Budget Insights and Leadership Strategies
At TAG Accountants Group, we strive to stay ahead of the curve by staying informed about developments and how they may impact our clients. While we cannot foresee the details of the upcoming end-of-month Budget (though it is unlikely to bring positive news!), we have outlined below some speculated inclusions. Additionally, we offer advice on key leadership skills that could enhance the efficiency of your organisation.
Budget Rumours
Inheritance Tax
There are rumours that wealthy individuals are passing on substantial amounts of their wealth in anticipation of possible changes to inheritance tax (IHT) in the Budget on 30 October.
Before doing anything, you need to check the value of your estate and your potential IHT exposure under the current rules. Currently, each individual is entitled to a nil-rate band of £325,000, with the potential for an additional £175,000 against the value of the family home, provided the home or assets of equivalent value are passed on to direct descendants upon death. This additional £175,000 allowance is referred to as the residence nil rate band (RNRB). The current rate of IHT is 40% on assets above the nil rate band.
An unlimited exemption exists for assets transferred during your lifetime or on death to your surviving spouse or civil partner. If the deceased spouse’s nil rate bands are unused, they are available to the survivor, meaning the tax-free amount on the death of the second spouse could be up to £1 million. However, where the estate is in excess of £2 million, the RNRB is reduced by £1 for every £2 that the estate exceeds £2 million, which means the RNRB will be reduced to zero when the value of the estate exceeds £2.7 million. In this scenario, that will leave just the combined nil rate band of £650,000.
There is currently 100% relief from IHT where business and farming assets are transferred during a lifetime and on death, and it is hoped that these reliefs will continue so that survivors do not need to sell off assets to pay the tax, although it is possible changes in this area could be made.
Under the current rules, there is no IHT payable where the donor survives for at least 7 years following the date that assets are transferred during your lifetime (known as potentially exempt transfers (PETs)—IHT would only be payable if the donor dies within 7 years (the rate of IHT tapers down as time passes from the date of the gift). The transfer needs to be an outright gift with no continued use or enjoyment of the asset by the donor, so gifting the family home but continuing to live there will not be ineffective unless other conditions, such as paying market rent, are met.
There could be capital gains tax (CGT) triggered on a lifetime gift, although it may be possible to defer the gain, meaning no CGT would be payable on the increase in value since the asset was acquired. Holdover relief is currently available for business assets and when assets are transferred into a trust.
We are here to help if you feel you want to consider acting before Budget Day.
Capital Gains Tax (CGT)
There is speculation that the rate of CGT might eventually be aligned with the rates of income tax, a situation last seen when Gordon Brown was chancellor, although alignment in one go seems less likely. It is hoped that Business Asset Disposal Relief (BADR), or something similar, is retained to encourage entrepreneurship and growth, although this might mean that Business Asset Taper Relief will return, which will then reduce the effective CGT rate to 10% after 10 years of ownership.
Other possible changes to CGT that have been mooted include further restrictions on private residence relief and changes to holdover relief for transfers into and out of trust.
One concerning rumour is the removal of the CGT-free uplift to probate value on death, meaning beneficiaries inherit the deceased’s CGT base cost of their asset rather than inherit at their market value on death.
So, should you consider any asset disposals ahead of Budget Day? Well, CGT changes normally take effect from April 6, but mid-year changes have been seen in the past, so they cannot be ruled out. The disposal date for CGT is the date of the unconditional exchange of contracts, and if any changes are made, there is likely to be anti-forestalling legislation to counteract attempts to artificially bring forward the disposal date. There may still be time to sell listed investments before 30 October, but other assets such as a business or property would typically take a lot longer to sell in the remaining timeframe.
Investors may be looking to realise capital gains on their investments at the current rates just in case there is an increase in CGT rates in the Budget. Having crystallised a gain, they may then wish to repurchase those investments after the change in rates to retain the balance of investments in their portfolio. Watch out, though, as 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.
An alternative strategy could 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 to get around the so-called “bed and breakfasting” rules.
Pensions
Changes to pension tax relief seem to have been mentioned by many observers in the last month or so, especially as these changes could yield more tax revenues than changes to CGT and IHT combined. The abolition of the lifetime allowance charge and a significant increase in the pension annual allowance to £60,000 a year in 2023 were seen as generous and could be reversed.
Other possible changes to pensions being rumoured are:
- Limiting pension tax relief for individuals to the basic rate or 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.
- Limiting the amount of employer pension contributions that can be paid by way of a salary sacrifice; and
- Putting employers’ NICs on employer pension contributions.
Pension changes normally take effect from the start of the tax year on 6 April, but like with CGT, there have been mid-year changes in the past. Taxpayers should therefore consider their pension planning options and whether to take any action in terms of drawdowns or making contributions just in case changes are effective from the date of the announcement.
Under existing pension rules, many pension funds allow pension scheme members to withdraw up to 25% of their pension savings tax-free if they are over the age of fifty-five. The Finance Act 2023 limited the tax-free amount to £268,275 unless the individual had applied for protection at a higher amount. There is speculation that the tax-free amount may be further limited going forward, but advice from many financial advisors indicates that immediate changes to the tax-free drawdown seem unlikely. Remember that there are anti-avoidance rules that limit the amount that can be reinvested in the pension fund within the year after a drawdown.
Effective Leadership Skills
Recognising Leaders Are Not Always Right
It is often the case that people do all they can to avoid conflict, whether in their personal or business lives—of course, some thrive on it! In a business environment, constructive conflict should be embraced, as it is common for a “no” answer to ultimately be more useful than a “yes.” Surveys indicate that the best managers and leaders in the business world seek and accept critical feedback from trusted colleagues as it enables them to get a balanced perspective.
By recognising that you do not always get it right, leaders will then foster a culture of openness, collaboration, and innovation in their organisation. When leaders are prepared to admit to errors, they create an environment where team members feel comfortable sharing ideas, taking risks, and learning from failure. This culture can then help to drive innovation and continuous improvement across the whole organisation.
Leaders who strive to always be right can inadvertently stifle this environment, which leads to micro-management and reduced employee engagement. Teams become less empowered to experiment and grow, which, in turn, limits the organisation’s ability to adapt to new challenges or opportunities.
In addition, leaders who can admit when they do not get things right demonstrate humility and authenticity, which results in strengthening trust and respect within teams. Furthermore, employees will have more respect and feel more connected with leaders who are human and relatable and feel they are working in a supportive workplace culture.
Another benefit of this approach is that it enables the right course to be set quickly, as leaders with this attitude recognise their fallibilities and are more willing to adjust their strategies or change direction before problems escalate out of control.
Ultimately, these traits produce a more sustainable and forward-thinking business.
Many of our clients invite us to board or senior management meetings, which gives us the opportunity, as an independent eye, to identify if there are issues around the leadership culture as well as to provide advice on the business itself and its financial performance. Contact us to find out more.
Help is Just a Phone Call Away
Whether you need to understand how the Budget affects you and your business or seek an objective perspective on your organisation’s culture, our professional team at TAG Accountants is here to assist. Simply call our approachable tax experts at TAG Accountants Group in Wolverhampton on 01902 783172 or click HERE to contact us via our website.
We look forward to helping you.