Ahead of Wednesday’s Budget, strongly rumoured to include major changes to inheritance tax (IHT) and capital gains tax (CGT), legal experts and private client advisers are sounding the alarm about the potential economic and personal impacts of these changes on the wealthy.
Tax and property advisers from the Spear’s network share their insights on how Chancellor Rachel Reeves’ long-anticipated first budget on 30 October could affect investors, business owners and wealthy individuals in the UK.
[See also: A Labour olive branch to non-doms?]
Inheritance tax: highest in Europe set to tighten further?
There has been long standing speculation surrounding inheritance tax changes.
At 40 per cent, inheritance tax in the UK is the highest rate in Europe. The changes being hinted at could include reducing the nil-rate band (currently £325,000, with an additional £175,000 allowance for residential property), which would significantly lower the threshold for paying inheritance tax.
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There has also been speculation about the possible capping or removal of reliefs for business and agricultural property. Currently, these reliefs can reduce IHT by 50-100%, depending on the asset type, but capping them at £1 million or limiting the assets they apply to could discourage entrepreneurship and negatively impact farming clients.
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Huw Witty, corporate tax partner at Shakespeare Martineau, warns such a move would harm the economy and could prove to be an unpopular and impractical policy.
Dhana Sabanathan, private wealth partner at Michelmores agrees. ‘It would be deeply unpopular if family-owned businesses could no longer rely on this relief for effective succession planning,’ she cautions.
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‘This has caused considerable concern among clients,’ she adds. With the UK seeking to remain attractive to entrepreneurs, any such change to BPR could be counterproductive, she warns.
One possibility is a cap on reliefs, as suggested by the Institute for Fiscal Studies, which could see BPR and APR (Agricultural Property Relief ) limited to £500,000 per person, Sabanathan says.
Julia Rosenbloom, a tax partner at Shakespeare Martineau, says a complete abolition of business property relief (BPR) and agricultural property relief (APR) is seen as unlikely due to the potential backlash. Instead, Rosenbloom believes a more probable outcome is a tightening of these reliefs to curb perceived abuses.
Rosenbloom explains that the government could impose a minimum shareholding requirement for BPR to align with significant business ownership rather than minor investments. ‘Currently, minor shareholders with no active role in a business still qualify for tax relief. A minimum threshold, such as 25 per cent ownership, could prevent this,’ she says. Companies with mixed trade and investment activities could also be targeted, with the government potentially aligning IHT relief conditions more closely with those for CGT, which are more restrictive on investment activities.
Rosamond McDowell, private client partner, Payne Hicks Beach and Spear’s Top Recommended tax lawyer, notes that IHT is a politically charged issue, particularly for Labour, who view it as a tool for wealth redistribution, and highlights that IHT currently raises only 0.7% of the total tax revenue, with the forecasted take for 2024-25 being £7.5 billion.
‘Inheritance tax has long been the Labour party’s favourite social leveller, a tax on the death estates of the idle rich, most hated by many of our clients, for whom it is either a further charge on their hard earned, already much taxed savings, or the tax most likely to see their long treasured homes and estates decimated,’ McDowell told Spear’s.
Spear’s Top Recommended Duncan Bailey, head of Brabners’ private client team, said his clients are adopting a ‘giving while living’ strategy.
‘This includes utilising lifetime allowances, via direct gifts, or setting up trusts to manage and protect your wealth for future generations,’ he said.
‘Understandably, many of my clients aim to pass on as much wealth as possible to their children, and when there is political change, people do tend to opt for a ‘giving while living’ strategy, which they have more control over.’
But this strategy may no longer be an option after Reeves’ budget. Government may extend the period for lifetime gifts to be exempt from IHT from seven to ten years and scrap the exemption for regular gifts out of surplus income — measures that have long been central to IHT planning.
Capital gains tax
Experts from the Spear’s network said many clients were anticipating a steep rise in capital gains tax rates, speculation which has led to a rush of pre-Budget selling and gifting, as individuals attempt to mitigate future tax burdens.
These anticipated changes could push the CGT take beyond the Office for Budget Responsibility’s forecast of £15.2 billion for 2024-25, but whether this increase will continue to help with the budget deficit remains uncertain. Given the Labour Government’s pledge not to raise income tax or VAT, McDowell suggests that CGT increases might be one of their few remaining options for boosting tax revenue.
She continues: ‘It has also been suggested (though not officially by any member of the Government) that the CGT rebasing which currently applies when a person dies might be withdrawn where their estates pass to a spouse. The current rule has, for example, allowed a wife, inheriting assets from her deceased husband, to pass those assets down to the next generation, free of CGT, and potentially free of IHT if she survives seven years.
‘If this rule is changed, it will be much more difficult, even without a change to the current IHT regime, to pass assets to the next generation without incurring either CGT or IHT or, at worst, both.’
Rosenbloom says a potential government strategy to align CGT with income tax rates, which could push the highest rate to 45 per cent for top taxpayers.
‘Such a move would undoubtedly dampen market activity and could have a cooling effect on the already fragile economy,’ Rosenbloom says. She suggests a return to a system resembling the ‘taper relief’ model, which was in place until 2008.
Rosenbloom advises those with potential gains to consider crystallising them before the budget.
The government is reportedly rethinking its CGT strategy after modelling revealed a tax rate increase would not automatically translate to additional tax receipts, news Matt Thame, Co-Founder and CEO, Cohort Capital, says is ‘reassuring’.
‘In fact, HMRC has stated that raising the higher CGT rate by 10 percentage points would actually lead to a £2.025bn fall in revenue by 2027-28,’ Thame says. ‘The government seems to have acknowledged this salient fact, and we hope it will continue to recognise the value in protecting the UK’s lucrative real estate sector, which continues to draw significant investment both domestically and internationally.’
[See also: What is carried interest and how will Labour’s plans affect private equity executives?]
Uncertainty over non-dom rules remains
The situation is particularly concerning for non-domiciled individuals. The Labour Government has long signalled a move away from the transitional provisions proposed earlier by the Conservative Government. These changes, including the potential scrapping of IHT protections for non-dom trusts, are causing anxiety among ultra-high-net-worth individuals.
The uncertainty surrounding these proposals is leading many non-doms to consider relocating. If the Government pushes forward with the changes, it could result in a significant exodus of wealthy individuals, which would not only hurt the UK economy but also undermine Reeves’ efforts to increase tax revenue, the experts agree.
‘In the run-up to this Budget, it has been difficult to settle the nerves of our UK resident non-dom clients, the kind of UHNW individuals and families who invest in UK businesses and in the UK economy, for whom the proposed changes will mean that the UK is just about to become a whole lot less rewarding for them to live in,’ McDowell says.
The Government’s proposed rule changes have already led to the departure of wealthy individuals from the UK. Various studies, including from the Adam Smith Institute, predict that these changes could cause a significant deficit in tax revenue.
She adds: ‘Many of them were prepared to stomach the changes originally proposed in March by the Tory Government, which included some pretty generous transitional provisions, and crucially preserved the IHT protections enjoyed by trusts set up by non-doms (known as ‘excluded property trusts’). But then the Labour Government’s policy paper in July made it clear that the transitional provisions were considered to be too generous, and that the IHT protections are also to go.
‘This latter change has, arguably, been the last straw for many of our clients, unable to stomach the thought of needing to be excluded as beneficiaries of their trusts, or face the prospect of a 40% charge on their death.’
Sabanathan says for her clients too, the changes to IHT treatment of trusts has been a ‘red line’ She urged Starmer’s administration to consider alternative proposals, such as extending the period of relief for foreign income and gains or introducing a flat-rate tax, which has proven successful in countries like Italy.
[See also: The UHNW non-doms leaving the UK to escape a Labour government]
‘Non-doms represent a small percentage of the population but contribute significantly to the economy,’ Sabanathan says.
‘If the tax landscape becomes too unwelcoming, they have the resources to relocate,’
Will prime property weather the storm?
Trevor Kearney, founder of The Private Office: Real Estate says that while the Budget will be painful for some, it’s not all ‘doom and gloom’.
‘Non-doms are fleeing to places like Milan and Dubai, but this does not mean they’re abandoning the UK forever,’ he tells Spear’s.
‘They will still keep a hub in the UK and travel back and forth and the UK will continue to be the ultimate destination to do business. Interestingly, we’re seeing our clients prioritise education and good schools and the UK’s education system is second to none – that’s a huge retainer, even with the added VAT onto fees. ‘
But he warns against the Government alienating non-doms and high net worth individuals from living and working in the UK. ‘That’s where the pinch points for the economy will be felt most,’ he says.
