There was much anticipation ahead of Labour’s first budget since being elected into government. The usual media frenzy and some questionable headlines fuelled panic with people wanting to cash in their investments, their pensions and bring forward house purchases/sales to avoid the anticipated tax rises.
Rachel Reeves pledges to reduce national debt and to boot the UK economy, but as ever, the devil is in the detail and this budget needs unpicking.
The panic laden autumn budget had the finance industry and tax lawyers working overtime, but what about the impact for those divorcing and us lawyers advising?
Here are my take home points:
- Don’t panic! A knee jerk reaction for some may have been to sell property to avoid any rise in CGT. However, if parties are in the midst of dealing with their finances on divorce, and property sold without the other’s consent, or notice given, that may give rise to criticism especially if the sale proceeds were then subsequently spent, or if that property was an income generating asset that assisted in the financially weaker party receiving an income, by way of ongoing maintenance or formed part of their settlement. Is tax mitigation a defence to dissipation?
- CGT – we now know that the rise to CGT from 18% for lower earners and 24% for higher earners, does not impact on gains for residential property, meaning the knee jerk reaction above is likely to have been in vain. However, there are many separating couples with property portfolios, commercial property and investments not in ISAs that will now be hit with this increase meaning there is ‘less in the pot’ and may encourage the parties to revisit the asset schedule.
Business Asset Disposal Relief from CGT, which reduces the tax on selling business assets, is also changing. Currently, the tax on these gains is 10%, but this will increase to 14% from April 2025 and to 18% from April 2026. You’ll need to consider if you need an updated business valuation or SJE reports to factor this change as this percentage could impact significantly on any settlement.
- IHT – unused pensions and pension death benefits will be subject to IHT from 6 April 2027. Previously, these assets were excluded from a person’s estate upon death for inheritance tax purposes. With 2027 being over 2 years away, the ‘imminent and certain’ factor is not going to argued, but nonetheless, we need to keep this on our radar for the any inheritances falling into the pot post 2027.
The Government are also introducing a cap of £1million for assets that would qualify for Agricultural or Business Relief. If one party is due to inherit the family farm, this could have serious implications as to the amount post tax that the party will receive.
My guess is that the relevance of these tax changes will trigger a surge in families taking advice on wealth preservation and passing assets down through the generations, which is likely to trigger enquiries for pre-nuptial and post-nuptial agreements.
- National Insurance contributions – employers are having to increase payments on behalf of their employees from 13.8% to 15% and the threshold is also reducing from £9,000 to £5,000. Our clients with businesses are going to be concerned on the impact to their business and may argue (perhaps justifiably so) that their business is now not as profitable as their spouse believes.
Employees may see less salary increases so this needs to be factored into income need and spousal maintenance negotiations. We may see more employers offering salary sacrifice arrangements instead of pay rises and will this mean a surge in pension contributions? Best get those up dated CEVs and be mindful of this when considering pension sharing. Or bonuses may be paid instead and so updating disclosure is needed.
- VAT on school fees – 20% is applicable from January 2025. How will this impact clients who are subject to a school fees order, will we see a rise in enforcement applications? Will this mean a reduction in spousal maintenance as the payor cannot afford the tax on fees as well as payments to the spouse? The high-net-worth clients may not feel the pinch, but it’s definitely something we need to be aware of.
There are other changes, but we’ve all seen the news and the updates, so I have only touched on a few key points for us family lawyers. My biggest take home from all of this though… our finger needs to be on the pulse! Get yourself connected with the best financial advisors and tax lawyers and planners that you trust to ensure your client have the most well-rounded service you can offer.
