance at income over £100k still applies, encashing a large amount of income from an offshore bond would mean the personal income tax allowance of £12570 would be lost.
2. Onshore Bonds
These work similarly to offshore bonds but come with a tax credit of basic rate tax. This doesn’t mean the tax isn’t paid! It just means the returns have already had tax applied. But this could be at effective rates of 17-18% compared to 20%. Depending on the length the bond is held, on encashment, top slicing could be applied which may avoid higher rates of income tax, which would be applicable if capital gains tax rates were 40% and were applied.
Further advantages of Onshore / Offshore bonds
5% tax-deferred withdrawals
Both offer the ability to take 5% of the original amount invested out as a tax-deferred sum each year. This means you can withdraw without immediate taxation, which may be helpful until tax rates reduce in future.
Assignment of segments
It’s also possible to assign segments of a bond to family members for them to encash under their tax rates, e.g. to children at university that may not be paying tax, or basic rate taxpayers.
3. Pensions
Lifetime Allowance and new Lump Sum Allowance & Lump Sum Death Benefit Allowance
Following the changes in April, Labour has announced that it will not introduce the lifetime allowance as it had previously promised. I have no doubt this is due to the complication and administrative burden this would place on pension companies and HMRC.
However, they did not rule out other changes. With pension assets now eclipsing total property wealth, this seems ripe for a raid! So where could they target them and target the wealthier?
Annual Allowance
This is the amount you can pay into a pension and get tax relief at your marginal rate. This was raised by the Conservative government in April 2023 to £60,000 a year from £40,000. This means higher earners can get 45% addition rate relief, reduce income below £100,000 to retain their personal income tax allowance, and thus save effectively 60% in income tax.
This could be reduced back to £40,000 or even £20-£30k under Labour.
Tax relief reduction
Instead of ‘rewarding’ wealthier people (I say rewarding, it is their money they are keeping. They are just able to pay less tax on it) with tax relief at rates of 60%, 45% or 40%, Labour could make it a flat rate relief, e.g. just 20% at the basic rate.
Administratively, this would mean less work for HMRC as they wouldn’t have to process all the refunds of the higher rate. It’s easier for most pension schemes as they would claim the tax back from HMRC for basic rate tax and that would be the end of it.
It would mean an end to salary sacrifice though, which is where the employer pays the pension payment from gross wages, and so if that was still allowed higher rate tax relief would still be obtained.
This would see revenues to the Exchequer increase immediately, would be relatively easy to implement in terms of administration and it effectively taxes the wealthier. For these reasons, if I were a Labour Chancellor, I think this would be one to watch out for.
But! I run a business, not a country, so perhaps my outlook is different.
Pension Death Benefits
Unless your pension is worth more than £1,073,100 (the old lifetime allowance) then if you die before you’re 75, your pension will pass on completely tax-free to whomever you leave it to.
If you die post 75 (even on your birthday!) then there is a pension tax charge where that money is added to the income of the recipient and taxed on their marginal income tax rate. BUT! it’s possible to leave this as a pension using ‘nominated beneficiary drawdown’ or ‘successors drawdown’ and thus control the taxation. All pensions are free of inheritance tax.
This doesn’t help a government that is trying to raise money immediately, if it’s possible to control the amount of tax paid. There is a possibility of adding inheritance tax to pensions, but this may provide some legislative difficulty as it would potentially affect all trusts.
Prior to April 2015, our advice was to spend pensions first. That was because there was a 55% tax charge if left to anyone after dying aged over 75, or marginal income tax if died aged over 75 and left to a financial dependent. Pension monies at death below 75 were also taxed at 55% if the pension had been ‘crystallised’ (tax-free cash taken). If the pension was uncrystallised (i.e. no tax-free cash taken from it) then the whole pot was tax free upon death.
I could see that being reintroduced, where there is a 55% death tax charge, as it has less effect elsewhere on other legislation. It would encourage withdrawal of pensions and income tax being paid now across the board, rather than being held to protect inheritances, where HMRC would also see an increase in death benefit taxes. That’s a win/win on revenue for the government.
What would we do:
If the above occurred, then consideration of drawing more from pensions and not using money from other sources, as we currently recommend, may be high on the list. It depends on the final rules and the trade-off between tax-free growth and paying taxes on withdrawal. If the primary goal of a pension is to look after someone in their retirement, then should it receive such generously low tax rates on death?
4. Venture Capital Trusts
Currently, these receive income tax refunds of 30% of the amount you invest. They are invested in very small UK businesses and as such are high risk. But, they make money for the treasury because these small business end up employing people and so the Treasury gets income and corporation tax receipts. If pensions and investments have their taxes increased then the use of these may become more popular and certainly will be useful to investors. They could be used to replace pension contributions if lower investment to those is allowed. They grow CGT free too, so also useful should CGT rates rise.
Inheritance Tax
There is talk of wide-ranging reform here. In truth, there are so many exemptions that avoidance of inheritance tax is currently very easy, if someone has the will to do it. So, it is probably right for reform in some way.
What this could mean:
Increasing rate from 40% to higher
Gifts made prior to 7 years from death are currently exempt - this could be extended or removed, or have an immediate lifetime charge. When money is given to trust, there is potentially a 20% lifetime inheritance tax charge if the amount is over the nil rate band (£325,000). This could be extended to PET’s (Potentially Exempt Transfers).
Reduction or abolishment of reliefs for businesses and agricultural land - it’s believed wealthy people are buying up agricultural land for the IHT relief instead of for commercial reasons. This is pushing up costs of purchase for young farmers.
I could write a book on the possibilities here. I think inheritance tax is due for some simplification, to remove loopholes, exemptions that no longer work and to make it understandable for everyone.
Summary
“It’s difficult to make predictions, especially about the future” - Niels Bohr, Physicist
As usual, there’s no point trying to predict what may or may not be introduced as we will probably be wrong and even if we are right in general, “the devil is in the detail” (Steve’s Nan, 1987. In fact, most months and years until her passing). These devilish details could derail any plans we put in place when ‘guessing’.
In light of this, we carry on as we are until we know for sure, then with all the different tools in our kit bag, we adjust and come up with new financial plans to make the best of whatever the situation is.
If things change, we change the plan. If they don’t change, we don’t change the plan.
Now, as always, financial perfection is the goal and getting as close to that as possible is our service and one we like to think we excel at!
"Financial planning isn't just about accumulating wealth; it's about creating a roadmap for living the life you aspire to” - Steve Rowe
This article does not constitute financial advice. We recommend that you speak to a qualified financial adviser for advice tailored to your individual circumstances and goals. Financial markets may go up or down, and you are not guaranteed a return on your investment. Past performance is not necessarily a guide to future performance.
About the author
Steve Rowe is the CEO and Founder of Lucent Financial Planning, an award-winning provider of financial services to individuals and business owners in the Midlands region. We want to be the Financial Advisers that change your life, not just the financial adviser that changes your ISA.
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