In a speech at the end of July, new chancellor Rachel Reeves warned the economic landscape Labour inherited was in a worse shape than it had expected.
While this isn’t an unexpected comment from any new government, it does highlight a likelihood of some increased taxes in the upcoming Budget on 30 October.
However, we shouldn’t forget there are some previously announced policies from the former government that will have a positive financial benefit. These are likely to be quietly continued or introduced as a first step to help boost Labour’s spending plans.
One of those due to be implemented from 6 April 2025 is the abolition of the tax benefits for furnished holiday lets (FHLs).
While this ongoing freeze will see many people pay more tax, there are some planning opportunities available
Currently, landlords of FHLs can claim capital gains tax (CGT) reliefs and plant and machinery capital allowances for items such as furniture and other fixtures, while their profits can count as earnings for pension purposes.
From April 2025, these tax benefits are due to be removed.
While we await the full details within draft legislation, people might want to start reviewing their current arrangements if they are affected, so action can be taken once the new rules are confirmed. This may mean some clients looking to sell properties soon.
And in respect of pensions, advisers will want to review contributions to ensure clients have enough UK relevant earnings to justify them without FHL income. Or look to reduce future pension contributions and consider alternative savings options.
The last government froze all income tax thresholds at 2021/22 levels and that was set to continue until at least April 2028. The new government has shown no indication it will reverse this policy.
Changes to how UK resident but non-domiciled individuals will be taxed going forward are also due to be introduced from April 2025
This means many more people will be pulled into higher rate or additional rate tax or enter the effective 60% band between £100,000 and £125,140 as the personal allowance is removed.
To demonstrate the impact of this fiscal drag, the Office for Budget Responsibility said if thresholds had been uprated in line with inflation, the personal allowance would be £15,220 in 2024/25, while the higher rate threshold would have increased to £61,020.
While this ongoing freeze will see many people pay more tax, there are some planning opportunities available. Employees can consider making personal pension contributions or gift aid donations to charity to reduce taxable income. Moving pension contributions to a salary sacrifice basis is another option that could be helpful from a tax perspective.
Where one spouse is in a lower tax band, married couples may have opportunities to redistribute income, or transfer income-producing assets. There can be further planning opportunities for those who run a business with their spouse. If you are in partnership, for example, it may be possible to review the profit-sharing ratio. If you are self-employed, increasing wages for a spouse who works in the business is another possibility, provided this is justifiable in terms of the work done.
Given the poorer financial position that the new government says it has inherited, it’s highly likely these will all be brought forward
Changes to how UK resident but non-domiciled individuals will be taxed going forward are also due to be introduced from April 2025.
The remittance basis of taxation, where UK resident non-doms only pay tax on income and gains they remit to the UK, will be abolished and replaced with a residence-based regime. Individuals who opt in to the regime will not pay UK tax on foreign income and gains for the first four years of tax residence, after which they will be treated as a UK resident on an arising basis.
The government will also change the current domiciled-based inheritance tax system to a new residency-based scheme, which will affect non-UK domiciled individuals and some trusts.
In these areas, there may be some actions clients could take in advance of the new rules being introduced. For example, considering how investments are held and if they can be changed either by ownership or the assets themselves.
While there is a huge focus on the potential tax changes that could arise from the Budget, these previously announced changes shouldn’t be overlooked. Given the poorer financial position that the new government says it has inherited, it’s highly likely these will all be brought forward. But there is the potential for some planning to start now to help those affected clients deal with the impact.
Andrew Tully is technical services director at Nucleus
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