UK chancellor's statement on public spending inheritance hints at tax rises in autumn budget on 30 October 2024

On 29 July the chancellor, Rachel Reeves, set out the results of an audit of public spending undertaken by HM Treasury which showed a £21.9 billion forecast overspend as against the plans set out at the Spring Budget 2024.

Alongside the immediate action the government is taking in response (by cancelling unfunded policy announcements made by the last government), the chancellor confirmed the date of the next Budget as Wednesday 30 October 2024 (which will be accompanied by a forecast from the Office of Budget Responsibility). The government also released some draft legislation (for consultation) and supplementary tax related information.

VAT on private school fees and charitable rates relief

Labour's manifesto confirmed that it would apply VAT and business rates to private schools, but until the chancellor's speech on 29 July there was no further detail on when this change would take effect and whether anti-forestalling rules would be introduced.

The draft legislation and technical note published on 29 July confirm that as of 1 January 2025, all education services and vocational training supplied by a private school, or a “connected person”, in the UK for a charge will be subject to VAT at the standard rate of 20%. Boarding services closely related to such a supply will also be subject to VAT at 20%.

The draft legislation also introduces anti-forestalling provisions so that any fees paid from 29 July 2024 pertaining to the term starting in January 2025 onwards will be subject to VAT. A technical consultation on the legislation and technical note will run from 29 July 2024 until 15 September 2024.

Schools that have offered pre-payment schemes in an attempt to avoid the fees being subject to VAT should review those schemes in light of the policy paper which warns that HMRC "stands ready to challenge the validity of such payments and will seek to collect VAT on those fees where it is due". This echoes the new government's plan to close the tax gap and tackle tax avoidance, an update on which will be provided at the Budget.

The government will also legislate to remove eligibility of private schools in England to business rates charitable rates relief. It will engage with schools before setting out a final proposal in due course, but it is intended to take effect from April 2025.

Tax treatment of carried interest

The chancellor reconfirmed her commitment to close the carried-interest "loophole" and published a call for evidence, seeking engagement with expert stakeholders by 30 August. While three main questions around the tax treatment were posed, it is still not clear how the government will change the tax treatment of carried interest.

It is encouraging, however, that the government has said in its call for evidence that it will seek to protect the UK’s position as a world-leading asset management hub and ongoing dialogue with the industry is welcome. A further announcement will be made at the Budget in October so interested parties should engage as a matter of priority if they want to shape the government's plans.

Changes to tax treatment of non-doms

There was little new in the government's policy paper regarding the reform of the taxation of non-doms from 6 April 2025. Most of it reflected the announcements made in the (Conservative) Spring Budget, tweaked in accordance with objections Labour raised at the time. Most importantly, it confirmed the four year exemption for foreign income and gains (FIG) for new arrivals and that changes will apply to UK resident settlors of offshore trusts.

There will not be any transitional regime for new FIG arising under the new regime, but the government is planning to retain the "Temporary Repatriation Facility" for historic unremitted FIG while undecided about the rate or duration. Labour denounced the two year facility at a flat 12% back in March and so the eventual position is likely to be less generous – although if the rate approaches 20%, the facility may need to make a distinction between income and gains to be attractive. The rebasing of capital assets has also been retained but the government has not yet committed to a relevant date – the original proposals set this at April 2019.

The inheritance tax proposals follow the same pattern – replacing domicile with worldwide taxation after ten years' residence and release from the net only after ten years' absence. The key difference, flagged up at the time, is that the Labour government will not be retaining excluded property trusts, although the paper alludes to some form of provision that "allows for appropriate adjustment of existing trust arrangements". While only speculation, this could, for example, allow settlors to be excluded within the first year without generating a deemed potentially exempt transfer (PET) as would happen under any non-excluded trust.

The only real surprise was the announcement of a full two-three year review of the Transfer of Assets Abroad (TOAA) and Settlements legislation regimes – both anti-avoidance regimes targeted at avoidance of income tax. These are complex, overlapping regimes and the TOAA rules in particular can be exceptionally difficult to apply to any structure, so a simplification would be welcome.

That said, the history of such reviews does not bode well – we might end up with ever more complicated rules (see also the codification of the remittance basis) or a move to a principles-based regime such as a Targeted Anti-Avoidance Rule, which can create great uncertainty. The only benefit of the current regimes is that they have been around long enough for the courts to provide clarification of many uncertainties and it would be regrettable (not to mention time consuming and expensive) if the existing accepted practices are thrown back into doubt.

Other tax measures

The government also published draft legislation on previously announced measures, including changes to the Energy Profits Levy (to increase the rate to 38% from 1 November 2024, extend the levy to 31 March 2030 and abolish the levy’s main 29% investment allowance for qualifying expenditure incurred on or after 1 November 2024), the abolition of furnished holiday lettings from April 2025 and the introduction of a transitional country-by-country reporting safe harbour anti-arbitrage rule.

Osborne Clarke comment

The government acknowledges that the immediate steps taken to tackle the spending pressures (which are predicted to result in £5.5 billion worth of savings in 2024/25) will not be sufficient and "difficult decisions" will be necessary to secure the public finances, which will be set out in the Budget in the autumn.

With the chancellor confirming in her speech that the government will not increase national insurance, the basic, higher, or additional rates of income tax, or VAT (echoing Labour's election manifesto), it seems more and more likely that tax rises will be made in other areas, with changes in the rates of capital gains tax and inheritance tax and/or a review of pensions tax relief for higher earners potentially being in the government's sights.