How will the UK tax burden increase – and what can you do to protect yourself?

The UK's Labour government has made a commitment not to increase Income Tax, National Insurance, or VAT in its upcoming budget. However, the Institute for Fiscal Studies (IFS) forecasts that the level of UK tax levied by this parliament will need to surpass 37% of national income if it is to meet its fiscal targets. This would exceed the highest level on record for more than 75 years and raises significant concerns in terms of which taxes will be increased to enable the government to meet its spending commitments.

So in this article we look at a number of taxes that could be targeted and how these changes could impact you - but to have a detailed conversation about how to protect your assets and savings from the impact of an even more punitive fiscal policy in the months ahead, contact us to schedule a meeting.

• School fees: Prepare for higher costs
• Inheritance Tax [IHT}: Start planning to avoid a future liability
• Pension tax reliefs could be targeted
• Capital Gains Tax [CGT]: Expedite your planning
• Speak with us to explore your options

School fees: Prepare for higher costs

Labour has committed to “end the VAT exemption and business rates relief for private schools” and so will effectively levy VAT on UK independent school fees. The average UK independent school fee is currently £18,063 per year per child and the average boarding school fee is £42,4591, so the cost of putting two children through boarding school from the age of 11 to 18 could increase by £135,869 (from £679,344 to £815,213).

Many private schools provide the option to pay fees in advance, and whilst exercising this option before a change in the law is announced may avoid the application of VAT, it’s anticipated that Labour could apply anti-forestalling provisions, making this option inviable as a means of mitigating the additional charge.

For grandparents with sufficient assets, covering [or making a contribution to] their grandchildren’s school fees could also provide the benefit of reducing the inheritance tax [IHT] bill ultimately levied on their estate. If you’d like to discuss this financial planning option in more detail, contact us to schedule a meeting.

Inheritance Tax [IHT]: Start planning now to avoid a future liability
It is unclear whether the new government will increase the rate of inheritance tax [currently chargeable at 40%] or reduce the ‘nil-rate band’ threshold [currently set at £325,000] over the course of the next parliament, but one of the most significant tax reforms expected to be confirmed² in the Budget on 30 October will mean that if you are a non-UK tax resident for more than 10 years, your overseas assets will no longer be subject to IHT — even if you still consider the UK your permanent home.

If you are a British expatriate or HNW individual, this development presents a unique opportunity to protect your assets from IHT, which under current legislation would see up to 40% of your wealth paid to the Treasury, rather than being passed on to your family and beneficiaries.

To understand more about establishing and maintaining your non-UK tax resident status, and how we can help you put in place a long term financial plan to manage and protect your wealth speak to a qualified advisor to discuss your specific circumstances and aims.

Pension tax reliefs could be targeted
The chancellor, Rachel Reeves, has raised concerns that pension tax reliefs could be targeted in the ‘pension review’ she announced as part of the Labour election manifesto. Immediately after the Spring Budget, Labour had announced their intention to reinstate the [£1,073,100] UK pension lifetime allowance (LTA), only to U-turn on this plan in the run-up to the election. If they revert to this plan, post-election, then the reintroduction of the LTA would affect approximately a quarter of a million people, significantly impacting the tax efficiency of their UK pensions.

The UK pension annual allowance, the amount you can save into a UK pension each year before having to pay tax on the contributions [currently £60,000] and the tax-free status of the pension commencement lump sum [PCLS] currently available on the initial 25 per cent withdrawn from a UK pension, could also be in danger, as Liz Kendall (Secretary of State for Work & Pensions) has repeatedly refused to rule out changes to the tax-free allowances.

Whilst the reforms won't become clear until the budget announcement on 30 October, it would be prudent to seek professional guidance from a financial advisor at the earliest opportunity and to expedite your planning relating to your private and company UK pensions if their value exceeds [or will ultimately exceed] £1,073,100.

Capital Gains Tax [CGT]: Expedite your planning
The Institute for Fiscal Studies and The Institute for Public Policy Research [think tanks that Labour has used previously for policy ideation] have recommended aligning CGT rates to Income Tax rates - which would see the top CGT rate levied on gains from the sale of shares in a company more than double, from 20% to 45%.

A significant hike in CGT will act as a catalyst for many UK entrepreneurs to accelerate their exit planning and consider international relocation, with the opportunities presented by significantly more tax-efficient jurisdictions becoming even more attractive.

"Higher CGT rates would increase the incentive for
people to leave the UK before realising gains"

The Institute for Fiscal Studies (IFS) – ‘Capital Gains Tax Reform’ [6 October 2024]

By relocating abroad, UK business owners can avoid the CGT that would be levied on the sale of their business, in order to realise and protect the return from their [long term] investment in it.

If you are thinking about your business exit and potentially relocating away from the UK, discuss your options with a qualified financial planner.

Speak with us to explore your options

As the Budget draws closer, now is the time to explore your options.

Consideration of how the potential tax reforms in the Budget could affect your future wealth make it more important than ever to review your long term financial strategy and put in place a robust plan. We can help you take control of your financial future, ensuring that whatever changes may come, your wealth is protected and positioned for growth.

To schedule a meeting with one of our international dual-qualified financial planners, please get in touch.

¹ Source - Independent Schools Council

² Source - HM Treasury Policy Paper – New residence-based regime for inheritance tax - 8 August 2024

This communication is for information purposes only and does not constitute financial, legal, or tax advice. To receive advice on financial planning, wealth management and pension solutions, please schedule a meeting with one of our Financial Advisors and Pension Specialists.