I’m starting with the premise that the Chancellor needs to raise some £22bn in taxes. I will take that as a given. I set out below how I think she is likely to raise this and my views on what I consider might be better options.
Economic background
The £22bn figure for the “black hole” widely being reported is the public spending overspend for this year alone. There may well be greater fiscal headroom than this but that will be dependant on the next forecast from the OBR. It’s also predicated on there not being any changes to the fiscal rules which the government has pledged to commit to (essentially, not to borrow more).
We know that the manifesto committed to not raising income tax, employee NI and VAT. This was loosely defined, though, and this probably means main rates of taxes. It doesn’t prevent the Chancellor from doing other things to these taxes which raise additional tax. So, potentially, the Chancellor will be looking at changes to income tax allowances/reliefs, employer’s NI, capital gains tax, inheritance tax, various duties and, or course, tax avoidance.
The tightrope the Chancellor is walking is very narrow. The tax burden is already at a post-war high, and so any further increase in taxes has to be balanced against the risk of suppressing economic activity.
The first half of 2024 showed better than anticipated economic activity, and an interest rate cut. The forecast economic growth for the full year is now 1.2%, rising to 1.5% in 2025. Hardly rocket propelled, but at least it’s positive.
Capital gains tax
In 1988, then Chancellor Nigel Lawson said: “In principle, there is little economic difference between income and capital gains, and many people effectively have the option of choosing to a significant extent which to receive. And in so far as there is a difference, it is by no means clear why one should be taxed more heavily than the other. Taxing them at different rates distorts investment decisions and inevitably creates a major tax avoidance industry.”
The easiest thing for the Chancellor to do would be to tax all gains as though it were income. I expect to see this, coupled with various reliefs for certain specific types of gains. Broadly, I would support this move, provided the reliefs and exemptions are targeted and focused.
I would reintroduce what some people may remember as Business Asset Taper Relief (BATR); essentially a reducing rate of CGT on assets that have been held for a minimum of, say, 5 years, with a low rate of say 20% on assets held for more than 10 years. This BATR would apply, broadly, to the same classes of assets that currently qualify for BADR (formerly Entrepreneurs’ Relief). And I would raise the lifetime exemption from the current £1million to £5 or £10 million.
I expect the Chancellor to introduce a ceiling on the principal private residence relief (the relief from CGT when you sell your main home), setting this at £1.5 or £2 million. I would support this move.
I also expect to see the introduction of CGT on disposals on death. This is far more controversial. I would only support it if there was a close interaction with IHT so that there wasn’t effective double taxation.
The other big question is when would these changes take place? History suggests that it would have to be from midnight on 29 October/30 October. If the changes are delayed until the start of the next tax year on 6 April there is the risk of considerable market distortions as individuals bring forward disposals to avoid tax. Alternatively, there would need to be some complex and tightly-drafted anti-forestalling measures.
Finally, and this is my dark horse, I expect Employee Ownership Trust CGT exemptions to be reduced or abolished. Currently, owner-managers can put their shares into an EOT and receive the proceeds over a period of time completely free of CGT. This relief is far too generous and I’d like to see the rate of relief halved, so that there’s still some incentive, but not as generous as currently.
Pension tax changes
This is (after the initial bad press) a relatively easy one for the Chancellor. It doesn’t have an immediate affect on people’s pay packets. It’s a more subtle changed, the effects of which only become apparent further down the line. Options for her include:
- Reducing the amount of the tax-free lump sum (with ring-fencing of benefits earned to date)
- Restricting the income tax relief on pension contributions to a fixed rate (say 30%) rather than the individual’s marginal rate of income tax
- Reintroducing the Lifetime Allowance on total pension saving (but this was only changed a couple of years ago, principally to prevent senior doctors from exiting the profession)
- Removing the IHT exemption from residuary pension funds on death
- Introducing employer’s NI on pension contributions
Whilst the country already has a huge pension problem, with may people still not making adequate provision for their retirement, it seems inevitable that there will be changes here.
Inheritance tax
I am anticipating a few short-term and immediate changes, with consultation on longer more structural changes. And at the same time I’d like to see the need for obtaining Probate either abolished (for estates under £1 million) or made much simpler for larger estates.
In the short-term, I’d like to see the nil rate band for IHT increased to £500k per individual and at the same time abolishing the Residence Nil Rate Band. This is an unnecessary and added complication when administering estates.
I expect to see consultation on more widespread changes, including some or all of:
- Reducing or capping Agricultural and Business Property Relief
- Having an annual gifts limit and doing away with Potentially Exempt Transfers
- Removing IHT exemption on residuary pension funds on death
- Removing the charitable gifts exemption on
And whilst not IHT, what about a Wealth Tax. This would be a flat-rate tax of say 1% or 2% on the value of all wealth above, say, £5million. This may present a problem for asset rich, income poor individuals, but there could be some form of “spreading” of the charge to make this more manageable.
Other taxes
Other things to watch out for (some of which have already been announced) include:
- Taxation of private equity carried interest
- Finalisation of the “non-doms” reform
- Property taxes (increases to the SDLT thresholds?)
- Business taxes – some targeted changes for specific industries, such as water company dividends)
Anti-avoidance
I guess I should end on my favourite gripe. How often do we hear the media talk about tax “loopholes” when they really mean using legitimate (but maybe overly-generous) tax planning measures to “avoid” tax when it should be “reduce” tax.
Now, I’m not saying that I agree with all the exemptions and reliefs; I don’t. But we should change the legitimate legislation to remove these reliefs, rather than saying we need to tackle avoidance.
Yes, there’s still avoidance going on, and this needs to be tackled. But let’s be clear about what is tax avoidance (legal but maybe verging on immoral) and tax planning (completely legal but maybe greedy).
I’ll leave it for you to decide where you sit on this one!
