Sir Keir Starmer has warned of a “painful” Budget, a month after the chancellor outlined a £22bn fiscal hole.
While taxpayers await Rachel Reeves’ statement in October, the prime minister has said that “those with the broadest shoulders should bear the heavier burden”, citing non-UK domiciled individuals in particular.
But besides non-doms, on whose shoulders could the burden fall?
Capital gains tax
With rates at historic lows, capital gains tax changes look like “low-hanging fruit” when it comes to raising revenue, says Paul Falvey, tax partner at BDO, an accountancy and business advisory firm.
Options for the chancellor include taxing capital gains at income tax rates, taxing gains at a single fixed rate below the top rate of income tax, or reducing the most widely used exemptions such as setting a maximum on private residence relief, Falvey says.
“Many individuals are already realising gains to avoid a rise in rates, and timing will be important for the chancellor too,” he says. “If Reeves is going to raise rates, announcing on October 30 that rates will change from April 2025 should net her a nice short-term boost to the tax take, but would risk disrupting market conditions, occasioning a sell-off of assets.”
Whatever tax rises are announced, Falvey expects to see the impact alleviated for business owners. “For example, it would not be surprising if the lifetime limit for business asset disposal relief is expanded if the main rate of CGT increases sharply, although the effective rate is perhaps unlikely to stay at 10 per cent.”
As well as being an “unwelcome move” for clients, Jason Hollands, managing director – corporate affairs at Evelyn Partners, notes how a CGT rise would be a “headache” for advisers and wealth managers.
“In a taxable environment, you might decide you want to reduce exposure to the US, or you want to move out of a fund because you’ve lost confidence in it,” he says. “It makes it more complicated, because you'd have to be considering that each of those trades might generate a potential taxable gain for the client.
“It would also really be a deterrent to investment, because a lot of people might conclude that if CGT was too high, then why bother investing if you might end up paying up to 45 per cent of any gain to the taxman, whilst taking 100 per cent of any losses that are made.”
Inheritance tax
Inheritance tax receipts amounted to £2.8bn between April and July 2024, marking a year-on-year increase of £0.2bn.
Apart from a nil rate band that has remained at £325,000 since 2009, Hollands says IHT receipts will continue to climb over the coming years, due to inheritances from the boomer generation. But he thinks it is unlikely that the government will raise the IHT rate.
Falvey at BDO acknowledges that it may seem attractive to freeze the nil rate bands for IHT, but says the chancellor could take the opportunity to overhaul the tax.
