Tax Changes Loom in Autumn Budget—prepare now for changes to key policies

As the Autumn Budget approaches on 30 October, there is growing speculation that significant changes could be made to the UK's inheritance tax and capital gains tax regimes.

Other reliefs are also under threat as the Government seeks to raise revenues without reneging on their promise not to increase income tax, national insurance, corporation tax and VAT.

We also know there will be significant changes to the tax regime for so called “non-doms” from 6 April 2025, as this has been in the spotlight since the Spring Budget in March. Hopefully more information will be provided in or alongside the main Budget announcements.

For individuals and businesses, planning ahead is crucial to mitigate the potential impact of any changes in tax policy.

Acting early could provide significant tax savings and prevent potential pitfalls resulting from new legislation.

Here are the key tax planning points to consider ahead of 30 October:

Review Your Inheritance Tax Planning:

The current Inheritance Tax (IHT) system is often criticized for its perceived unfairness, particularly in how it affects different wealth brackets. 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 about how IHT may be changed but there could be a clue in the paper Rachel Reeves wrote when she was a backbencher in 2018, entitled The Everyday Economy, in which she said:

Inheritance tax ... It needs to be either reset or shifted wholesale to a tax on the receipt of any gifts throughout a lifetime, making tax on all gifts equal and thus avoidance more difficult."

Individuals can currently make gifts of any size to other individuals without an immediate IHT liability arising. They are Potentially Exempt Transfers (PETs) and fall out of account for IHT provided the transferor survives seven years. If the rules are changed, we could see IHT imposed on lifetime gifts, so in view of this we are encouraging clients to make planned gifts before 30 October 2024.

There has also been lots of talk around the generosity of Agricultural and Business reliefs which often provide a complete exemption from IHT on qualifying assets. On the one hand the reliefs exist to ensure family-owned businesses are able to carry on trading and survive after a death, but certain aspects of both reliefs could be regarded as generous. For example, we may see a tightening of the relief so that it is more difficult to shelter investments within a trading business from IHT.

It has also been suggested that Business Relief on AIM-listed investments could be reduced or removed, but the government must surely assess the potential impact on the market and the wider UK economy before such a significant change.

Changes to Capital Gains Tax:

Like IHT, there is concern that Capital Gains Tax (CGT) rates could increase, prompting many to consider crystallising gains under the current, more favorable rates. It has been suggested that CGT rates could be aligned with income tax rates and in the aforementioned paper in 2018, Rachel Reeves said:

Capital gains tax could be reformed, halving the annual allowance, having it paid at income tax rates and improving tax compliance."

It was suggested that this would contribute to over £20bn of additional tax revenues per annum, but HMRC’s own current projections estimate that raising the higher CGT rate by 10 percentage points would actually lead to a £2.025bn decrease in revenue by 2027-28

It is not clear whether any increase will be effective immediately or from 6 April 2025, but clients should plan for an immediate change.

Options may include:

• Gifting Assets - If you have been considering gifting assets with latent gains, you may want to do so before the Autumn Budget is announced. By acting now, you could secure the current tax rate, avoiding any potential increase.

• Using Trusts - Selling shares to a settlor interested trust could also crystallise gains. This might be particularly useful if there is an imminent sale or if you believe a sale will occur soon after the Autumn Budget. However, due to its complexity and the associated risks, seeking the advice of a tax professional is essential.

Finally on CGT and IHT, it is possible that HMRC will remove the rule that allows assets to benefit from a CGT-free step up in base cost when the pass on death, even if no IHT is levied because of the spouse exemption of Business or Agricultural reliefs.

Pension Contribution Rules

Pension tax relief costs the government almost £50bn per year, making it an obvious candidate for changes in the forthcoming Budget.

Tax relief is currently given on pension contributions at an individual’s marginal rate of tax, provided they are within the available annual allowance. Higher rate relief could be restricted, perhaps by introducing a flat rate of relief of say 30% and back in 2018, Rachel Reeves said:

Higher rate pensions contribution reliefs could be restricted, and legislation could require that 20 per cent of all pension contributions be invested in employment-creating opportunities in exchange for the tax reliefs currently available to pension funds."

Almost two thirds of the tax relief is enjoyed by higher rate and additional rate taxpayers and 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 we feel it is likely that such a change would instead be introduced from the start of the tax year 2025/26.

One area of pensions tax relief that could be changed immediately, could be to impose employer’s national insurance contributions 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.

It may be appropriate in some circumstances for people to draw their lump sum now ahead of the Budget if they are able to, but financial advice should be sought and generally, from a tax perspective, we would only advise taking the lump sum if there is a clear plan for its use - as taking it will add to an individual’s estate for IHT, and investment returns will be taxable.

Given the uncertainty, avoid making any major changes to your pension strategy before the Autumn Budget, as any new rules will likely apply going forward.

The UK “non-dom” regime

Effected individuals should review their trust and estate planning strategies, particularly in relation to excluded property trusts and existing offshore stockpiled gains within those structures. In some cases, it might be advisable to act before the Autumn Budget.

Areas to consider include:

• Excluded Property Trusts - If you have a substantial settlor-interested excluded property trust, consider excluding yourself from the trust now. This could prevent the trust from being subject to potential new rules, particularly if there is no anti-forestalling provision. Acting now may avoid having the exclusion treated as a Potentially Exempt Transfer (PET) after any new rules come into effect.

• Capital Gains Tax (CGT) Planning - If you have offshore trusts with stockpiled “Section 87 gains”, consider making distributions before any potential CGT rate increases. This could be key if a CGT surcharge is added, leading to higher tax liabilities. Distributing these gains under a remittance basis could allow you to manage the timing of tax payments. For example, claim in the 2024/25 tax year and remit the gains on 6th April, potentially optimizing your tax position.

• Remittance Basis and Foreign Income - Ahead of the abolition of the remittance basis from 6 April 2025 significant care should be taken in planning remittances in 2024/25 and the subsequent years. It may, for example, be sensible to avoid remittances in 2024/25 if there is a temporary lower rate applicable to remittances made after 6 April 2025 under a temporary repatriation facility.

We expect to be able to provide more information on the changes that will affect UK-resident non domiciles post 30 October.

In Summary - 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, if you have been delaying decisions on asset transfers, trust setups, or other tax planning strategies, now may be the time to act and better position yourself and your business to handle any changes announced on 30 October.