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

The new Labour government has made a commitment not to increase Income Tax, National Insurance, or VAT. 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.

In this article we look at each of the 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.

• Pension tax reliefs could be targeted
• School fees: Prepare for higher costs
• Inheritance Tax [IHT}: Start planning to avoid a future liability
• Capital Gains Tax [CGT]: Expedite your planning
• When will Labour’s first budget be announced?
• A window of opportunity

Pension tax reliefs could be targeted
The new 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and the tax-free status of the pension commencement lump sum [PCLS] currently available on the initial 25 per cent withdrawn from a UK pension, could also be in danger, as Liz Kendall (Secretary of State for Work & Pensions) has repeatedly refused to rule out changes to the tax-free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 there remain a number of uncertainties in terms of the potential tax reforms, 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.

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 to avoid a future liability
It is unclear whether the new government will increase the rate of inheritance tax levied on assets held by UK domiciled individuals worldwide [currently chargeable at 40%] or reduce the ‘nil-rate band’ threshold [currently set at £325,000] over the course of the next parliament, but they have now confirmed plans to charge inheritance tax on all non-UK assets held on trust, a move that could result in significantly higher tax bills for those targeted.

There are a number of tax efficient structures that can be used as part of your UK and international estate planning, but to identify the structure that will work best for you and for your beneficiaries, speak to a qualified advisor to discuss your specific circumstances and aims.

Capital Gains Tax [CGT]: Expedite your planning
And whilst Rachel Reeves previously indicated that Labour had "no plans" to increase Capital Gains Tax (CGT) receipts by aligning CGT rates with Income Tax rates, this does not rule out the possibility of significant CGT rate increases in the future, by aligning the two tax rates more closely. The Institute for Public Policy Research (a think tank that Labour has looked to before for policy inspiration, such as a windfall tax for energy companies) had recommended raising CGT to the same rate as Income Tax, estimating this would raise £50 billion over the next four years. Considering the basic rate of Income Tax across the UK is 20% and the top rate is 45% (47% in Scotland), this would represent a substantial jump from current levels.

If you already have plans to sell a property or other assets, it might be worth considering bringing these plans forward, to realise capital gains now rather than later. However, this course of action should only apply if ‘taking profits’ fits in with your overall long-term financial plan and its important therefore to discuss your options with a qualified financial planner.

When will Labour’s first budget be announced?
Labour have committed to deliver their budget announcement only after the Office for Budget Responsibility (OBR) have reviewed and reported on their plans. With an OBR report requiring ten weeks to complete, the earliest possible timing for the budget announcement would be October, after the Party Conference season.

A window of opportunity
The level of uncertainty around the government’s forthcoming tax reforms in the interim will be a cause of significant concern for many, but this timeline provides a narrow window of opportunity to seek advice from a qualified advisor to discuss your medium and long term financial plans - encompassing, for those most likely to be affected, and free to move, consideration of other international jurisdictions, offering a more favourable tax environment, together with a lifestyle that meets their requirements.

We will continue to keep a close eye on policy announcements and the evolving tax landscape in the coming weeks to provide you with relevant updates, but by looking at your UK pensions and assets and understanding your options with the support of a qualified international advisor, you will be in the best possible position to optimise their growth and mitigate any potentially unnecessary UK tax liability in the future.

If you would like to schedule a meeting with one of our international dual-qualified financial planning and wealth management experts, please get in touch.

¹ Source - Independent Schools Council

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.