So, after many weeks of painful waiting the Autumn 2024 budget is almost upon us. For those focussed on CGT and IHT, my checklist of possible budget changes may prove useful. I will be ticking these off or (hopefully) crossing them out as the day proceeds! Why not join me?
Potential Capital Gains Tax Changes
Rates of capital gains tax (CGT) are at historic lows so increasing them seems a possible option. In the past, we have gone through cycles of reforming CGT. For example, in 1988 then Chancellor Nigel Lawson changed the CGT rate from a flat 30% to tax gains at income tax rates.
The potential options for the current Chancellor include:
- A return to taxing all capital gains at income tax rates as if they were just another form of income (ie up to 45%) – as supported by the Institute for Public Policy Research.
- Taxing gains at one fixed rate below the top rate of income tax (from 1965 to 1988 a flat rate of 30% was charged on gains).
- Reintroducing some form of tapering for longer term gains and taxing short terms gains more heavily as is the case in the States.
- Reducing the most widely used exemptions – for example, setting a ceiling on the private residence relief of, say, £2million.
- Introducing CGT on disposal on death (in addition to IHT) – perhaps at a lower rate/s than lifetime rates.
Press reports suggest that the option of creating a UK exit tax to stop individuals moving overseas before realising taxable capital gains as in Australia, Canada and the USA, has been ruled out…. but who knows?
Regardless of which options the Chancellor implements, there is also the issue of when the changes will actually take effect. As CGT is a transaction-based tax, changing the rate part way through the year is not a major problem administratively but it would seem unfair. Such changes coming into force is more typical of anti-avoidance legislation. However, announcing on 30 October that rates will change from April 2025 should nevertheless net a short-term increase to the tax take if individuals bring forward disposals to save tax.
If effective tax rises are announced, the impact may be softened for business owners.
Potential Inheritance Tax Changes
While it may seem attractive to freeze the nil rate bands for IHT as all governments are prone to do these days, it is just possible that the Chancellor will take the opportunity to give IHT an overhaul. Abolishing the residence nil rate band and increasing the main nil rate band to £500,000 per person, or £1million per couple, would be a welcome simplification at relatively low cost.
This sort of reform might be announced as a trade-off with other more onerous changes to increase the IHT take for the wealthiest taxpayers. These could include:
- Removing the IHT exemption for residuary pension funds on death.
- Introducing progressive bands of IHT starting at say 25% and perhaps rising to 50% for the largest estates.
- Reducing and/or capping 100% business relief (BPR), and agricultural property relief (APR)
- Tightening the BPR and APR qualification criteria (e.g. removing the relief for AIM shares and less active farmers)
- Combining and reducing other reliefs – for example by having one annual gift relief set at £10,000 but including larger gifts out of income and Potentially Exempt Transfers in the death estate.
Changes to BPR and APR would be of particular concern to business owners. Despite their high combined cost to the government, it seems pretty unlikely that these important reliefs that allow the passing on of family businesses relatively tax free will be withdrawn altogether.
Instead, I would expect them to be restricted by cunning technical amendments to the rules. For instance, it would be relatively straightforward to limit the relief for shares in unlisted companies so that companies listed on AIM no longer qualify for relief. Similarly, the current two-year holding period requirement for such assets could be extended, perhaps with bands of relief at different rates rising over the years before full relief is obtained. Another alternative could be to limit the relief for very large estates on death – for example, such that the first £10m of business assets could qualify for 100% and higher values only qualify for 50% relief.
Whatever changes are introduced on BPR and APR, I would expect them to be preceded by a detailed consultation exercise. Any consultations in the areas of CGT and IHT will, naturally, need to include trusts … an area littered with banana skins and serious unintended consequences for unwary tinkerers.
Steve Parnham
