Alex Chappell

18th October, 2024

Blog, DB News

Budget Preview

“I had too much time to think” he said as he put the easiest forehand he’d had all day straight into the net. The comment is a classic, reflecting the idea that when you have time to think your mind can over analyse the options. This can often result in poor decision making and execution.

Well we’ve had plenty of time to think about this budget haven’t we? Rachel Reeves £22bn black hole was uncovered in late July, giving us all around three months to consider the ways she might try to fill it. Speculation has been rife, with a plethora of articles formulating very plausible scenarios and adding fuel to the fire.

There has been some communication from the party of course, committing not to change Income Tax, Corporation Tax and VAT. Naturally this direction only served to focus minds on the taxes that might be altered to fill this significant black hole. As is the world these days, the media hype builds around what the party didn’t say, rather than what they did say, so everyone is now expecting big changes in Capital Gains Tax, employers National Insurance, pensions and Inheritance Tax.

Now it’s worth reiterating that this government, as well as so many governments across the world, are facing real financial problems. A lack of economic growth since the financial crisis in 2008, twinned with huge support packages during crises (such as Covid), means government debt levels have never been higher. Increasing tax revenue to ensure this borrowing doesn’t get out of control is imperative.

This can be done in two ways – higher taxes, or higher growth. Ideally (as Rachel Reeves has alluded), both can be achieved, though this is much easier to say than do. So, what are her chances? To do both they need to really think this through. They can increase Capital Gains Tax (CGT), though they would need to be selective about how they do it. The obvious way would be to increase CGT on the sale of buy to let properties and share investments. The former in theory should help housing supply and would reduce the number of private landlords. But this is a policy the Conservative Party played with, without significant success.  The latter would make share ownership less attractive, and detract from investment into UK Plc. They could of course adopt a little Trumpism and exclude the tax hike on investments into direct UK assets, like a tariff on investing overseas.

Business sales could see a rise in CGT, though this would be seen as very counter intuitive. It would disincentivise people from starting and building businesses, therefore have the effect of reducing corporation tax and income tax revenues rather than raising them.

Another tightrope they need to walk is the view of investors. When Lizz Truss went big, mortgage rates increased 1% in a week, and pension funds nearly went bust as Government bonds sold off. Markets offer “cheques and balances”, in other words punishing what they perceive as badly thought through policy and rewarding sensible ones. It is no coincidence that since the budget date was announced, the cost of UK borrowing has risen by 0.3% (UK government bond yields have increased). Markets are already concerned about the risk of too much spending, which in turn will be reminding politicians of what happened two years ago. The golden nugget is finding a way to promote growth and higher taxes, which will allow them to spend, without risking sustainability.

From a planning perspective there will no doubt be changes that alter the tax landscape post October 30th. For most, it’s impossible to take pre-emptive action whilst being sure your actions will prove advantageous. Sure, we do expect a change to Capital Gains Tax, potentially to pensions and Inheritance Tax legislation, however there are so many ways they could do this. Some would be more significant than others, and each would have their own implications and solutions. Just like with any easy forehand, it’s important not to overthink the game, and put the ball into the net.

Of all the potential changes, CGT and IHT rates can be moved overnight. Other taxes would likely need new legislation and more lead time, providing us with a planning timeframe to ensure our clients are well positioned. Of course, we are absolutely ready to evaluate the detail and ensure our clients receive the appropriate advice.

We will be releasing a blog within 48 hours of the budget to update our readers on the implications of any significant tax changes, and of course our advice teams will be in touch directly to discuss timelines and options to maximise your tax efficiency within the revised HMRC tax framework.