In an unusual step, the Chancellor of the Exchequer Rachel Reeves has done little to quell speculation about upcoming tax increases in a speech in Downing Street.
Both the Prime Minister and Chancellor have failed in recent days to provide any reassurances the Labour party will stick to its manifesto promise not raise National Insurance contributions, basic or higher rates of income tax, or VAT.
Described by government as a ‘scene setter’ speech, the Chancellor outlined how this government ‘will make the choices necessary to deliver strong foundations for our economy.’ She added although she wouldn’t pre-empt the conclusions of the Office for Budget Responsibility’s review of the ‘supply side of the economy’ it was ‘already clear’ productivity is down, with ramifications for public finances in terms of lower tax receipts.
Pointing the finger at her predecessors, Reeves said the economy was still reeling from the impact of ‘political convenience’ over ‘economic imperative.’ That austerity had delivered a ‘hammer blow’ to the economy after the financial crisis and Brexit had caused ‘further disruption as businesses trying to trade were faced with extra costs and extra paperwork’, she added.
“All this meant that when the pandemic arrived, our country was underprepared, public services weakened and our economy fragile. We finished the pandemic with higher tax rates and higher debt, and our peers.”
The speech has been widely interpreted as paving the way for significant tax increases. There is speculation regarding changes to the unpopular agricultural and business property relief proposals; caps on lifetime gifting and/or considering change to the current taper rate; and a mansion tax that could see the current exemption from capital gains tax (CGT) under private residence relief end for properties above a certain threshold. CGT could be charged when homeowners come to sell their ‘primary’ residence. Higher-rate taxpayers would have to pay 24% of the value of any gain they make from the increase in the value of their property while basic rate taxpayers would have to pay 18%.
For many law firms, the news the Chancellor could target the tax reliefs Limited Liability Partnerships (LLPs) currently have will not be welcome. The equivalent of employer National Insurance Contributions (NICs) could be introduced targeting ‘one of the UK’s most globally competitive sectors and undermine the growth agenda the government is working to deliver’, according to Law Society vice president Brett Dixon.
Calling for a ‘balanced approach to tax equalisation’, Dixon said the Law Society is concerned ‘poorly designed tax burdens could stifle investment, recruitment and innovation, which would ultimately reduce jobs, secure livelihoods and access to justice when we need it’.
The legal sector is ‘a global powerhouse’, he added, worth an estimated £60 billion, employing more than half a million people and exporting more than £9 billion in services.
“The legal sector is already contending with major regulatory changes in anti-money laundering and compliance, as well as significant pressure from HMRC’s evolving approach to tax advisor regulation. Adding further burdens now risks creating a perfect storm that limits firms’ ability to invest, hire, and contribute to growth, which could prove damaging to the wider economy.
“There will also likely be an impact on legal aid firms, a significant portion of which are structured as LLPs. Often operating with tight margins, this could be a heavy blow to those firms and have a real impact on the availability of legal aid across the country, putting further pressure on public services.”
Commenting on the potential impact for first time buyers, Hilesh Chavda, partner at law firm Spencer West LLP said:
“A cap on lifetime gifting would definitely impact the so-called “Bank of Mum and Dad,” particularly if the cap is set at a low level. Many families rely on lifetime gifts to help children with major expenses such as property purchases, and any restriction could reduce that support.
We’ve already seen an increase in client queries around this topic, which suggests growing concern. Whether gifting now is advantageous really depends on how the measures are drafted. If the rules capture gifts already made, then there’s no benefit to acting immediately. We won’t know until the Budget if this comes in and how it will be formulated.
Ultimately, this could reshape how wealth is passed down to future generations, potentially leading to a reduction in early financial assistance if there isn’t an incentive.”
Nathan Emerson, CEO at Propertymark, added:
“With increasing speculation about potential tax rises, it is crucial that careful consideration is given to avoid hampering growth within the housing market, as it is a central engine of the economy.
“It is encouraging to hear the Chancellor state that her Autumn Budget is aimed at boosting productivity. Any measures designed to ease the cost of living and positively impact the housing market would be very welcome news for consumers.
“However, with continued uncertainty ahead of the Autumn Budget regarding possible changes to Stamp Duty and National Insurance, both of which could directly affect landlords, these measures will be closely scrutinised. The Chancellor must ensure a careful balance is struck to promote future investment and enhance confidence in the sector, especially at a time when governments across the UK are pursuing ambitious housing targets.”
