October 2024 Newsletter

Welcome to our October 2024 newsletter. As we approach the Autumn Budget, speculation is rife about potential changes to Capital Gains Tax (CGT) and other financial policies. In this edition, we will explore some of the key rumours surrounding CGT reforms, including possible rate adjustments, the future of Business Asset Disposal Relief (BADR), and the impact on entrepreneurs and investors. We’ll also highlight pension-related changes that could be on the horizon, as well as practical advice on asset disposal strategies ahead of Budget Day.

Stay informed and prepared as we navigate these possible developments.

Possible Capital Gains Tax Changes In The October Budget

Many commentators are suggesting that the rate of CGT might be aligned with the rates of income tax, a return to the regime that applied when Gordon Brown was chancellor. Rachel Reeves is known to be a disciple of Gordon, so maybe we will see a return to taper relief as well! One would hope that Business Asset Disposal Relief (BADR), or something similar, is retained to encourage entrepreneurship and growth. She might even reintroduce Business Asset Taper, one of Gordon’s ideas, to reduce the effective CGT rate to 10% after 10 years’ ownership. If some form of CGT relief to encourage entrepreneurs is retained, then maybe the conditions for obtaining the relief will be tightened still further?

Other possible changes to CGT to listen out for include further restrictions to private residence relief and changes to hold over relief for transfers into and out of trust. A more controversial change would be the removal of the CGT free uplift to probate value on death, with beneficiaries inheriting the deceased’s CGT base cost of their assets, as suggested by the now abolished Office of Tax Simplification (OTS).

Should We Bring Forward Asset Disposals Before Budget Day?

CGT changes normally take effect from 6 April, but there have been mid-year changes in the past. This possibility has caused many taxpayers to bring forward disposals to take advantage of the current rates. The disposal date for CGT is the date of unconditional exchange of contracts and there is likely to be anti-forestalling legislation to counteract attempts to artificially bring forward the disposal date. There is still time to sell listed investments before 30 October but other assets such as a business or property typically take a lot longer to sell unless a buyer is already lined up.

Beware “Bed and Breakfast” Anti-Avoidance

Many investors may be looking to realise capital gains on their investments at the current rates, just in case there is an increase with effect from 30 October 2024.  They may then wish to repurchase those investments after the change in rates to retain the balance of investments in their portfolio.  Where the same shares and securities are bought back within 30 days of the date of disposal, the shares bought back would be matched with those sold and the desired capital gain and increase in base cost may be negated.

For example, if 1000 shares in A plc were bought for £2 a share several years ago and are sold on 29 October 2024 for £4.50 a share there would be an apparent £2,500 capital gain, potentially tax free if the £3,000 2024/25 CGT annual exemption is unused. However, if the same class of shares in A plc are purchased on say 5 November 2024 for £4.45 a share there would be a £50 capital loss instead of the desired capital gain and the base cost would remain at £2 a share. This is because the repurchase is within 30 days.

An alternative strategy would be for the taxpayer’s spouse to repurchase the shares (“bed and spousing”) or to repurchase the shares in the taxpayer’s ISA or pension fund.

Rumours Of Pension Changes in The October Budget

Changes to pension tax relief seems to be top of the list of possible changes in the Budget and could yield more tax revenues than changes to CGT and IHT combined. As recently as 6 April 2023, we saw the abolition of the lifetime allowance charge and a significant increase in the pension annual allowance to £60,000 a year, which Rachel Reeves commented were too generous, so we may see those changes reversed or curtailed.

Possible changes to pensions to listen out for include:

• Limiting pension tax relief for individuals to basic rate or possibly a 30% flat rate.
• Further limiting (or abolishing) the 25% tax free lump sum.
• Freezing or reducing the £1,073,100 lump sum and death benefit allowance.
• Making the undrawn pension fund subject to inheritance tax; and
• Limiting the amount of employer pension contributions that can be paid by way of a salary sacrifice.

Pension changes normally take effect from the start of the tax year on 6 April, however, there have been mid-year changes in the past. Taxpayers should therefore consider bringing forward pension planning just in case changes are effective from the date of the announcement.

Many Over 55s Can Withdraw 25% Of Their Pension Fund Tax-Free

Under current pension rules, many pension funds allow pension scheme members to withdraw up to 25% of their pension savings tax-free. Finance Act 2023 limited the tax-free amount to £268,275 unless the individual had applied for protection at a higher amount. There are rumours that the tax-free amount may be further limited, with an amount of £100,000 suggested, and this has resulted in significant withdrawals from pension funds in recent weeks. It should be noted that there are anti-avoidance rules that limit the amount that can be reinvested in the pension fund within a 12-month period.

Pension lump sum “recycling” is countered by anti-avoidance rules where the lump sum withdrawn is more than £7,500 during a one-year period and subsequent pension contributions are increased by more than 30% of the lump sum.  A breach of this rule will mean that the lump sum is an unauthorised payment and will be taxed at 40%.

Check Your State Pension Entitlement

The current State Pension is £11,502 and is due to rise to around £12,000 a year for 2025/26. At current annuity rates it would cost over £300,000 to receive an index-linked annuity starting at £12,000 a year, so it’s important to maximise your entitlement.

In order to receive a full State Pension, you need 35 qualifying years, but is it worth topping up voluntary Class 3 National Insurance contributions in respect of missing years? This is a financial decision but there is a short breakeven period. It is around 3 years for employees and even shorter for the self-employed who can pay Class 2 contributions for missing years. You can also get credit for missing years if you were not working because of bringing up children.

Employees need to make Class 3 contributions of £824.20 or £907.40 a year for extra years which yields £302.86 a year in additional annual state pension.  Self-employed individuals can pay Class 2 contributions at the rate of £179.40 for each missing year to yield £302.86 per annum.

Normally you can only go back six years to make up missing contributions but there is currently an opportunity to fill up missing years going back to 2006/07 – note that the deadline for the extended carry back is 5 April 2025.  

“Nudge” Letters Being Sent by HMRC To Taxpayers

HMRC have recently increased their use of “one to many” or “nudge” letters to taxpayers which suggest that there may be errors or omissions in tax returns or accounts information.  HMRC argue that these letters are a key tool in their compliance strategy, but this is essentially a “fishing” expedition more akin to direct mailing and this may alarm many taxpayers who are completely innocent.  Please get in touch with us if you receive such a letter and we can deal with the matter on your behalf.

Beware “Scam” Letters Claiming to Be From HMRC

We have also become aware of scam letters and emails purporting to be from HMRC being sent to taxpayers. These letters request important personal information which would be needed by fraudsters to access your data. If you have doubts about whether a communication from HMRC is genuine, please contact us and we will check its authenticity.

Renters’ Rights Bill

On 11 September 2024, the Renters’ Rights Bill was introduced in the House of Commons. This bill follows the Conservatives’ Renters’ Reform Bill, which did not complete its passage through parliament before the General Election.

The bill applies to England only and can be viewed here: https://bills.parliament.uk/bills/3764

The bill is like the previous government’s bill but, as pledged in Labour’s manifesto, it includes further measures.

The Renters’ Rights Bill:

• Abolishes section 21 (no-fault) evictions – Labour will implement this new system in one stage, giving all tenants security immediately. Landlords will also benefit from more straightforward regulation and clearer and expanded possession grounds.

• Ensures possession grounds are fair to both the landlord and tenant – The bill introduces new safeguards for tenants, giving them more time to find a home if landlords evict to move in or sell, and ensuring unscrupulous landlords cannot misuse grounds. Landlords will be able to recover their property when reasonable.

• Provides stronger protections against backdoor eviction – by ensuring tenants are able to appeal excessive above-market rents which are purely designed to force them out. As now, landlords will still be able to increase rents to market price for their properties and an independent tribunal will make a judgement on this, if needed.

• Removes fixed-term assured tenancies – Instead, all tenancies will be periodic, with tenants able to stay in their home until they decide to end the tenancy by giving 2 months’ notice.

• Introduces a new Private Sector Landlord Ombudsman and a Private Rented Sector Database.

• Give tenants strengthened rights to request a pet in the property – the landlord must cannot unreasonably refuse but can require pet insurance to cover any damage to their property.

• Applies the Decent Homes Standard and ‘Awaab’s Law’ to the sector, both of which aim to make homes safer.

• Makes it illegal for landlords and agents to discriminate against prospective tenants in receipt of benefits or with children.

• Ends the practice of rental bidding – Landlords and agents will be required to publish an asking rent for their property and it will be illegal to accept offers made above this rate.

• Strengthen local authority enforcement and rent repayment orders – by expanding penalties and introducing investigatory powers to councils.

There have been mixed reactions to the bill, with fears that a heavier compliance burden for landlords will only serve to increase rents.

Furthermore, it appears that the ban on section 21 evictions will come into effect on the day the bill receives Royal Assent. The Conservatives previously said this measure could not be implemented until the court system was ready and there are concerns surrounding how the courts will cope once the bill becomes law.

Immediate impacts could be a noticeable wave of section 21 evictions before they are outlawed.

For tenants, the bill offers increased protection and goes further than the previous government’s bill by applying the Decent Homes Standard and Awaab’s Law to the sector.

For many, regardless of their opinions on the contents of the bill, it gives them clarity. The sector has experienced a long period of uncertainty and the bill’s introduction can be viewed as ‘the beginning of the end’. The bill is scheduled to be debated in parliament this autumn.

Wales: controls on second homes and holiday lets

Since Welsh local authorities were empowered to charge a council tax premium of up to 300% on second homes, the number of second homes for sale has trebled in one area. Pembrokeshire local authority imposed a 200% council tax premium on second homes in April 2024, although owners can delay paying for up to one year if they put their property up for sale. According to a BBC article (see here), 135 Pembrokeshire second homes were for sale in July 2024, compared to 28 in July 2023.

The power to impose the premium was given to local authorities as a means of making it easier for local people to afford to buy a new home.

Other councils that charge a premium include Anglesey and Conwy (100%) and Carmarthenshire (50%). In Ceredigion, the premium is currently 100% but it will increase to 150% in 2025.

Cyngor Gwynedd charges a premium of 250% and is also the first local authority to introduce the ‘Article 4’ direction, which requires homeowners to gain planning permission in order to turn a home into a holiday let or second home from 1 September 2024. This is another measure aimed at making houses more affordable for local people and is viewed by some as essential to preserving communities and the Welsh language.

However, some are opposed to the new rules, citing a potential decline in tourism and a fall in house prices due to the market becoming smaller. Campaign group ‘People of Gwynedd Against Article 4’ are set to launch a legal challenge.

Diary Of Main Tax Events October/ November 2024

Get Prepared for the October Budget

As we await the official announcements in the October Budget, now is the time to review your financial strategies, particularly in light of the potential changes to Capital Gains Tax, pensions, and other key areas. Proactive planning could help you mitigate risks and take advantage of current opportunities before new rules come into effect.

If you have any questions or concerns about how these potential changes might impact your personal or business finances, please don’t hesitate to reach out. Our team is here to provide expert guidance and ensure you’re fully prepared for whatever the Budget brings.

Let’s face the final quarter of 2024 with confidence.

Related posts:

October 2023 Tax Newsletter November 2023 Tax Newsletter December 2023 Tax Newsletter January 2024 Tax Newsletter