I have always said I would hate to be in politics and I think the last few weeks have really hammered home that thinking. Whatever I may think of his policies and politics, I do not envy John Healey as he prepares to deliver his first budget in a couple of weeks time.
The country finds itself in a perilous financial position. The so called ‘fiscal headroom’ seems to have been shrinking progressively and the cost of Government borrowing is now at a generational high (and showing no signs of going down).
As a result, there seems little room for manoeuvre. It looks likely that there will be some relief for lower income families on fuel bills and the planned increase in fuel duty will also be scrapped. All of this will need to be paid for while Mr Healey attempts to remain within Labour’s self-imposed ‘fiscal rules’.
Against this backdrop, it seems safe to assume that Mr Chancellor will, once again, be looking down the back of the sofa (read, the pockets of the better off) for more money, despite being promised that this wouldn’t be the case in both 2024 and again in 2025.
Odds on favourite seems to be Capital Gains Tax reform. The most heavily muted idea is simply an increase in the rate, potentially to align with income tax rates all the way up to 45%. Alternatively, they may opt for a middle ground and increase CGT to something like 30% say.
More concerning is the talk of the CGT uplift on death being removed. This would mean that, in addition to a 40% IHT charge, assets could also have a (based on current rates) 24% CGT charge applied, resulting in a total marginal tax of 64% on a good chunk of some assets.
Of course this would look even worse if combined with an increase in the headline rate (see above). In this scenario, it is easy to see the overall marginal rate of tax on death for certain assets rising above 70% or, dare I say it, 80%.
These kinds of tax rates usually evoke a reaction of ‘surely not!’, however this Government has form. The pension IHT changes kicking in next year will often lead to marginal tax rates on the pension fund of 65% and up to around 80% in some extreme cases. It seems they simply don’t care!
The big question is what to do about it and this is where things get notoriously difficult.
You could opt to sell assets that have high gains now, ahead of the budget. While paying 24% now sounds like a good idea compared to the prospect of up to 45%, as with all rumours, these changes may never come to pass.
In addition, if you sell now on the basis that they are going to charge you on death anyway and then they don’t introduce that measure, then you will have paid a potentially nasty tax bill unnecessarily.
All in all, without the proverbial crystal ball, it is very difficult to know. The old rules still apply here – we have to plan based on what we know and then adapt that plan as new information comes to light.
As we saw in the run up to the last budget, a lot of people took action in light of rumours and speculations that didn’t come to pass and ended up doing themselves significant damage as a result. As always, tread carefully.
If you feel you need assistance with your own estate planning decisions (before or after the budget), please don’t hesitate to get in touch.
