Date posted: 21st Oct 2024
In anticipation of the Labour party’s first budget statement in nearly 15 years, there is widespread speculation regarding how the new Chancellor plans to balance the books amidst claims of an inherited financial shortfall.
Lee Watson, tax partner at Clive Owen LLP, said: “In its manifesto, Labour pledged no tax rises for working people. It will be interesting to see how this commitment is reconciled with a larger-than-expected financial black hole.”
He noted that while Labour has reaffirmed its plan to levy VAT on private school fees, other fiscal strategies remain unclear. “It will be intriguing to see if they move forward with closing the non-dom tax regime benefits and look to increase the tax on certain investments which give rise to capital gains tax rather than income tax“ he added.
Tax expert, Lee predicts potential “stealth tax” increases rather than direct tax rate hikes, suggesting: “We could see businesses and individuals paying more tax without an explicit rise in headline tax rates. For example, reducing the threshold for tapering the personal allowance from £100,000 to £80,000 would effectively increase taxes without raising the rate. Similarly, companies currently claim relief for inflationary increases on assets held since before December 2017, but individuals and unincorporated businesses do not have the same benefit. Removing this relief could, in theory create a fairer tax system.”
Turning to capital gains tax, Lee cautioned against overly aggressive changes. “Capital gains tax is often viewed as a tax on the wealthy, making it an obvious target. However, excessive increases could deter investors and business owners from selling, waiting instead for potential changes in government by 2029. This delay could stifle business growth, especially if owners demand higher prices to offset the increased tax burden. If an increase is inevitable, I wouldn’t be surprised to see the return of taper relief.”
He also speculated on inheritance tax, which could be ripe for reform: “Inheritance tax is seen by many as unfair, taxing assets that have already been accumulated post-tax. We might see restrictions to business relief or even the removal of tax reliefs for pension funds upon death.”
While pension tax relief is often a hot topic, Lee believes any significant changes to the regime are unlikely in this budget. “Reforming the pension system is a huge undertaking, particularly given the differences between public and private sector pensions. However, we could see the re-introduction of the pension lifetime allowance as an immediate measure, with broader pension reforms deferred to 2026/27.”
Despite the concerns, he is hopeful that the Budget will bring some stability and incentives for businesses. “Uncertainty is rife right now, and business owners need clarity. The sooner the Budget arrives, the better, so businesses can plan based on concrete facts rather than speculation. I’d like to see incentives such as a re-introduction of the super deduction for capital investments, as well as support for SMEs to help them manage the rising minimum wage rates.”
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