Crystal Balls, Smoke and Mirrors

Taking a brief break from the pressures of the long and growing list of clients, friends and family wanting to talk about the impending Budget, I thought I might steal a few moments to write an article about…..you guessed it, crystal ball gazing on the Budget!

To all intents and purposes, this is the first time since 1997 that we’ve had a change of government with the incoming party holding a majority (and a significant one at that) so the situation is ripe for the most dramatic Budget in 27 years.

Those of us with a long enough memory will remember the 1997 Budget for Gordon Brown’s unexpected raid on our pension funds, or at least that’s how it was presented by the press.  It was a significant tax raising Budget, with some major structural changes to the tax system, so if that is the blueprint Rachel Reeves intends to follow, we can expect some radical tax measures to grapple with come 31 October. 

Ms Reeves has already set the scene for a tax raising Budget with the announcement of the £22bn revenue shortfall.  This is a somewhat arbitrary figure that is probably without solid foundations, but it is clearly designed to pave the way for unpopular tax raising announcements.

Anticipating taxpayer behaviour

One of the interesting things that always happens when a negative Budget is anticipated is that taxpayer behaviour is influenced to perform transactions that they perhaps weren’t otherwise considering or, more to the point, anticipated transactions are accelerated to ensure they get in before the Budget.  Not only does this result in an acceleration of the crystallisation of tax liabilities, but it also triggers some liabilities that might otherwise have never come to pass.

Putting aside that possibly unintended benefit, what do we think is likely to be appearing in the Budget that is creating the financial fear and anxiety that I’m currently seeing?  Well, there are a whole raft of things we know the Chancellor isn’t going to do, assuming the Labour party is true to its manifesto.  We can expect VAT, income tax, national insurance and corporation tax rates to remain as they are.  We know VAT is going onto private school fees and we know the winter fuel allowance is becoming means tested.

Targeted cuts

So, what’s left to tinker with to close the £22bn shortfall?  Well, first and foremost, there are a plethora of tax reliefs and exemptions spread amongst the various taxes acts that could be removed or reduced to raise a few pounds here and there.  I’ve no doubt we will see a whole variety of measures within this category, with the most likely candidates being the following:

• The removal of higher rate income tax relief on pension contributions.
  
• The reduction of the pensions annual allowance, perhaps taking it back from the current £60,000 down to the previous £40,000.
  
• The removal or reduction of the 25% tax-free cash available from pension funds.
  
• Scrapping or amending business asset disposal relief (formerly entrepreneurs relief).
  
• Scrapping or limiting the availability of business property relief and agricultural property relief for inheritance tax purposes.  I can particularly see AIM listed shares being the subject of some unwanted attention here.

I expect there will be others, but these are the biggest revenue earners for the Government.

Possible tax hikes

Moving on to tax increases, the Chancellor doesn’t have much wiggle room here, so the options are limited, but I think we can expect some or all of the following:

• An increase in the rates of CGT across the board, with the higher rate perhaps moving from its current 20% to 25% or 30% and the residential property rate increasing from 28% to, say, 35% or even 40%.
  
• An increase in dividend tax rates, with perhaps a steeper increase for certain types of dividend.  Whilst this is a form of income tax, it has been given its own name, which perhaps makes it fair game to be attacked in the Budget.
  
• The removal of the freeze in fuel duty.
  
• An increase in road fund licence costs for electric vehicles.
  
• An increase in council tax across the board, with a particular focus on second properties.

Once the date of the Budget has passed, we will be able to go back to acting rationally and planning our financial affairs with a degree of certainty, but for the moment, we have to think the worst and act accordingly.  Was that perhaps the Chancellor’s plan all along??!