Tax and financial planning in a changing political landscape

With the election just a few weeks away, I doubt if there is anyone in the country who is expecting anything other than a Labour landslide.

With that in mind, we’ve been taking a look at what the likely changes will be to our tax regime to enable you to consider whether any planning should be done now. We have broken this down into the following sections:

• Pensions

• Tax increases generally

• Capital Gains Tax (including Entrepreneur’s relief)

• Tax avoidance

We’ll cover these one by one.

Pensions

There are two rumours circulating at the moment.

The first is that the tax-free lump sum that you can take from your pension will be removed. This has been in place for decades, and some people rely on it as a way to eventually settle their mortgage. Changing this would be such a long-term unpopular decision that we feel it is highly unlikely.

A more likely scenario is the restoration of the lifetime allowance on pensions and its impact.

When this was removed last year, it felt very much like using a sledgehammer to crack a nut.

The reason given was that many doctors were retiring because their pension funds were too big. I’m sure there were other ways to solve that particular financial problem than changing the entire tax regime, and my suspicion is that at some point, a lifetime allowance on pensions will be restored.

What does that mean for planning?

Well, it depends on two things:

1. What will the limit be if it’s reintroduced?
2. Will those with funds over that limit before the reintroduction receive an exemption?

If you believe there will be exemptions, then getting money into your pension now is a good idea. But if not, a rethink might be required.

Tax Increases Generally

The Labour manifesto was very clear. There will be no increase in Income Tax, National Insurance, VAT, or Corporation Tax. While a lot can happen in a five-year term, I think we can be pretty confident that this promise will be kept for the foreseeable future.

There is always the possibility that when Rachel Reeves gets the keys to 11 Downing Street, she will say that the country’s finances are worse than she thought and require further drastic measures. But there is no longer the same secrecy around national finances, so this will be a hard act to pull off.

It’s worth remembering that when Labour came to power in 1997, the transition from Kenneth Clarke as Chancellor to Gordon Brown was negligible. Indeed, for the first five years of his time as Chancellor, Gordon Brown’s budget speeches were peppered with the use of the word “prudence” to demonstrate his commitment to not making drastic changes. The increases in government spending came in the second term rather than the first.

But, of course, sometimes it’s what you don’t say! And the manifesto does seem to leave the field clear for increases in Inheritance Tax, stamp duty, fuel duty, council tax, all sorts of windfall taxes, and perhaps most significantly, Capital Gains Tax.

Capital Gains Tax (CGT) 

The issues around Capital Gains Tax are a little misunderstood.

If you sell your company, then part of what you are selling is the profits that you have built up within the business. If we say that they have been taxed at 20% already (pretty much the average Corporation Tax rate over the last 20 years), then if you end up paying 40% Capital Gains Tax on the sale, the total tax would amount to 52% (20% plus 40%x80%).

But, of course, when people sell their companies, a lot of the value is attributed to the goodwill element. And that hasn’t been taxed at all. So, there may be some justification in equalising that level with current levels of income tax. Increasing Capital Gains Tax is unlikely to lose Labour any votes or support because most of the people who will pay it are unlikely to be voters they will rely on to win the election anyway.

What About Entrepreneurs’ Relief?

There has always been some kind of allowance for people selling their businesses, although the methods have changed a few times in my career.

And besides, how much revenue would getting rid of Entrepreneurs’ Relief actually raise anyway? It’s a maximum of £100,000 per person selling their business (the difference between the current 20% of CGT and the 10% paid on the first £1m if Entrepreneurs’ Relief is claimed).

Is there anything you should be thinking of doing with this in mind?

Well, I suppose if you were heavily involved in the sale process for your business, then you might want to try and get it through a little bit quicker in case the tax regime changes. Unfortunately, pushing a sale through faster can lead to some unintended consequences.

I suspect that Capital Gains Tax will go up on property sales and that Jeremy Hunt’s reduction in his last budget will at the very least be reversed. So maybe get those property sales through more quickly if that’s what you are planning.

Tax Avoidance

Every party of every colour always talks about tackling tax avoidance. It’s an easy soundbite for two reasons: firstly, you can pretty much make up any figure you like for how much this will raise, and secondly, it’s an easy target (those villainous tax avoiders).