Scenario planning for potential tax changes at the Autumn Budget

Scenario: What if the Capital Gains tax rate rises or it is applied at time of death?

In the current tax year to April 2025, if you made a capital gain of £30,000, a basic rate taxpayer would pay £2,700 or 10% of the amount and a higher or an addtional rate income tax payer would pay 20% or £5,400. This is after assuming you enjoy the first £3,000 capital gains free using up your tax-free allowance.

If the rate rises inline with income tax bands, a basic rate taxpayer would pay £5,400, a higher rate taxpayer would pay £10,800 and additional rate taxpayer £12,150.

Now imagine you give away this £30,000 gain at the time of your death to a loved one, there is currently no capital gains tax to pay. If the rumour mill is to be believed and our Chancellor decides to impose capital gains tax at time of death, then the capital gains tax rate remains the same, and you use your annual allowance, you'll pay 20% on £27,000 of the gain – or £5,400.

How can you mitigate a large capital gains tax liability?

It is a good idea to spread the sale and purchase of assets over a period of time. For example, you can sell a proportion of the £30,000 assets, and buy the same assets immediately in an ISA, which protects them from capital gains tax in the future. You can also offset losses, so if you plan to sell assets in a particular tax year, and one makes a gain and one makes a loss, you can offset the losses first before calculating any capital gains tax liability.

Scenario: What if the inheritance tax-free threshold (the nil rate band) is cut?

Currently, the first £325,000 of your estate can be left completely tax free to loved ones after your death., If you’re leaving the home you live in to children or grandchildren, you also get a £175,000 residence nil rate band – so you can leave £500,000 altogether before inheritance tax becomes an issue. If you are a married couple, double this and you get a £1m inheritance tax free as a couple before the 40% kicks in.

If these allowances would cut, single people with no children would be impacted the most. If the nil rate band fell to £250,000 for example, and there were no other exemptions to take advantage of, you would pay 40% on £75,000 – or £30,000 extra tax due by your loved ones on your estate after your death.

Even more worryingly, the Chancellor could decide that married couples or those in a civil partnership will not be able to pass on their unused nil rate band to their surviving spouse. Currently, your nil rate band passes to your partner at the time of your death and there is no inheritance tax to pay, no matter the size of your estate. You therefore retain the £1 million inheritance-tax free threshold as a couple, if you own a home together.

Say you’re married and have an estate worth £700,000, including a home worth £350,000, you’d currently pay no inheritance tax if you left everything to your spouse on the first death.

If you could no longer pass your nil rate bands to your partner, and still pass everything to your spouse on the first death, they will only be able to cover £500,000 of the estate with their nil rate bands, so there would be a 40% tax left on the remaining £200,000. That is a possible £80,000 inheritance tax bill to deal with, which could force you to sell your home or other assets to cover it.

How can you prepare for possible inheritance tax changes?

We suggest you start gifting cash in your lifetime. There are different rules to consider depending on the amount of cash you gift and who you gift too. remember Ann Robinson in the news recently openly sharing her plans to give away all her assets and cash in her lifetime? Read more here on how you can do this yourself tax efficiently.

Scenario: What if there is a nom-dome exodus?

The UK's non-domiciled tax regime has long been a contentious issue, with recent developments bringing it back into the spotlight. This small but influential group, numbering around 70,000, contributes a staggering £12.4 billion to the UK economy - a figure that dwarfs the average Briton's contribution by a factor of 15. The impact of this community on the UK's fiscal landscape is undeniable, with the top 1% of earners accounting for about 30% of income tax revenue, and the top 10% responsible for over half.

However, the winds of change are blowing, and they're carrying some of Britain's wealthiest residents to sunnier shores. A recent exodus has seen approximately 10% of non-doms leave the UK, resulting in a significant dent in tax revenues.

These high-net-worth individuals are setting their sights on tax-friendly havens like the Isle of Man, which has seen a jaw-dropping 1300% increase in interest from potential relocators. Monaco, Dubai, and Singapore are also experiencing a surge in demand from Britain's departing elite.

The crux of the matter isn't so much about income tax anymore - it's the prospect of being hit with a 40% inheritance tax on wealth accumulated abroad that's causing many to pack their bags. For those who've built their fortunes overseas before settling in the UK, the thought of their hard-earned assets being subject to such a hefty levy upon their death is proving to be the deal-breaker. There are however rumours that the Chancellor is now re-considering this move, let’s see.

What can the government do to retain its allure for high-net-worth individuals while still satisfying manifesto commitments and bolstering the public purse?

Possible solutions to this conundrum are not straightforward.

One approach could be to implement a tiered system of inheritance tax for non-doms, based on the length of their residency in the UK. This could incentivise longer-term commitment to the country while still offering some protection for wealth accumulated abroad.

Another option might be to introduce a 'wealth contribution' scheme, where non-doms pay an annual fee based on their global assets, in exchange for more favourable inheritance tax terms.

Additionally, the government could consider offering tax breaks or incentives for non-doms who invest significantly in UK businesses or infrastructure projects, thereby ensuring their wealth contributes directly to the nation's economic growth. Whatever the solution, it's clear that a delicate balance must be struck between attracting global talent and ensuring fair contribution to the UK's fiscal health.