Posted: Thursday, 29 August 2024 @ 12:32
As usual, when a Budget is on the horizon, there is much speculation about forthcoming changes. This year, we have a new Chancellor, and she faces several significant challenges in order to raise sufficient revenue to meet required (and desired) Government expenditure. Twas always thus?
Labour’s manifesto commitment not to raise Income Tax, National Insurance, or VAT still leaves several possible ways to raise revenue. What might happen?
Inheritance Tax
There have been a number of research projects and reports to the Treasury in the last 10 years about how this may be changed and perhaps simplified. In fact, the change to introduce the Main Residence Nil Rate Band was one of the biggest and certainly had a major impact in its complexity. It is especially unfair to those without a ‘main residence’ property, as they will not qualify for an extra uplift of (up to) £175,000 on top of their nil-rate band of £325,000.
Although only about 5% of estates actually pay the tax, Inheritance Tax receipts have climbed significantly over the last few years. This is mainly due to the nil-rate band of £325,000 not rising (Fiscal Drag), while assets and other parts of people’s estates have risen in value significantly. The Chancellor may well not tinker with this too much. Perhaps she’ll raise the nil-rate band to £400,000 and abolish the Main Residence band? Whatever they do, it will be designed to raise more money. Will the ‘7-year rule’ change? Will Business Property Relief be altered? Answers on a postcard…
Things to Consider:
Whatever happens, it will be a good reason to review your estate and Inheritance Tax planning in your Will, regardless of your level of wealth. Also, money put into Pension Plans will potentially avoid Inheritance Tax if the policyholder dies before age 75.
Pensions Tax Relief (on Contributions Paid In)
This is especially valuable to higher-rate taxpayers under current rules. For certain types of pensions, a contribution of £1,000 gross means the policyholder will pay £800 (£1,000 net of basic rate tax at 20%), plus if they are a higher-rate taxpayer, they may get up to a further £200 back in tax adjustments (i.e., money from the Treasury). The bigger the contribution, the bigger the tax relief. With rising incomes and increasing pension contributions, the Treasury will be paying out greater amounts in Tax Relief. There has been much speculation over the years about whether or not this will be changed or altered. It is a complex area, so Rachel Reeves may not go there.
Capital Gains Tax
Capital Gains Tax is due when certain types of assets are sold or given away. This could include shares, properties (not a person’s main residence), and other types of assets. In fact, Capital Gains Tax allowances (the amount of gain you can have before tax is paid) have been reduced significantly in the last few years by several Chancellors. This has raised more revenue for the Treasury. The tax rate, however, is different from Income Tax, which is an anomaly. There is scope for allowances to be reduced to zero and the tax rate to rise. Let’s see what transpires!