A leading Aberdeen tax expert has warned that potential drastic changes to Inheritance Tax (IHT) and Capital Gains Tax (CGT) as part of Labour’s Autumn Budget could stifle wealth creation and cost the Treasury more than it hopes to generate.
The upcoming Budget on October 30, the first of the new Labour Government, has created uncertainty for many. Speculation and gossip are rife as the pre-budget anxiety builds, including the impact on businesses of suspected increases to Employer National Insurance contributions.
National Insurance payable by Employers looks set to rise based on recent comments, but pledges made not to raise Income Tax, VAT, Corporation Tax or Employee National Insurance contributions suggest IHT and CGT remain potential targets.
Graeme Cran, Associate Director of Private Client Tax, Azets Aberdeen, said: “The possible alignment of CGT rates with Income Tax rates is one such drastic measure floated by some, but I hope and suspect this is unlikely to materialise. It’s long established that raising CGT rates above a certain threshold produces less not more in tax receipts as people defer where possible and consider alternative measures rather than realising gains.
“Many are concerned about a possible change to the CGT rules for business owners. Currently, gains of up to £1 million can be taxed at only 10%, with any surplus being taxed at 20%. If growth is the key pledge of the Labour government, does increasing the taxes on entrepreneurs support that objective?”
Rumours also suggest that Rachel Reeves may introduce some form of lifetime allowance on gifting, with some speculating on a lifetime cap of £1million, in a move that could dramatically impact estate planning.
Currently, estate planning requires consideration of both IHT and CGT as any gift of an asset is a disposal for CGT purposes. Individuals can make unlimited tax-free gifts in their lifetime if they survive for seven years, but the asset they gift must either be sitting at a capital loss, for instance, a flat in Aberdeen or qualify for certain CGT reliefs to hold over the gain, such as shares in the family business.
The flexibility of tax-free gifting has allowed families to create and pass on wealth without the burden of CGT or IHT, which can apply at a rate of 40%.
Graeme warned that the draconian targeting of CGT and IHT reliefs could severely impact how families transfer wealth to the next generation, which in turn may disincentivise wealth creation.
He said: “We’re all fully aware of the government’s need to raise funds, but they have painted themselves into a corner by ringfencing the majority of taxes, which simply increases the focus on IHT and CGT, the two taxes which cause the most concern for business owners.
“Lower rates of CGT are the reward people are given for risking their own capital in creating and growing a business. A successful entrepreneur should be supported rather than penalised by the tax system. We must ensure we support wealth creation and that requires sensible and pragmatic tax policy in respect of both CGT and IHT. Ill-conceived changes will alter behaviour and likely generate less not more in revenue.
“I strongly suspect the Budget will not be as drastic as many fear, but it won’t be painless.”.