Wild speculation: “We tend to get what we expect”

August 29, 2024

Prime Minister Keir Starmer stood in the No. 10 Rose Garden on Monday morning and gave a speech appar­ently aimed at meeting the country’s expec­ta­tions for the state of public finances and therefore the budget on October 30. The year 2024 “will be painful” and the country must “accept short-term pain for long-term good.”

The particular focus of deliv­ering this speech and specif­i­cally addressing budget expec­ta­tions has added fuel to the already raging fire of specu­lation about the tax changes likely to be announced.

While we acknowledge that, like many others, we add to the specu­lation (in articles like this), it is our respon­si­bility as advisors to provide you with the best service and advice. We want to share our thoughts on the likely tax changes so that you are suffi­ciently informed to make the right decision for you, your family and your business.

We pride ourselves on providing proactive, practical tax advice, partic­u­larly because we recognize the invaluable value of this skill and approach in times of change — be it political, economic or changes in our clients’ personal, family and business situa­tions.

I have previ­ously written an article about my predic­tions for tax changes: “Expected tax changes under the new Labor government”, which can be found here Here. Some of these thoughts are repeated below, both for emphasis (due to the impact of the predicted changes) and to summarize all of our current thoughts in one article.

I wanted to make further comments in the context of the Prime Minis­ter’s speech, as we approach the end of the summer and continue to develop our thinking on various customer scenarios.

Below you will find our findings in detail. Much of this is specu­lative and cannot be guaranteed, but it will give you an idea of ​​what we think and expect and hopefully enable you to make decisions and seek advice from us. We sincerely hope you find our expert opinions infor­mative and useful.

Inheritance tax

Abolition or significant reduction of Business Property Relief (also known as Business Relief)

Signif­icant changes to inher­i­tance tax are expected. Although the government has not made any formal state­ments, it is very likely that it will signif­i­cantly reduce or abolish Business Property Relief (BPR), possibly capping it at £500,000 per person.

If the BPR were abolished, this would result in the value of the company/share being subject to the 40% inher­i­tance tax exemption to a 40% inher­i­tance tax on death.

We strongly expect that the assets eligible for the BPR will be restricted if they are retained in some form (e.g. if they are capped) (e.g. AIM-listed shares will lose their quali­fying Status).

A majority of customer inquiries focus on the impact of BPR loss. Some may prefer to speculate and wait to see if any changes will be reversed by a future government (depending on age and health status), but some clients may want to act now to try to “finance” the current situation.

Further changes to inheritance tax

Other inher­i­tance tax changes we predict include:

• Abolition of agricul­tural land relief for landlords (those who own and rent agricul­tural land and property) – We assume that the effective annual interest rate for agricul­tural owner-occupiers will remain the same. However, the difference between owner-occupier and landlord needs to be clarified as there are many situa­tions that constitute hybrids.
• Abolition of the inher­i­tance tax exemption for pension funds – This will upend plans for many to cut inher­i­tance tax and poten­tially reverse the current plan of not touching the pension fund and living off other assets.
• Abolition of the zero interest rate band for residence – Reducing the available nil rate band back to the standard value of £325,000 per person (in most cases £650,000 per married couple).
• Signif­i­cantly restricts the value that someone can put into a trust without incurring lifetime inher­i­tance taxes – currently £325,000 for every 7 years, expected to be reduced to around £30,000. This will have a signif­icant impact on clients’ ability to make lifetime gifts and not be subject to capital gains tax liability and maintain control of assets (e.g. protecting against financial immaturity of benefi­ciaries, protecting against risk of future divorce of benefi­ciaries, mere wanting to retain control over decision-making regarding the asset(s), etc.), the practical reason why many choose to gift assets via a trust). Customers consid­ering making lifetime gifts through a trust should do so before October 30, 2024. Many clients are likely to consider using investment company struc­tures rather than trust funds in the future (we have extensive experience advising on such struc­tures).
• Related inher­i­tance tax changes for trusts that have already been estab­lished – Those who have trust funds should consider whether the trust fund is still needed and whether the trust fund should be dissolved and the trust assets trans­ferred to the selected benefi­ciaries as personal property.

Capital gains tax

Tariff increase, but…

We expect signif­icant increases in capital gains tax rates, likely as index­ation allowances are reintro­duced — there could be some winners (making disposals on or after Budget day) if they have held assets for a long time (given index­ation allowances), but mostly likely to be losers .

We are preparing some models for some customers, which we estimate will apply after October 29, 2024 for customers thinking about selling assets.

Loss of the basic cost of the inherited property

We also assume that inherited assets will lose their capital gains basis cost increase if the estate has success­fully applied for an inher­i­tance tax exemption or relief. We are unsure whether this would apply to disposals beginning on or after October 30, 2024 or to deaths on or after October 30, 2024.

At the risk of the timing being the former and the risk of signif­icant capital gains being lost to base costs, it is prompting some to attempt to crystallize the increased base costs through sales or dispo­si­tions before October 30, 2024, if they already have think about selling such assets.

Income tax

We believe it is possible that dividend income tax rates could be increased from October 30, 2024. Therefore, if the reserves in the company allow it, it would be advisable to consider paying dividends before October 30, which would normally be in the period from November 1 to 2024. April 5th.

Pensions

As well as expecting the inher­i­tance tax exemption to be abolished, we also believe that the 25% tax-free flat rate could be reduced or abolished, with changes expected from Budget Day.

Given both potential changes, some are consid­ering releasing some of the value of their retirement savings now, where possible.