Will Labour’s Autumn Budget target high net worth individuals with a wealth tax?

High net worth individuals (HNWIs) in the UK should closely watch Labour’s Autumn Budget on 30 October.

With big spending plans and tax plans to raise around £8.5bn in taxes – mainly through increased tax compliance and closure of so-called non-dom loopholes – it will be no surprise if Labour chooses to introduce some form of wealth tax in their Autumn Budget on 30 October.

Despite previous assurances from Labour that they will not introduce a direct wealth tax, the combination of ambitious spending plans and their pledge not to raise income tax, VAT, or national insurance leaves limited options additional revenue generation. This means HNWIs and businesses, often seen as the UK’s ‘wealth creators,’ are likely to be targeted.

Potential changes include reforms to Capital Gains Tax (CGT), Inheritance Tax (IHT), and pension legislation, all of which could have a significant impact on HNWIs' wealth planning and investment strategies.

In response to speculation, John O’Connell, chief executive of the TaxPayers' Alliance, said 

If this new Labour government is genuinely committed to wealth creation as it claims, it should avoid hiking the very taxes that so ruthlessly crush economic growth, particularly capital gains tax.

Direct vs indirect tax hikes

While Labour have said that they will not directly raise the rates of wealth-focused taxes, what we could see is a tweaking of rules around these taxes to indirectly bring more people into charge. An example of this has already been seen with VAT now being charged for private school fees.

A further freezing or reduction of allowances will see more people fall into the top rates of income tax giving a greater effective rate of tax for those high earners. The freezing of the allowances previously by the conservative government saw a 40.7% increase from 20/21 to 23/24 in the number of higher rate income taxpayers and a 99.2% increase in the same period of the additional rate income taxpayers. This is with no change in the headline rate of income tax. Freezing allowances can therefore be an extremely effective method of increasing the tax take.

For HNWIs, this could mean higher overall tax bills even if the headline rates remain unchanged.

Post-Budget tax landscape for HNWIs

Which taxes could be impacted, and how could they be reformed to generate that crucial revenue?

Let’s look at the key taxes that HNWIs should be keeping an eye on:

Inheritance Tax

In 2023/24, only 5% of deaths generated an Inheritance Tax (“IHT”) bill, raising around £7 billion. If we compare the quarter ended 31 July 24 with the same quarter last year, we see a marked increase of 9% on IHT revenues. 

One might therefore question if any change is indeed needed as the wealthiest in society are already bearing the cost of IHT and the amount of tax collected is increasing at a good rate.

However, it is widely predicted that Chancellor Rachel Reeves has IHT firmly in her sights to help ‘plug the black hole’. So, what could she do?

Given that IHT is already charged at 40% the Chancellor is likely to target those assets which are liable to IHT and tighten up on who qualifies for reliefs rather than increase the headline rate.

Potential changes being:

• Reduction in the availability of Agricultural Property Relief and Business Relief bringing more assets into charge on death.
• Defined contributions pension pots be brought into the remit of IHT.
• Reduction in the IHT tax threshold, known as the nil rate band. However, given the rise in property values in recent years we are already seeing many more people brought into the scope of IHT this might therefore be deemed not necessary.
• Extension of the seven-year gifting rule to ten years.

Capital Gains Tax

The potential changes to CGT have attracted the most media attention. Currently the top rate of CGT being 24% on the sale of a residential property and 20% on any other chargeable assets. Comparing that to income tax where the top rate of tax is 45% there is a vast difference. This tax gap may be seen to encourage taxpayers to structure their affairs in such a way to ensure profits are taxed as capital rather than income.

This large differential was first brought in by Alistair Darling in 2008 when he introduced a flat rate of 18% for all taxpayers and entrepreneurs’ relief (“ER”) for business assets. This saw a 10% rate of CGT on the first £1million of gains on the disposal of a business asset. Since then, various Chancellors have continually tinkered with CGT to give the rates we have today. Despite many changes being made to ER over the years the rates are now back to 2008 levels, although it is now termed Business Asset Disposal Relief.

Prior to this, the top rate of CGT was 40% with a tapering of the rate dependent on how long you had held an asset. So, what changes could we see?

• The most likely situation is an increase in the headline rate of CGT, more closely aligning CGT rates with income tax rates.
• Changes to Business Asset Disposal Relief to tighten up on which assets qualify for the relief. It would be hoped that the relief is not abolished entirely to ensure the incentive remains for entrepreneurs to start and grow businesses recognising the personal risks they take in doing this.
• Reduction in the annual exemption - although with this currently being £3,000 per annum it is hard to see how much lower it could go, without increasing the administration burden on many who could unintentionally be brought into the CGT charge.
• Removing the tax - free up lift of assets inherited on death meaning beneficiaries inherit the deceased’s base cost. This would see any assets sold immediately after death brought into the CGT regime that would have historically been outside the scope, as the asset was sold for a value equal to that at the date of death, meaning no chargeable gain was created. If this were brought in some rebasing of assets would be required, like the rebasing we see in March 1982 values. The administration of tracking down historical base costs would otherwise make this unworkable.
• Removal of CGT gift relief on the transfer of assets into a trust.

Pensions

There has been intense speculation of future reforms to how pensions are treated for tax purposes. There are several reforms which could raise tax receipts, so what more options does the Chancellor have?

• Currently, tax relief on personal pension contributions is delivered at the marginal income tax rates of 20% (basic), 40% (higher rate), and 45% (additional rate). Instead of the current regime, a "flat rate" of pension tax relief for all pension savers could be announced, with a rumored rate of around 30%. This would make pension savings more attractive for those on lower incomes, but it would represent a significant reduction for higher earners, for whom pensions are an important part of wealth building and tax management.
• Limit the amount of tax-free lump sum from pensions, which is currently 25%, up to a maximum of £268,275. In its latest study, which gathered data between April 2018 and March 2020, the Office for National Statistics (ONS) found that 70% of adults have one or more pension pots, and the savings total was £57,000. Reducing the amount of tax-free cash from your pension to say £100,000 wouldn't impact on the majority of pension savers, but those with larger pensions would be hit the hardest and could discourage them from savings into pensions for retirement.
• Reintroduce the lifetime allowance, which was abolished in April 2024. The lifetime allowance is the total limit people can have in their pension pot without incurring tax penalties, which was previously set at £1,073,100. Labour indicated it could reintroduce the cap before u-turning on the commitment during the election. As with pension tax relief, the Government is unlikely to want to “rock the boat” with NHS staff, particularly doctors and consultants, who could be hit with high tax bills, adding extra complexity to the system.

Prepare now

These potential tax reforms, particularly around CGT, IHT, and allowances, suggest that HNWIs should be prepared for a more challenging tax environment, post 30 October.

Given the uncertainty surrounding potential tax changes as the Autumn Budget draws closer and speculations increase, it is important to keep in mind your long-term objectives and not undertake any knee jerk planning which in the longer term could be detrimental to your overall tax and financial plan.

For support in reviewing your financial and tax planning strategies ahead of the Autumn Budget, and to ensure you can mitigate the impact of any changes, please seek professional advice prior to making any important decisions.