Last year, chancellor Rachel Reeves delivered the largest tax-raising Budget in three decades, promising a “once in a generation” event and stating that she would not be back to hit the country’s wealthiest with further taxes.
But wealthy people and their advisers have little faith in Reeves’ words. Many are already preparing for what they fear will be another Budget this autumn that will increase their tax burden.
Part of the problem stems from Labour’s manifesto pledges to rule out increases to the top three revenue raisers: income tax, national insurance and VAT.
Since these three levies raise more than 55 per cent of all taxes, their exclusion leaves Reeves with little scope to raise significant funds easily. If she wants to increase taxes — a prospect that looks ever more likely given the continued fragile public finances, including a £5bn fiscal hole created this week as a result of Labour’s welfare climbdown — she has a smaller pool of options to choose from.
FT Money asked advisers to the wealthy which taxes their clients are most concerned about and what action they are taking to protect their assets.
Burden of taxation
Most tax experts think high earners and those with greater wealth are likely to bear the brunt of any further tax increases.
Reeves has already shown an appetite to target this cohort of people through scrapping and reforming the non-domicile regime for rich foreigners, introducing VAT on private school fees, increasing the rates of carried interest and capital gains tax and expanding inheritance tax to businesses, farms and pensions.
Yet despite these reforms being implemented less than a year ago, well-heeled individuals remain concerned there could be further changes on the way.
“Clients in general are feeling the burden of taxation . . . More people are looking to take more action,” says Ian Cook, chartered financial planner at Quilter Cheviot, a wealth manager.
“There’s a general lack of trust in this current government. They feel it’s only going to get worse.”
Some of the actions people are taking include gifting money and assets to younger generations to start the clock ticking on the seven-year rule, which allows assets to be exempt from inheritance tax as long as the donor lives for at least seven years after the gift was made.
Advisers are also busy setting up structures such as trusts and family investment companies, which are used to support succession planning.
Some of the biggest worries are over further changes to inheritance and capital gains tax. Even a wealth tax is being talked about as a possible option.
Clare Munro, tax adviser at Weatherbys Private Bank, says most of her clients are older Britons who tend to be less geographically mobile than younger or non-British high-net-worth individuals. However, the idea of a wealth tax “is the kind of thing that would get them packing their suitcases”.
Munro mentions research produced five years ago that advocated a one-off wealth tax of 5 per cent on net assets above £500,000.
Overall, she thinks introducing a wealth tax would be a “really bad idea” and one that is probably “unlikely”. “It would depend on if Reeves is desperate enough,” she warns.
Other advisers say their clients, particularly business owners, are concerned CGT rates could increase again.
At the Autumn Budget Reeves increased the main rates of CGT that apply to assets (other than residential property and carried interest) from 10 per cent and 20 per cent to 18 per cent and 24 per cent respectively.
Britain’s ‘most-hated tax’
But by far the most frequently mentioned tax giving wealthy people the jitters was inheritance tax. People are “struggling with the uncertainty” of not knowing “if there’s going to be any other fundamental change,” says Michelle Denny-West, partner at Moore Kingston Smith, an accountancy firm.
Tens of thousands of individuals are already grappling with the extension of IHT to previously exempt assets such as pensions, farms and businesses. Most tax advisers say IHT is the area keeping them busiest, with wealthy people increasingly giving away assets to younger generations and using trusts and other vehicles to mitigate potential IHT liabilities.
Many are also taking more money out of their pensions. Reeves’ Budget announcement that pensions will be liable for IHT from April 2027 has turned years of planning “on its head”, Denny-West adds. Pensions were previously “the last thing people touched” but now “people are really looking to raid their pension pots in a way they didn’t before”.
Cook says that he is having more discussions about accelerating withdrawals from pension pots because of the upcoming rule changes. People are increasingly considering whether to take more money out of their pot than previously planned to give to family members or fund renovating properties.
He adds that this is the busiest he has been in his 20-year career for IHT planning.
Ceri Vokes, a partner at law firm Withers, agrees IHT has become a “much bigger deal” since Reeves’ Autumn Budget, both for wealthy non-doms and wealthy Brits.
“IHT is often seen as Britain’s most-hated tax because it does feel inequitable to many people,” she says. “Britain is also such an outlier in having a high rate at 40 per cent and a small threshold [of £325,000].”
She reports an increase in British business owners choosing to leave the UK, due to the potential risk of triggering IHT on their death. Previously, businesses qualified for full IHT relief.
However, the relief was capped at £1mn in the Autumn Budget, with assets above this triggering a 20 per cent charge. Meanwhile, new rules mean spending more than 10 years outside the UK ends liability to UK IHT.
“You’d have expected your non-doms to move in the end. But it’s quite something when people in their 40s and 50s who have lived here their entire lives have decided to leave,” says Vokes.
Miles Dean, partner at tax adviser Andersen, also reports growing interest from Britons looking to relocate for tax reasons since the Budget.
He says it used to be mostly people looking to relocate for CGT reasons, “to take a big dividend”, for example. However, relocations are now being driven by fear of increased IHT, income tax, CGT and sometimes a combination of all three.
“It’s a desperately miserable situation for the UK to find itself in because these wealth creators are taking their money and spending it elsewhere,” he says.
