As pre-election Spring Budget fever dies down with the perhaps anticipated outcome of a Chancellor trying to do something politically meaningful with very little in the tank, for our individual and family clients our minds now turn to the medium term. Dan Hartland explores what should be on their agendas in the coming months.
Of course, as the general election approaches there will be more speculation that clients may need to be prepared to react to, particularly where they have major events planned, such as a business sale in the period between any election result and the first fiscal event thereafter, perhaps the 2025 Spring Budget . In such cases, it would be sensible to plan a completion in good time before that. Equally, the Budget announcement for non-doms puts their longer term planning in the spotlight and while there is still uncertainty over the detail of the new regime, those who are not already engaging with advice would be well advised to do so.
In the medium term, it seems clear to me that clients should be prepared for potential tax reform in key areas. They should ensure they understand what this could mean for them and how they can navigate this uncertainty in a sensible way. Irrespective of the party in power, the challenge will be the same. That is, we currently have a high tax regime and little appetite or opportunity for austerity measures to facilitate tax cuts.
While the focus is often on the rates of tax, of course the overall revenue raised by taxation is also affected by reliefs and allowances and many areas have been highlighted as needing reform over recent years. It is fair to say that we have a tax system that is overly complex and non-sensical in many areas and this is increasingly being highlighted by commentators in the mainstream press. There are also some big policy issues that have yet to be tackled and properly costed, such as social care and getting to net zero. Some of the most commonly quoted areas are considered below.
- While the Chancellor made steps to more broadly spread the impact of high earnings on child benefit entitlements, cliff edges are still created in the income tax system for those with earnings at £100,000 plus, at which the personal allowance is gradually withdrawn (creating a tax rate of up to 60%). For those with young children the impact can be even greater as they lose full entitlement to free childcare hours.
- While inheritance tax affects very few people, other ‘taxes’ such as funding social care for elderly parents, can have a more significant impact on inheritable wealth for much less wealthy individuals. Successive governments have failed to come up with a coherent policy, this being an area that will need to be tackled at some point with an aging population, bringing inevitable funding requirements.
- We have an inheritance tax system that incentivises the retention of businesses and agricultural assets through reliefs and capital gains tax rebasing where, commercially, the right answer may be to incentivise an orderly succession, whether to the next generation or through a sale, to support the continued success of a business.
- In recent months the message from the Shadow Chancellor has been that Labour has “no plans” to increase the capital gains tax rate. Although the rate has been a topic which has driven intense debate across the political spectrum over the years, this is also a story where it cannot just be about the headline rate. Under the current capital gains tax regime, if assets are held for a long time, people are paying tax on the inflationary increase in value even if on a sale they are no better off in real terms. We also need to better incentivise our risk takers for entrepreneurial activities which ultimately contribute to our tax base through business profits and employing people.
- We have a stamp duty land tax system that creates a barrier to people moving and exacerbates the structural issues we already have in our housing market.
Whoever wins the next election, and particularly if there is a change in government, it is difficult to see how thought will not need to be given to some of the bigger issues we have in our tax system which require thoughtful reform and simplification if any party is to achieve its political objectives. This is likely to result in concerns and uncertainty for clients who wish to plan their affairs for the longer term, particularly our entrepreneurial clients where capital gains tax and business reliefs for inheritance tax purposes can be disproportionately important to their future planning considerations, given these taxes are often at the centre of speculation as to reform.
Now is definitely a time for action and to start discussions around sensible measures that might be appropriate.
For more insight and guidance, get in touch with Dan Hartland.
