Increasing CGT rates now seems the most likely course of action for Labour in the upcoming Budget, according to Nicholas Nesbitt, partner at Forvis Mazars.
Following Keir Starmer’s speech on Tuesday, where he warned the UK public the autumn Budget would be “painful”, increases in taxes to plug the shortfall in public finances is what many people are expecting come October.
However, Nesbitt believed some areas where the government may raise taxes were more likely than others.
CGT
Nesbitt expected CGT rates to increase and suggested this may be coupled with an increase in the business asset disposal relief limit on selling businesses from £1mn.
He said: “A probable worst-case scenario would be an alignment of CGT rates with income tax rates. An alternative would be to extend the regime of having different tax rates for different assets (residential property, investment, business assets etc.).
“From a financial planning perspective, it may make more sense to realise gains within investment portfolios now at the known rates, instead of deferring the problem with little likelihood of future reductions.
“This is reinforced by the fact that, due to the reduction in the CGT AEA, many investors are now paying CGT regularly on investment portfolios when they previously haven’t.
“Where clients don’t anticipate requiring the funds in the near future, they may consider deferring realising gains to death but that is somewhat restrictive from an investment perspective and could be a potential area of attack as well."
Nesbitt thought it “would not be surprising” if the CGT uplift was removed for assets that benefit from an IHT relief.
Pensions
The more likely areas for the government to focus on when it comes to pension taxation would be reducing the lump sum allowance and addressing the taxation of pensions on death, according to Nesbitt.
“Following the abolition of the lifetime allowance, the LSA is no longer linked to any wider legislation and therefore the government could easily reduce the amount of tax-free cash individuals can take from their pensions.
"The taxation of pension death benefits has long felt anomalous – you get tax relief on contributions; you get tax-free investment growth and you can pass the funds tax-free on death.
“Given the level of wealth stored up in pensions, we expect that the new government may seek to tax pension funds on death moving forward,” he added.
IHT
Nesbitt said he did not expect the 40 per cent headline rate of IHT would change, and didn’t expect the nil rate bands to decrease.
However, he thought the government may look to tighten rules on gifting money away, perhaps by taxing gifts over a certain size, or introducing a lifetime limit of gifts.
“Some other areas that the government could look at are removing business relief on AIM assets, and limiting agricultural property relief.
“Given the uncertainty over how the government might look to change IHT legislation, and given that IHT planning typically involves significant decisions that can impact an individual's long-term financial position, we are being cautious about undertaking planning in this area currently.
