- Businesses are expected to accelerate liquidation plans ahead of potential increases in Capital Gains Tax (CGT) and the loss of Business Asset Disposal Relief (BADR).
- Hikes in Employers’ National Insurance contributions could deter employers from hiring.
- Property owners are likely to rush to sell Furnished Holiday Let (FHL) properties before April 2025.
- Higher dividend tax rates may lead to discouragement in investments in UK businesses.
With the highly anticipated Autumn Budget on the 30th of October, there are several predicted changes to be announced to fulfil the £ 22 billion “black hole” in the UK’s public finances, particularly concerning CGT, Inheritance Tax (IHT), Dividend Tax, and the confirmed end of the Furnished Holiday Let (FHL) regime, are set to have significant implications for business owners, investors, and landlords. Simon Thomas, Managing Director of chartered accountancy firm Ridgefield Consulting, explains how these changes could shape key business and financial decisions ahead of the budget announcement.
Changes to Capital Gains Tax (CGT)
Aligning CGT rates with income tax could drastically increase the tax burden for individuals selling business assets. Currently, CGT rates for assets stand at 10% for basic rate taxpayers and 20% for higher rate taxpayers. An increase in CGT to match income tax rates could prompt many business owners, especially those considering a sale or exit, to act quickly before the new rates take effect to avoid paying a higher level of tax.
If Business Asset Disposal Relief (BADR) remains in place, those planning to dispose of business assets may still benefit from the 10% CGT rate. However, uncertainty looms regarding the potential reduction or elimination of this relief. A rise in CGT could diminish the attractiveness of business investments, particularly for short- to medium-term exits.
Potential Changes to Inheritance Tax (IHT)
Although less than 5% of UK estates currently attract inheritance tax, rising property prices have pushed more estates above the threshold. If the value of an estate is over £325,000, the amount over the threshold will be subject to IHT at 40%.
There are certain reliefs available for instance for business and agricultural property that Labour are considering altering or removing, if so more individuals may find themselves caught in the IHT net.
Potential changes to gift rules or property reliefs may lead to hurried decisions regarding estate planning, with individuals seeking to take advantage of current rules before changes are enacted.
Dividend Tax Changes
One of the benefits of being a shareholder or director in a limited company is the ability to receive dividends when the company is in profit, Labour’s potential alignment of dividend tax rates with income tax could significantly increase tax liabilities for individuals relying on dividends as a source of income.
Currently, dividend taxes are set at 8.75% for basic rate taxpayers and 33.75% for higher rate taxpayers, much lower than income tax rates. An alignment could see basic rate taxpayers facing a jump to 20%, and higher rate taxpayers to 40%, discouraging the use of dividends as a tax-efficient method of profit extraction.
This change could broadly impact UK businesses particularly SMEs and owner-managed companies. Higher dividend tax rates may reduce the attractiveness for investors, investing in UK businesses or entrepreneurs starting a business, as the after-tax return on investment diminishes.
Impact of Employers’ National Insurance Hike on Hiring Decisions
Rachel Reeve’s suggestion of raising Employers’ National Insurance contributions is supposedly not intended to be a tax on working people, but it may effectively become one as rising costs deter businesses from hiring new staff. As Employers’ National Insurance rates rise, the overall cost of employing staff increases, making recruitment less attractive.
Consequently, businesses may hesitate to grow their workforce, fearing that elevated payroll costs will outweigh the benefits of new hires. This has the potential to stifle growth and limit opportunities for job seekers.
Impact of the End of the Furnished Holiday Let (FHL) Regime
The confirmed end of the FHL regime by April 2025, first announced in the Spring Budget and upheld by Labour, will have significant consequences for furnished holiday let business owners. Former tax advantages, such as Business Asset Disposal Relief and capital expenditure deductions, will be removed. Mortgage interest relief, which is currently treated as a deduction from rental income, will change to a 20% tax credit. For higher and additional rate taxpayers, this means a reduction in relief from 40% and 45%, respectively, to just 20%, increasing their overall tax liabilities.
Investment in FHL properties is also set to become less attractive, as capital expenditure will no longer be tax-deductible. Property owners will only be able to claim deductions for the cost of replacing items, not for improvements or new investments, further discouraging renovations or upgrades.
As a result of these changes, many FHL business owners may face a higher tax burden, increased costs, and reduced incentives to invest in their properties. This could prompt some to liquidate their assets or sell properties that no longer offer the same tax advantages.
Helen Thomas Economist and CEO of Blonde Money commented: ‘There are some worries for owners of businesses with the noises coming out of the Treasury. Increasing the national insurance contributions for employers means another cost, just after the last few years when inflation has gone through the roof and on top of extra costs that will come with the changes to workers’ rights. Small businesses don’t have the kind of resources of big HR and legal departments to deal with all of that. It’s going to get very expensive just to have staff! And then there is a worry about inheritance tax, if it turns out that there is the removal of business asset disposal relief. That means it will be more expensive to pass on a business to the next generation. The chancellor has to find money from somewhere, if she is to pay for investment in the NHS and above-inflation pay rises for public sector workers. It is a shame if the burden falls too heavily on small business owners.’
As we await the details of the Autumn Budget, these potential tax changes are causing concern among business owners and could reshape the business and investment landscape. Whether it’s business owners planning exit strategies, investors weighing higher CGT and dividend tax impacts, or property owners reconsidering their FHL investments, these reforms may prompt swift decisions ahead of the Budget.
