The Labour government’s first budget will be announced on 30 October. While the Chancellor has promised not to increase income tax rates, she could potentially target capital gains tax, inheritance tax, council tax and pensions to raise much-needed tax revenue for the Treasury.
British taxpayers have been warned that this budget will make “big asks” of the public, particularly the wealthy.
In his Rose Garden speech on 27 August, Prime Minister Sir Keir Starmer explained that public finances were “worse than we ever imagined” after discovering a £22 billion black hole. Tough action needs to be taken as a result.
“There’s a Budget coming in October and it’s going to be painful. We have no other choice, given the situation we’re in. So those with the broadest shoulders should bear the heavier burden.”
Chancellor Rachel Reeves’ speech to the Labour Party Conference on 23 September did not indicate what tax reforms will be in the budget. She did, however, confirm that while tough decisions need to be made, the government will keep the tax pledges it made in its election manifesto.
“We said we would not increase taxes on working people, which is why we will not increase the basic, higher or additional rates of income tax, national insurance, or VAT. We will end the non-dom tax loopholes. And we will crack down on tax avoidance and tax evasion.”
It looks like the Chancellor will have to focus on the remaining taxes, something likely to impact middle-class investors and families, perhaps significantly so.
Capital gains tax (CGT)
Although some Labour MPs had previously ruled out increasing capital gains tax, they may need to reverse this decision. Private Residence Relief, however, should remain in place, keeping main homes out of the tax net.
One potential change that has long been rumoured in the British press would be to align capital gains tax rates with income tax rates. For some taxpayers, this would mean the higher rate jumps from 20% or 24% (for property) to 40% or even 45% in some cases. This may be logistically difficult to do in the middle of the tax year, so if they went for this option, it might not come into effect until April 2025, perhaps not even announced until nearer the time.
Another way of increasing revenue from this tax would be to reduce the capital gains tax exempt amount even further from £3,000 (two years ago it was £12,300) or eliminate it completely.
Income tax
While rates are highly unlikely to change in this budget, the government can continue to use frozen allowances and tax bands to generate more income tax revenue. The longer the freeze continues, the more tax people pay over time, even though rates haven’t changed. The Conservative government started this policy, so it will be interesting to see what approach Labour take here.
Inheritance tax (IHT)
Inheritance tax is one tax that can strongly divide opinion. Prior to the general election, Labour MP Darren Jones, now Chief Secretary to the Treasury, told a public meeting that his party sees inheritance tax as an important way to reduce “intergenerational inequality”. In a leaked recording, he said the “bulk coming through the system of huge amounts of inherited wealth” will help to redistribute value across generations.
In any case, increasing IHT may seem a safe way for the government to increase tax revenue without hurting ‘working people’. Options include:
- Increasing the tax rate from 40%.
- Reducing the £325,000 nil rate band and/or the £175,000 residential nil rate band. The latter was only introduced in 2017 and could be abolished completely.
- Limiting the potentially exempt transfers (PETs) on lifetime gifts.
- Removing or restricting the favourable business and agricultural reliefs.
Pensions
Continuing the inheritance tax theme, the government may consider bringing pension funds into the IHT net, but this would be a major, unpopular reform.
While Ms Reeves has stated she didn’t plan to curb the pensions tax relief, this has not stopped speculation that it could be reduced to a flat rate of 30%. She also didn’t plan to reinstate the lifetime allowance immediately, so this potential reform may be saved to consider later.
The government has also said that it does not intend to remove or restrict tax-free cash on pensions, but again, this has not prevented speculation that it could be lowered to £100,000.
The new government launched a large-scale pension review soon after taking office, so pension reforms may take some time to be confirmed.
Non-domicile regime
Prior to the election, the Labour Party was committed to reforming the non-domicile regime, and the Chancellor’s conference speech reiterated that they would “end the non-dom loopholes”. Hopefully, the budget will provide some clarity here.
Foreign nationals – ‘non-doms’ living in the UK can currently be taxed on a remittance basis. This is expected to be reduced to their first four years of residence.
Domicile status also impacts an individual’s liability to inheritance tax on worldwide assets, so this reform is of great interest to British expatriates and those planning to move overseas. Based on the proposals outlined in the Conservatives’ last budget, which Labour did not object to, it’s possible inheritance tax will become based on a 10-year residence period (on arriving in, or departing from, the UK), rather than domicile. But this is far from set in stone, and we need to wait for confirmation of the new regime.
Council tax
The Prime Minister has refused to rule out reforming council tax. The tax bands are currently based on 1991 property values, so these could be revised. Wales already has plans to address property wealth by revising council tax with higher rates and bands.
Alternatively, the think tank Fairer Share has proposed moving to proportional council tax, making it a flat percentage of the property’s value and updated annually.
UK budget 2024 – are you vulnerable?
For now, pretty much everything you read in the press is speculation. The only concrete information will be when the Chancellor delivers her autumn budget. However, for the new government to make good on some of its pre-election promises and commitments, it needs to generate additional income. So, if you are a UK tax resident, you may well have less money in your pocket from November.
If you’ve moved abroad and still have UK assets, now would be a good time to review your arrangements so you are not too adversely affected by the changes introduced by the country you’ve chosen to leave. Non-UK residents with UK assets are vulnerable to UK tax changes. After all, the government is less likely to be concerned about its popularity levels with people who’ve left the country.
Even without these budget fears, it’s always sensible to review your UK assets when living permanently abroad. Restructuring where and how you hold your assets can provide significant tax and estate planning benefits. As the leading cross-border wealth management specialist, Blevins Franks has been providing highly personalised advice to our clients for almost 50 years. We can help to ensure that your financial planning is up-to-date and structured to protect your wealth for the future.
Contact Blevins Franks today.
