As the Chancellor prepares for her first Budget, our Evelyn Partners tax experts consider Rachel Reeves’ pro-growth agenda and what they would advocate for from a tax policy perspective to support these plans.
One of the buzzwords to come out of the 2023 Labour party conference was securonomics and becoming a better version of Britain by building on the existing strengths of our economy.
Labour’s manifesto 1 stated that it will ‘embrace a new approach to economic management - securonomics - that understands sustainable growth relies on a broad base and resilient foundations. This means a more active, smarter government that works in partnership with business. Labour will stop the chaos and support business through a stable policy environment - strengthening our economic institutions and giving investors the certainty they need to fuel growth.’
It also pledged to kickstart economic growth and make Britain a clean energy superpower, while its 'business partnership for growth'2, published in early 2024, states its five point plan for growth:
With this in mind, what could a long-term pro-growth plan look like?
The UK economy is reliant on small and medium businesses, which employ 60% of UK employees3. Entrepreneurs drive innovation, create opportunity and solve complex macro ‘problems’ (environmental, social) with creative flair and flexibility. Entrepreneurship is not an easy route and we see many reasons beyond short term economic impact to incentivise this risk taking.
Currently, incentives for investing in high-risk capital include reduced capital gains tax (CGT) rates of 10% on exit, at present named ‘Business Asset Disposal Relief’. The potential value of this relief has been reduced from £10m to £1m in recent years. There is speculation that this relief could become less generous, or be abolished altogether, in which case the Government needs to consider how this vital sector of our economy remains incentivised to take entrepreneurial risks.
The Government deserves praise for the news that the EIS and VCT investment reliefs have been extended to 2035. Similarly the extension of “full expensing” for capital allowances and preservation of the aims of the research and development regime will, we hope, incentivise investment in ideas, innovation and capital spend by small and medium-sized enterprises (SMEs). Whilst ideologically, it would be great if UK plc could fuel its own growth, realistically we need to attract overseas investment and ideas to grow at a faster rate. The potential changes to the non-dom rules should bear this in mind and at least not detract from, and ideally incentivise, making the UK an attractive home for investment.
Investment is critical if we are to tackle the UK’s productivity problem. To grow the economy and create jobs, we need wealth in the hands of the people who will spend and invest in productive output to further the multiplier effect and boost economic growth and job creation. The Government’s plans for inheritance tax and any potential gift taxes are not clear, but any barriers to wealth being passed down as part of the “Great Wealth Transfer” could be damaging to the UK’s financial health.
The regime for potentially exempt transfers could be overhauled in the forthcoming Budget. Currently, gifts made over seven years before a person’s death are exempt from inheritance tax (IHT). If the Government decides to draw from past reports when considering any IHT changes, an All-Party Parliamentary Group report in 2020 proposed introducing a charge on lifetime gifts set at 10% over a £30,000 annual allowance. A lifetime charge on gifts would inevitably slow down the transfer of wealth.
In terms of business succession, Labour must prioritise policies that protect and facilitate the growth, preservation and continuity of family-owned businesses. Businesses plan for many variables and risks, but the trickiest and painful one is the death of the owner manager. On top of the personal loss for the family, the last thing that the employees, suppliers and local community want is for the business to be sold in order to pay inheritance tax. The Callaghan government in 1976 realised these wider societal benefits of securing jobs, economic stability, long-term investment and innovation within the UK by introducing businesses property relief, since renamed business relief (BR). Its purpose remains the same nearly 50 years later.
Ensuring certainty in business succession through measures such as BR is crucial for maintaining an environment conducive to the preservation and future growth of SMEs. The debate about the (relatively modest) cost of the relief all too often eclipses the benefits.
Similarly, agricultural businesses are at the whim of environmental as well as commercial climate. Since Brexit farming in the UK has become even more precarious with the withdrawal of European subsidies. In the meantime food security, provenance of what goes into the food chain and stewardship of the natural environment have grown in strategic importance. Hence agricultural property relief, which was introduced in 1984 to protect the agricultural value of land from inheritance tax on death, has become more relevant and important for the country.
Wishlist:
In the absence of economic and political stability, businesses need some form of certainty to make strategic investment decisions. The Government has committed to publishing a business tax roadmap which should set out the tax policies that businesses can expect over the next five years.
Employment, incentive reliefs such as R&D and patent box, treatment of debt and capital spend are just a handful of areas where business would benefit from some certainty. The UK needs to remain a competitive place to do business.
At a domestic level, one could argue that the policies that determine the tax base, and therefore the cash tax that UK businesses really pay, is even more important to get right for a healthy UK plc. Certainly this would be the position adopted by many SMEs and so legislation to accelerate tax relief on investments would be welcomed. On the other hand, large corporates tend to be more interested in managing disclosure of earnings and maintaining a consistent effective tax rate.
We asked the following question in a recent survey* of 500 business owners with turnovers of £5m upwards:
Which of the following would be top of your wish list for the Chancellor’s Budget on October 30th?
The top of the wish list for 22% of respondents was ‘Reform business rates’. 19% replied, ‘cut corporation tax’ and 18% said, ‘increase capital allowances’.
Based on manifesto pledges, we are not expecting an increase to the headline corporation tax rate which is currently set at 25%. We are also expecting full expensing to be made permanent and Rachel Reeves has been very clear about the need for the private sector to co-invest with the Government in order to tackle the woeful lack of investment in both businesses and national infrastructure in recent years. We need 5G networks, data centres and green energy solutions to name but a few if UK plc is going to remain competitive. Full expensing absolutely provides an incentive for businesses to invest in capital spend but since this is a wish list, what about going further and introducing a deduction for capital spend that is more than 100% of the cost?
There has long been a call for a reform of business rates. The current rules are based on bricks and mortar which is easy to identify, easy to value, easy to track and therefore easy to tax. We have seen reports suggesting that reductions for the high street and higher rates for large multinationals and tech firms might be perceived as more equitable in today’s digital and international economy.
Simplicity in the tax system is valuable but there is clearly a need for a more progressive approach that puts fairness at the centre of the policy. Our expectation is that further consultation will be announced before any reformative changes.
Wishlist
The Budget is set to impact stakeholders at all levels of the property sector. From first time buyers, where Labour has not committed to continuing the SDLT enhanced first time buyer allowance of £450k, through to institutional investors and large housebuilders, whereby Labour’s manifesto focussed on ‘getting Britain building again’. Let’s also not forget the investors in the middle who will be paying close attention to the rate of capital gains tax.
A well thought out plan to tackle the planning issues that have caused havoc with housebuilders, not least identifying areas of ‘grey belt’ being low quality green belt, will go some way to unlocking Labour’s ‘1.5m new homes’ headache.
It’s not clear at this stage where the CGT increase will land. What we do know is that while initial reports suggested that the higher rate of 24% for real estate may increase, with suggestions that the Treasury had been modelling an increase to between 33% and 39%, more recent comments leant towards no changes to the residential property CGT rate.
Whilst it’s unlikely that anything can be done at this stage in anticipation of a rates increase, particular attention should be paid to changes to the funds regime for future investment planning. This is something that the Conservative Government focussed on, the latest addition being the Reserved Investment Fund. Prior to the General Election, we were waiting for the ratification of the statutory instrument to implement this new regime. This has yet to happen and we anticipate further clarification on its progress in the upcoming Budget.
Wishlist
Private equity is a significant part of the UK economy, both as a source of investment for UK businesses but also as an industry itself, forming a key element of the UK’s financial services sector. Currently, London is second only to New York as the world’s leading private equity hub.
While this is due to a variety of factors, one of the key elements is the tax treatment of private equity executives. Many jurisdictions, particularly in Europe, have sought to rival the UK’s prominence in this sector through changes to their tax regimes particularly for the executives themselves.
Alongside salary, executives in the private equity industry receive ‘carried interest’ as part of the investment return arrangements in the fund. Carried interest is a share in the profits of a particular investment made by the fund and is contingent on the performance of that investment. Due to the unique nature of this performance share, carried interest distributions have their own tax regime which sees these distributions taxed at a rate of 28%.
Concerns have been raised that this is generous when compared to the income tax rate of 45% on, for example, a banker’s bonus. The disparity in tax rates has seen the carried interest regime described as a ‘loophole’. However, this seems to ignore the unique nature of carried interest with its usual longer term time horizon and link to overall performance of the investment and fund, not specific performance by the executive.
As noted, many other jurisdictions apply a lower rate of tax to carried interest distributions than salary and bonus. Spain applies a 22.8% rate, Germany 28.5%, Italy 26% and France 34%. The US itself only applies a 34.7% rate. As such, reclassification of carried interest as income, with the resultant application of a 45% rate to distributions, would be much more onerous than the main rivals in this sector.
Senior executives are more mobile and flexible than ever and if the Chancellor overreaches those executives paying the highest rates of tax may choose to relocate to a more favourable jurisdiction, prior to the receipt of any returns. The result could reduce the overall tax, whilst diminishing long-term capital funding for UK businesses. Furthermore, it could also drain knowledge and expertise from the UK economy.
With all of this in mind, including the principle of securonomics underpinning overall policy, it is hoped that the Chancellor seeks to balance the narrow view of increasing tax rates to raise revenue with a need for the UK tax system to be competitive with other economies. That way, the UK can retain its prominence in this sector, which contributes greatly to the UK economy, both directly within the financial services sector and via its contribution of growth capital to UK business.
Wishlist
Pensions have historically been an effective means of building retirement savings and also for passing wealth to future generations. Tax and regulatory consistency is key for encouraging people to save into their pensions, enabling investment and growth.
As such, we would encourage the Chancellor to preserve the fiscal incentives to save into the pension and resist the temptation to raid pension pots. This would include confirming that there will be no changes to tax relief on contributions and that tax-free cash will continue in its current form.
We expect the Chancellor to announce a replacement regime for the ‘lifetime allowance’, which was abolished under the previous Conservative Government. Whatever replaces the lifetime allowance, it should encourage people to keep their pensions invested and allow for tax-free transfer on death to financial dependents.
The Chancellor has stated that she wants pension funds to invest more into UK plc. The best way she can encourage this is to make the UK an attractive place to list and for businesses to grow. Pension savings are best invested into businesses with the best long-term growth prospects.
Wishlist
Labour’s manifesto for the General Election remained silent on the future of capital taxes for the rural economy and only cited its commitment to no increases to income tax, national insurance or VAT for the rural sector. However, what did come out of the manifesto was a pledge to make environmental land management schemes work for farmers and nature and to promote biodiversity. Labour also recognised that ‘food security is national security’.
With food still the primary purpose of farming and many farmers and rural land businesses relying on subsidies to support their businesses, the change to environmental land management schemes (ELMS) incoming in 2027, means rural businesses require certainty on their tax obligations to manage cashflows and their livelihood.
With the joint working group between HM Treasury and industry professionals being put on hold due to the change in government, it is hoped the Chancellor avoids major changes to taxes that impact the rural economy, for example agricultural property relief.
Wishlist
With a huge amount of speculation in recent weeks around possible Budget announcements, the chopping and changing narrative is creating uncertainty and worry amongst business owners and investors. While we can’t be sure what changes will come in, we can help you understand how you may be affected by the changes and help you to make informed decisions in the run up to and post-Budget.
Please do get in touch with the contacts listed if you would like to discuss any of the above.
[1] - manifesto
[2] - 'business partnership for growth'
[3] - Business population estimates for the UK and regions 2024: statistical release - GOV.UK
*The research was conducted by Censuswide, among a sample of 500 18+ UK Business Owners (Businesses with a turnover of £5m+). The data was collected between 18.09.2024-02.10.2024. Censuswide abides by and employs members of the Market Research Society and follows the MRS code of conduct and ESOMAR principles. Censuswide is also a member of the British Polling Council.
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Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2024/25.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
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