As the UK government prepares for its upcoming Budget on 30 October, speculation is mounting regarding how it will address a £22 billion shortfall in public finances.
With Prime Minister Keir Starmer announcing that the UK will face “short- term pain for long-term good” and pledging that “those with the broadest shoulders should bear the heaviest burden,” the focus appears to be on high-net-worth individuals and non-domiciled taxpayers.
As the Labour Party have consistently promised no rises to income tax, national insurance and VAT, rumours of a potential ‘wealth tax’ are circulating, alongside discussions about increases in the main rate of Capital Gains Tax (“CGT”) and a renewed examination of Inheritance Tax (“IHT”).
As the government grapples with the challenge of balancing fiscal responsibility with economic growth, the implications of these proposed measures could significantly reshape the financial landscape for affluent taxpayers in the UK.
This article delves into the key speculations surrounding the Budget and the potential impact on the nation’s economy and its wealthiest citizens.
Non-Dom Reforms
Although the non-dom regime is confirmed to be replaced with a new residence-based regime, we still do not know how this is going to be put into effect. The abolition of the remittance basis and the implementation of a new four-year foreign income and gains regime is a key change that will affect many non-domiciled individuals in the upcoming tax years.
We hope to gain further clarification on the residence-based regime and the tax liabilities, including IHT liabilities, on non-domiciled individuals in the Budget.
Capital Gains Tax
Currently, profits exceeding the annual exemption of £3,000 from the sale of assets such as investments, businesses, second homes, or buy-to-let properties, are subject to CGT at up to 20%.
Profits from selling properties that are not an individual’s primary residence are taxed at up to 24%.
A lower rate of CGT (10% on a lifetime limit of £1 million) may also apply where individuals sell shares in certain businesses or assets used in certain businesses. Business Asset Disposal Relief (“BADR”) is a less generous iteration of its predecessor, Entrepreneurs’ Relief, and therefore BADR may be seen as one of the easier reliefs to remove, given the now more limited benefits, and that it, per HMRC estimates, costs the Treasury c£1.5 bn per annum.
The CGT annual allowance has faced many reductions in recent years, dropping from £12,300 to just £3,000 since the 2022/23 tax year. It is difficult to envisage a further reduction in the annual allowance at this time.
There are several options available to Chancellor Rachel Reeves as to how to further reform CGT. One possibility is to equalise the rates at which CGT is charged to income tax rates, meaning that investors could be liable to tax at up to 45% on both income and capital gains. This approach would result in the UK having one of the highest rates of CGT in the world.
An alternative to the rather extreme approach above would be to implement a single fixed rate for capital gains that is higher than the current rates but lower than the highest income tax rate (e.g., 30%).
Other options available to the Chancellor may include the reintroduction of tapering or indexation for long-term gains and heavier taxation on short-term gains (similar to how gains are taxed in the USA) or a limit of the benefit available as a result of commonly utilised exemptions, such as establishing a cap on private residence relief.
Another proposal which has been suggested is to introduce a limit on the uplift of the base cost of assets on death to the value at probate, although care would need to be taken as to how this is implemented to avoid double taxation to CGT and IHT.
We should also note the comments from the Chancellor regarding the taxation of carried interest (a certain type of receipt of private equity executives). Currently taxed at a higher rate of CGT of 28%, it is almost certain that the rate will be increased, potentially to income tax rates.
Inheritance Tax
IHT is applied at a rate of 40% on the value of an estate that exceeds the nil rate band, which is currently set at £325,000. We have discussed how the nil rate band operates in a previous blog, you can access it here.
There are already inevitable changes to IHT in the pipeline, given the upcoming changes to the legislation around an individual’s domicile, which will allow the Chancellor to overhaul the operation of IHT in its entirety. It may be a good opportunity to reintroduce progressive rates of IHT, such that the liabilities on smaller estates are reduced, and larger estates pay more.
Firmly in the firing line are the main IHT reliefs, including potential limits to relief under Business Relief and Agricultural Relief, and removing the IHT exemptions for certain pension pots. It would be surprising to not see mention of these, if not in October, but in a Budget in the near future.
Wealth Tax
Some think tanks have proposed the concept of a 1% wealth tax, similar to taxes imposed on net wealth elsewhere in Europe (e.g., Switzerland and Luxembourg).
It seems unlikely that such a tax would be implemented in the United Kingdom however, due to controversy and the unfair burden that it can impose on individuals who possess valuable properties but earn modest incomes.
The introduction of a wealth tax has not proved to be incredibly effective in other countries; Spain having introduced theirs in 2022 and only raising €632 million. Founder of Tax Policy Associates, Dan Neidle, recently commented on the likelihood of a wealth tax being introduced to the UK on the Financial Times’ Money Talks podcast; “Almost all the proposals we see for a wealth tax are from lobby groups and NGOs, and they’re not serious proposals, it’s political showboating.”
In our view it is far more likely that IHT and CGT will be the focal point for personal taxation in the Budget.
Concern for HNWIs
Understandably, HNWIs find themselves increasingly anxious with the potential changes looming on IHT and CGT. As political rhetoric emphasises taxing those with greater means, many worry about the effect such measures will have on their current financial position and future investments. Increased scrutiny on non-domiciled taxpayers further complicates matters, as they await clarity on how upcoming reforms will affect their tax liabilities.
Ultimately, the evolving economic environment, coupled with proposed tax alterations, threatens to reshape the financial realities for HNWIs in the UK, prompting them to reconsider their taxation profile, and ultimately where they are resident in light of potential upheaval.
If you have any concerns regarding your personal tax position and any potential changes to your liabilities, please feel free to contact us today at hello@sanctoras.com and have a discussion with one of our Associates regarding tax planning and how any changes that arise following the Budget will affect you.
