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“No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores.” This statement was made in the famous case between the Ayrshire Pullman Motor Company versus the Inland Revenue in which the concept of “avoidance” was legitimised.

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This view was further upheld in the case of the Inland Revenue vs the Duke of Westminster in 1936, “Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate acts is less than it otherwise would be.”

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Tax avoidance, as opposed to evasion, was therefore an acceptable pursuit. However, as taxes rose, tax avoidance schemes proliferated, and a new general anti-abuse rule (GAAR) was brought in to differentiate between artificial schemes that had little commercial purpose other than to save tax. Promoters of such aggressive schemes now required prior clearance from HMRC to determine whether or not theirs was a legitimate tax avoidance vehicle.  In other words, tax avoidance may have been within the letter of the law, but not within the spirit of it.  Tax planning, however, is acceptable.

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So the tedious wait for Rachel Reeve’s first Budget is over. As expected, tax rises are the only way that consecutive governments seem to believe that problems can be resolved and those who have more are required to pay a “fairer” share of the tax burden. If you ever ask someone which tax should rise, it will always be the tax that doesn’t affect them. It’s no surprise that the private sector bore the brunt of the tax increases via Employer’s National Insurance contributions which of course will affect employees indirectly through lower salary rises, pension contributions and companies simply hiring fewer people.

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Capital Gains Tax didn’t increase as much as expected, rising to 24% for higher rate taxpayers, but it will certainly act as a disincentive to invest if your gains are reduced by almost a quarter.  Worse off are the basic rate taxpayers whose CGT rate has nearly doubled to 18% from 10%.

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The Conservatives had already reduced “Entrepreneur’s Relief” from £10m to £1m against which a lower tax rate would apply on the sale of a qualifying business and now the current tax rate of 10% will increase to 14% next April and to 18% from April 2026. Above the allowance, tax will apply at 24%. Whether this deters new businesses starting up in the UK, we will have to see.

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We predicted pensions becoming liable to Inheritance Tax (IHT) but little detail other than that is provided and consultation is ongoing, hence no change until 6th April 2027.  Certainly, the attraction of a pension being passed down to the next generation as a “Family” pension has been lost. What is worse is that once IHT has been charged at 40%, the beneficiaries would be further charged up to 45% on the income from the reduced fund.

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Another big change to Inheritance Tax was the removal of the 100% Business Property Relief and Agricultural Property Relief which had allowed such businesses to be passed onto the next generation without having to be broken up to meet the tax bill. The existing relief will now only apply to the first £1m of assets, and thereafter 50% relief will apply, resulting in an effective tax rate of 20%. For most farmers, land prices will mean that they are almost certainly to exceed this allowance.

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Finally, the Non-Domiciled favoured tax regime will be abolished and again we will need to see how this plays out for these wealth generators who would probably prefer to live somewhere with a warmer climate and no Inheritance Tax.

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So how did markets respond? Concerns over the budget have been dragging on investor sentiment in recent weeks and UK shares have been drifting down on the uncertainty. Given that many of the key initiatives had been leaked, the main UK stockmarket saw little movement on the day. There was a relief rally of 4% in the AIM market as the reduction in tax exemptions was not as onerous as feared.

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Gilt yields had been rising (and prices falling) throughout the month with bond markets not taking kindly to Rachel Reeves intention to change the fiscal rules to enable more borrowing for investment. On the day, gilt prices initially rose, signifying that the budget was ok, only to fall back later in the day as longer-term spending plans were digested. However, this was nothing like the Truss / Kwateng debacle mini budget of two years ago. Given the seismic change in strategy that the Chancellor has promised, the reaction from investors has been relatively muted and measures unveiled unlikely to be a key driver for markets going forward.

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All is not lost, however.  Much that could have changed, didn’t.  There are still many ways to legitimately mitigate Inheritance Tax for private individuals, business owners and farmers. Likewise, managing portfolios without incurring Capital Gains Tax until such time as a gain is taken is also possible. Remember, there was no change to the rate of dividend taxation.  EXE Capital’s ability to both provide financial planning alongside investment management has never been more relevant.

Thoughts on the Autumn Budget, James Scott-Hopkins

Founder, EXE Capital Management

The views are those of the author only. The above does not constitute a recommendation to buy and advice should be sought from your financial advisor. The value of investments can fall as well as rise. Past performance is no guarantee of future returns.

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