Autumn Budget 2024 Predictions – what could we expect?

The Future of Inheritance Tax

The current Inheritance Tax (IHT) system is often criticized for its perceived unfairness, particularly in how it affects different wealth brackets, making it somewhat of a political football over the past few years.

While estates below the threshold pay no IHT, those in the middle bracket face higher effective rates – and the wealthiest often end up paying a lower effective rate due to various reliefs and exemptions.

There has been lots of speculation around the future of IHT and ways in which it could be reformed. Here are 4 key areas of IHT where we could see changes:

• Business Relief (“BR”) and Agricultural Relief (“AR”).
• Capital Gains Tax (“CGT”) probate uplift
• Pensions and inheritance
• Trusts

Any reforms raise the question about how far Labour will go, and if there is a risk it could disincentivise people from saving into pensions?

Read more | The Future of Inheritance Tax

Pensions – how far will Labour go?

Pensions could be in Labour’s sights - think back to 1997 and Gordon Brown’s £5bn annual tax raid on company pension schemes which was kept under wraps in the run up to the election.

There are several possible avenues of attack:

• They could introduce a flat rate of tax relief on pension contributions, thereby ending the advantage that higher and additional rate taxpayers enjoy. The Institute for Fiscal Studies has estimated that imposing a flat rate of 30% could generate £2.7bn annually. Whilst we would encourage individuals to make use of their available annual allowances before the Budget, implementing the change to a flat rate of relief would be very challenging indeed, so such a change could be delayed until the start of the tax year 2025/26.
• We could see measures be introduced to impose IHT on undrawn pension funds, which may be liable to income tax and CGT on investment income and gains. Both measures would discourage the warehousing of wealth in pensions funds which currently enjoy a tax exemption on income and gains and are outside of one’s estate for IHT.
• Employer’s national insurance contributions could be imposed on employer pension contributions. This would however mean significant additional costs for employers, including public sector employers, which one assumes would ultimately be passed onto employees in lower salaries and benefits.
• There is a possibility of pension funds being charged to Inheritance Tax (IHT) on death, which is probably something few would argue with provided the result is not a double charge to IHT and then income tax when funds are withdrawn by beneficiaries.
• Finally, there is again speculation that the 25% tax free lump sum could be removed or restricted, perhaps to £100K. This would be a significant change and will affect many who may have earmarked that money for repaying a mortgage or other significant purchase upon retirement.

Any reforms raise the question about how far Labour will go, and if there is a risk it could disincentivise people from saving into pensions?

Read more | Tax Changes Loom in Autumn Budget

“Double Death” Tax

Will there be a ‘double death tax’ in the form of Capital Gains Tax and IHT? Labour could remove the exemption from CGT on death which means that an estate beneficiary does not have to pay tax on gains that accrued before they inherited the asset. The Office for Tax Simplification has previously recommended the abolition of the capital gains uplift on death, either in respect of assets which qualified for relief from IHT, or more widely on all the assets of the estate. Both approaches would create significant administrative challenges, not least for the beneficiary in determining the CGT base cost of an asset they did not personally acquire, and which may have been acquired many years or generations before. The latter would create a genuine double taxation on the disposal of assets by estate beneficiaries.

Additional revenue through changes to the UK Non-Dom regime

Labour have said “We will end the use of offshore trusts to avoid inheritance tax so that everyone who makes their home here in the UK pays their taxes here.“

How they will do that remains to be seen, it is more difficult than it might seem, but surely the question the government should be asking is whether scrapping the current, favourable, inheritance tax treatment results in more or less tax being paid?

The pragmatic approach, one that is likely to raise or protect tax revenues, would be to impose the FIG rules for income tax and capital gains tax and retain the special inheritance tax regime for non-doms in respect of their non-UK assets. Otherwise, we will encourage those people who bring wealth, investment and a lack of reliance on the state, to leave which will surely be to everyone’s detriment apart from satisfying the ideology that it is wrong in principle for some people to be able to live a substantial part of their life in the UK, only for their offshore estates to be outside inheritance tax, regardless of the cost/benefit.

One way of potentially reducing the non-dom exodus could be to reform inheritance tax such that the base is widened by the restriction of reliefs, but the rate is reduced. If the rate was lower than 40% it may be more palatable to everyone (inheritance tax seems to be a universally disliked tax even though it only affects less than 5% of estates), reduce the desire or need for planning and be more internationally competitive.

We have already seen concerns that the planned changes could prompt non-domiciled individuals and wealthy investors to leave the UK to avoid the tax charges. Responding to these concerns, there are now reports that Rachel Reeves will “soften” her stance and reconsider parts of Labour’s manifesto plan for non-domicile tax.

Watch now | Proposed changes to UK Non-Dom Rules for 2025/26

Corporation Tax & Investment - lessons from Ireland

Could a cut in UK corporation tax drive growth?

In March 2021, then-Chancellor Rishi Sunak, announced a rise in CT to 25%. Originally designed as a short term move to get some revenue through the door to pay for the cost of lockdown, Labour has since announced their intention to keep they CT rate at this higher level. However, a permanently high corporation tax (CT) rate could severely damage future investment into the UK and stifle homegrown entrepreneurship at a time when this country needs both desperately.

Could our nearest neighbour, Ireland, provide the perfect example of an alternative solution?

The Irish economy is approximately a sixth of the size of the UK. Yet CT receipts (despite coming off a rate of 12.5%) are a fifth of the UK with its much higher rate of 25%.

Our research (based on previous changes to the UK CT regime and the Irish model) suggests that a gradual reduction in the CT back to 19%, and then potentially down to 17%, could lead to a significant overall increase in the tax take – perhaps as much as £20 billion. This would be in addition to all the ancillary benefits a revitalised UK economy could bring.

As the Irish experience has shown, a lower UK corporation tax rate would mean far more investment in the UK, with more jobs and more wealth creation which will mean higher receipts from personal and indirect taxes which will easily exceed any decline in corporation tax revenues.

Read more | Dear chancellor, follow the Irish model

ISA investments

Despite what they said on the campaign trail, the roll-out of a British ISA has been scrapped by Labour, who backtracked on the scheme, stating “we are not planning to complicate the ISA landscape even further”.

This comes as unsurprising news, given the complications that would arise with having to define ‘British’ investments that could be held, and that many investment providers would be unlikely to offer this tax wrapper.

Labour is touting encouraging further investment into the UK, but we would imagine they are looking at far larger plans than an additional £5,000 per individual per year tax incentivised vehicle, and mechanically could be achieved more simply by increasing the push on pension providers to ‘buy British’ forcing billions of pounds of inflows.

Read more | Navigating the speculation – should you make your financial moves now?

R&D Tax Reliefs

The new Labour government's manifesto, while emphasising the need to support innovation and business growth, did not specifically mention the R&D tax relief regime. However, following the International Investment summit on 14 October, Rachel Reeves confirmed that the current rates of R&D reliefs will be maintained.

This will allow the UK to maintain a world-leading capital allowances offer, with full expensing and the £1m annual investment allowance, and we will maintain the current rates for the research and development reliefs which provide generous support for innovation.

The recent Research and Development Communication Forum (RDCF) meeting provided no indication of changes in the upcoming October budget. HMRC has noted that the new ministers are still familiarising themselves with the R&D tax relief regime and are showing strong interest.

Whilst we predict no major changes in the forthcoming Autumn Budget, future amendments cannot be ruled out. HMRC is currently conducting another Random Enquiry Process to assess the impact of recent changes on error and fraud levels. Despite improvements, with error and fraud rates forecast to have halved, they are still considered too high, making future changes likely to address these concerns.

Stay informed and prepared

Given the uncertainty surrounding potential tax changes, it's vital to stay informed and prepared.

If the Autumn Budget introduces changes that are effective immediately, the window to act under the current rules may close rapidly. Therefore, it is vital to better position yourself and your business to handle any changes announced on 30 October.