Here’s how wealth creators in the UK can navigate the upcoming tax changes, write Ollie Saiman and Katherine Waller
As we approach the new government’s first budget it seems almost impossible to avoid the widespread speculation about what Halloween tricks or treats are going to jump out of the Chancellor’s red box on 30 October.
Given the seriousness of the apparent £22bn black hole, it seems reasonable to assume that we should brace ourselves for tax rises, rather than tax cuts.
Within this context we’re not particularly surprised about the exodus of non-doms and high-net-worth (HNW) individuals from the UK, towards sunnier more tax friendly climates; the UK is home to an internationally mobile population, and it makes sense that many should wish to leave, at least for the time being.
However, when we founded the purpose-led wealth manager Six Degrees last year, we saw an opportunity to address a sizeable gap in the market: the majority of wealth creators in the UK today, are business owners and entrepreneurs – people with deep-rooted connections to the country through their families, workforces, management teams and communities. And because their ties to the country are strong, the question is not where to go, but how to best navigate the changes that are coming.
What will the changes mean for those who stay?
At Six Degrees, we believe that predicting the future is an impossible task. So when it comes to potential tax increases, we prefer to consider a range of possible outcomes and plan accordingly. However the government’s commitment throughout the election campaign to not raising the ‘big four’ of income tax, National Insurance, VAT and corporation tax, leaves minimal wiggle room when it comes to generating more revenue.
So where do we see the key pressure points?
Capital Gains
With only around three per cent of the UK population paying Capital Gains Tax (CGT), hiking it would fit well into the Labour strategy of increasing the tax burden on niche groups such non-doms, private equity executives, and parents with private education costs. As with Inheritance Tax, CGT impacts such a small portion of the population that any increase would be politically straightforward to implement without creating significant backlash.
Furthermore, any increase to CGT would disproportionally impact the wealthy, creating a de facto ‘wealth tax’ in a more palatable – but still ideologically aligned – form. After all, those who create wealth tend to do so by growing equity value and realising capital gains over time – rather than earning income through traditional sources such as a salary.
For these individuals, any increase in CGT would have a significant impact, particularly following the erosion of Entrepreneurs’ Relief in 2020, an act which made CGT more relevant for entrepreneurs and founders.
However, changes to CGT may not be as simple as increasing the rate. The government has several options to increase CGT revenue by removing reliefs – for example by putting a limit on the number of years one can look back to utilise allowable losses – reliefs that are particularly beneficial to entrepreneurs and investors who build wealth by taking risk and sometimes incurring losses as par for the course.
Inheritance Tax
Despite being hugely unpopular, only around four per cent of the population pays Inheritance Tax, the 40 per cent levy on the value of one’s estate over and above their tax-free £325,000 ‘nil rate band’. Again, this in our opinion makes it a prime target for changes that could increase revenue without alienating the broader electorate.
Much has been written about the potential for removing IHT reliefs on AIM-listed shares and agricultural land. A full removal of Business Relief could mean the inclusion of private company shares within one’s chargeable estate – a move which would be massively to the detriment of family businesses, but perhaps a tempting treat for a cash-strapped government.
Less is being said about the potential for removing the IHT free status of pensions. It is rare that HNW individuals and families ever need to access their pensions in their lifetimes as they have sufficient wealth elsewhere. The fact that pensions fall outside of one’s chargeable estate for IHT purposes therefore renders them an incredibly tax efficient way to pass on wealth to the next generation.
We feel that it would be uncontentious amongst the wider electorate if the government changed this to make pensions chargeable to IHT, removing the ability for pensions to be used as tax efficient vehicles for wealth transfer.
“The most pro-growth, pro-business government the country has ever seen…”
How the government would reconcile these changes with their commitment to growth remains to be seen. The Treasury will no doubt be considering the negative impact of these tax rises on entrepreneurial endeavour and UK innovation; it’s clear that full alignment of CGT rates with income tax would put a major dampener on appetite for taking entrepreneurial risk and investment more generally.
For those who remain committed to the UK like the families we look after, now is an important time to review their wealth strategies, consider potential tax changes, and plan accordingly.
Whether it’s rebasing their assets in order to realise gains at the current rate of CGT, safeguarding family businesses from IHT changes, or considering other strategies to protect the future value of their business sale proceeds, we’re seeing clients take a range of different actions with regards their personal wealth. One thing which cannot be ruled out are tax changes mid-year, rather than as of the start of next tax year, meaning a limited window over the next seven weeks to plan.
Ensuring that wealth meets its intended purpose is key to the Six Degrees approach, and our focus remains on helping clients navigate the complexities of an ever-changing tax landscape.
So as the budget approaches, one question remains paramount: how are you planning for what’s coming?
Ollie Saiman and Katherine Waller are co-founders of Six Degrees