After a change in government over the summer, Labour’s first Budget will be delivered by Chancellor Rachel Reeves on Wednesday 30 October 2024. 

We have been warned to expect a severe budget with headlines such as ‘£22 billion black hole’ and ‘the worst set of circumstances since the Second World War’ resulting in Labour stating there will be “difficult decisions” on tax, spending and benefits. 

There is some good news for working people, as Labour has pledged not to increase income tax, National Insurance or VAT but this has led to much speculation about how the ‘black hole’ will be filled!

We have been considering the possible tax rises, which could affect those private clients who are going through the process of a divorce or dissolution, or otherwise planning to separate from their spouse or civil partner:

Capital gains tax 

Many private clients are fortunate enough to have built up personal wealth and may have invested in second properties or shares along the way. These can be valuable assets when a couple is separating when considering the division of financial assets. 

An increase in the amount of tax payable on the profit made from the sale of such assets could reduce the funds available to the couple. When drafting a financial order, careful consideration should be given to whether any of this tax liability can be mitigated, who will be responsible for its payment and if an indemnity for payment will be required. Legal and tax advice is likely to be essential. 

If a CGT rate increase is announced, it is important to consider when it would become effective. If the increase is due to take effect in April 2025, the divorcing or separating couple may wish to dispose of assets before then, which means they will most likely need urgent financial protection and legal advice. 

Inheritance tax 

Inheritance tax is usually payable on the value of a deceased person’s assets above £325,000, at a rate of 40%. Whilst inherited assets are classed as non-matrimonial assets, this does not strictly apply if the assets are required to meet specific needs. Depending on the couple’s personal finances, there may not be sufficient matrimonial assets to stretch to purchasing two homes. Therefore, an increase in inheritance tax payable could impact private clients going through a separation, for example, if an inheritance received or due to be received is required to meet housing needs. 

Individuals may wish to take personal planning advice in relation to the assets they are accruing in their lifetime to reduce the tax burden that loved ones might have to shoulder when they die. 

Pension tax relief

The Budget could include changes to tax relief in pension contributions. Pensions can be a valuable asset of a marriage or civil partnership and are subject to close examination when considering the division of assets on divorce or dissolution. Currently, employees receive tax relief at the same rate as the tax they pay on their income, i.e. basic taxpayers receive tax relief at 20% and higher earners at 40% or 45%. If this tax relief is adjusted, it will reduce the funds available in each pension fund potentially resulting in smaller pensions being shared between separating couples. It is essential that pensions are considered in detail upon separation to ensure any order made will help to maximise the sharing of pension benefits. 

In addition, individuals who are also business owners currently do not pay national insurance on pension contributions they make to their employees. There is speculation that this could change in the Budget, potentially resulting in decreased profits for the business and impacting business valuations in matrimonial proceedings. Instructing a matrimonial lawyer will ensure that business accounts and valuations are analysed in detail. 

Fuel duty 

This may not be top of the list of concerns when going through a separation but an increase in fuel duty could have a knock-on effect on personal budgets. This is relevant when considering an individual’s income and outgoings. Each person’s income needs must be reviewed fully, as there may be a need for spousal maintenance or an individual may need to demonstrate that they cannot afford to pay spousal maintenance. 

VAT on private school fees

From January 2025, VAT will be added to private school fees. This may affect the affordability of private education for families. It could drive up monthly outgoings, which have been increasing steadily due to rises in the cost of living. 

This will need to be considered during financial negotiations or court proceedings, if relevant, to ensure school fees are properly provided for in a financial order.  Individuals may find they need to re-visit the issue of school fees by applying to vary a school fees order and in some circumstances, a parent might consider an application for a specific issue order to change a child’s school if agreement cannot be reached.

Anyone affected by the outcome of the Budget is likely to require specialist tax advice and legal advice. For individual private client legal advice please contact kelly.brown@anthonycollins.com or 0121 212 7446