Autumn Budget 2024: Should Scottish taxpayers act now to avoid pain later?

The new Chancellor, Rachel Reeves, will be presenting her first Budget on 30 October 2024 and there is already heightened press speculation about what this could bring for taxpayers.

Some of the speculation, if correct, could lead to additional taxes being paid on future transactions and it may therefore be advisable to consider if any appropriate action should be taken before 30 October 2024.

What we know

In the Labour party’s Election Manifesto, commitments were made not to increase income tax, national insurance, corporation tax and VAT. What was notably missing from the Manifesto was any assurance that capital gains taxes and inheritance tax will not change. Press coverage has therefore focused on these two areas as well as pensions tax relief and the expectation is that there is a strong chance that these taxes and reliefs may change for the worse after the Budget.

Capital gains tax

Possible changes to capital gains tax include the alignment of capital gains tax rates with the current higher income tax rates, the introduction of different capital gains tax rates for different asset classes and the removal of certain favourable tax reliefs. If these changes are announced this could result in the tax payable on capital disposals being higher resulting in less proceeds being received after tax. It remains to be seen how business owners will be impacted by any changes, but the following steps could be considered before the Budget:

• Rebase your share investment portfolios. The downside to this is that it would crystallize a capital gain however the current annual exempt amount for gains of £3,000 and the current capital gains tax rate of 20% may well change post 30 October 2024 with higher tax rates applying and less reliefs being available.
• Utilise the full annual ISA allowance of £20,000. Spouses can also use their own £20,000 ISA allowance.
• Consider selling any investment residential properties which currently would be subject to a capital gains tax rate of 18% or 24% depending on whether you are a lower or higher rate taxpayer. The capital gains tax rates post 30 October 2024 could be much higher.
• The gifting of assets such as land, building or shares will generally result in a disposal at market value and may give rise to a charge to capital gains tax. Hold over relief is however currently available for agricultural land, business assets, including gifts of shares in a trading company, which can defer capital gains tax arising until the transferee disposes of the asset in the future. Taxpayers should check if the assets they hold will qualify for hold over relief and consider if it is appropriate to make a gift of these assets as the rules regarding Hold over relief may well change after the Budget.

Inheritance tax

The other tax on which there has been a lot of speculation concerning possible changes is Inheritance tax. There could be possible changes to the rules regarding gifting, restrictions or abolishment of Agricultural and Business Reliefs and changes to the nil rate band of £325,000 and the IHT rate of 40%. Amongst the actions that could be considered are:

• Gifting monies now rather than wait until after the Budget to utilise current potentially exempt transfer rules.
• Consider gifting monies into a trust. Currently if you have not gifted to a trust within the last seven years you can transfer up to £325,000 into trust without triggering an IHT charge.
• Fully utilise current gift reliefs. You currently can gift £3,000 each year without this being added to your estate and if you have not used the allowance in the previous tax year you can gift £6,000. If no gifts have been made by a spouse, you can therefore gift £12,000 between you without any IHT consequences.

Pension tax relief

Predictions of possible changes include changes to the tax free lump sum, the introduction of a flat rate of pension tax relief and a reduction in the £60,000 annual pension allowance on pension contributions. Some of these changes may be delayed until the government’s pension review however in the meantime it could be worth actioning the following:

• Consider fully utilising the pension annual allowance of £60,000 before the Budget. If you are a higher rate taxpayer this will mean your pension will be topped up by £15,000 from the government and you will receive higher rate tax relief on these contributions.
• If the pension allowance is fully used this year, you are also allowed to utilise the available pension annual allowances for the previous three tax years.
• Consider setting up pensions for children or grandchildren. Up to £2,880 net a year can be invested in these pensions with the government topping these up to £3,600.

Act now to mitigate impact of tax reforms

There usually is some level of scaremongering before a Budget however this time there is a heightened anticipation of unwelcome tax changes to be introduced.

We would therefore recommend that all taxpayers give consideration as to any action to be undertaken before 30 October 2024 in order to potentially reduce tax liabilities on any planned transactions.