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Financial Planning • August 05, 2024

Significant Tax Reforms on the Horizon: Capital Gains and Inheritance Taxes Set for Major Overhaul

Hoxton Blog • Significant Tax Reforms on the Horizon: Capital Gains and Inheritance Taxes Set for Major Overhaul

Please note: The following information is not intended for residents of the United Kingdom and should not be construed as financial or tax advice.

With a Budget date of 30th October 2024, it appears that Rachel Reeves is laying the foundation for tax increases. The most likely focus will be Capital Gains Tax (CGT) and Inheritance Tax (IHT). There may also be changes to existing allowances and tax reliefs.

The highest rate of CGT is 24 per cent – far lower than the top rate of income tax of 45 per cent – and Ms Reeves was careful not to rule out increasing CGT during the election. One study suggested that equalising CGT and income tax rates would raise £16.7 billion a year, although it did not account for how such an increase to CGT would affect tax planning.

This could mean that for most taxpayers the rate of capital gains tax on sales will increase from 24% to 45% on sales or transfers of property and from 20% to 45% on other assets such as shares. This is a massive increase and action should be taken to rebase assets before the budget, this is particularly true for anybody currently in a zero-tax jurisdiction such as the UAE who may return to the UK one day in the future.

Shares can be sold and re purchased after 30 days or a spouse could repurchase on the same day, this will reset the base cost to the current value rather than being left with the historic cost. Shares could be rebased by transferring them to a Family Investment Company (FIC). When the shares are eventually sold corporation tax at 25% would apply rather than 45% at capital gains tax rates.

In respect of property, it may be worth biting the bullet and incurring a smaller tax charge now rather than a much bigger one later. Again, the family investment company route could be attractive here, although stamp duty implications must also be considered.

This potential move comes after investors have already suffered from changes to investment profit tax rules. The annual tax-free allowance for capital gains tax was cut from £12,300 to just £3,000 under the previous government, making it much easier for investors to incur a liability, so this increase will hit far more people than before.

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Taxation of non-doms

Labour’s recent policy paper confirmed its commitment to ending remittance-based taxation for non-doms and the introduction of a residence based IHT system. This piggy backs off the plans put forward in the previous government’s Spring Budget.

From April 2025 foreign income and gains will benefit from a 4-year tax-free window where the individual was not UK resident in the previous 10 years.

IHT will be chargeable on worldwide assets where an individual has been UK resident for 10 years and there will be a 10-year tail keeping assets in-scope on departure from the UK.

Trusts established by non-doms will no longer shelter non-UK assets from IHT, although the government has suggested some transitional arrangements for trusts already set up.

Planning around these changes will be key, especially as further details are made available. Please get in touch so that we can evaluate how these changes may impact you and what steps can be taken to improve your position.

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Jason

August 05, 2024

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