Tax Reform is on the Way

The UK Budget will be held on 30 October 2024 and it appears that some taxes will be going up. We already know about VAT on private school fees, but where else can the Chancellor, Rachel Reeves, raise revenue? During the election campaign, she promised not to raise the rates of Income Tax, National Insurance, VAT and Corporation Tax.

There are perhaps three main areas she will look at:-

Inheritance Tax (IHT)

IHT is long overdue major reform. For example, the allowances for lifetime gifts have not risen since the tax was first introduced almost forty years ago. Such reform could include a reduction in the many reliefs that are available, particularly the 100% relief for qualifying businesses, which currently includes many quoted on the AIM market on the London Stock Exchange.

There is also the extra IHT break for leaving a home to a direct descendent, relieving up to £350,000 of value per married couple which was only introduced in 2017. It is immensely complicated in its detail and could conceivably be abolished, perhaps with an increase in the normal nil rate band, which has been frozen for the best part of twenty years, as partial compensation.

However, IHT is payable on only a small proportion of estates and any changes will probably not raise huge amounts of extra tax.

Capital Gains Tax (CGT)

There may also be significant changes to CGT in addition to the ending of the tax breaks for furnished holiday lets, which has already been announced.

Business asset disposal relief could be completely abolished, having in the recent past had the maximum tax saving reduced from £1 million to £100,000 by the Conservatives.

It is possible that the rates of CGT will be raised, perhaps even to align them with income tax rates, something formerly done by Conservative Chancellor Nigel Lawson in the 1980s. Again such changes will not bring a vast amount of extra money into the Exchequer purse and the Chancellor will have to consider the effect of higher rates on people’s investment decisions.

Pensions Tax

The third likely area for potential change is pensions tax, where it might be possible to generate a lot more income for the government. George Osborne was part-way through reform of this area when the Brexit referendum intervened.

Currently, tax relief is given at the taxpayer’s marginal rate of tax, so higher and top rate taxpayers benefit a lot more from this relief than basic rate taxpayers, although some top rate taxpayers have relief restricted. Restricting tax relief to a flat rate of 20% for everyone would bring in many extra billions of tax each year and, in some eyes, also make the system more “fair”. Presumably, any such change would not apply retrospectively to pension contributions made before Budget Day.

Changes to the rules on pension withdrawals, perhaps including a reduction in the amount of tax-free lump sum that can be taken, may also be being considered.

Other tax reliefs may go, particularly where there is no great evidence that they help to produce their intended economic consequences. An example might be the generous 50% income tax relief for investing in start-up companies via the Seed Enterprise Investment Scheme.