Economic strain ahead? Assessing the impact of Labour's first budget

After the Chancellor proudly announced in last week’s Budget that her main priority would be “boosting long-term growth”, she proceeded to list policies that seem to undermine this very goal. For business owners and farmers alike, this series of measures could stifle, rather than stimulate, an already vulnerable economy.

Following the infamy of the first (and only) Budget in the premiership of Liz Truss, Labour had a prime opportunity to shine and avoid any signposting “disasters ahead”. Although not as immediately damaging as the infamous Truss mini-Budget, the reality is these policies are unintelligent and will ultimately prove damaging to people’s pockets during a cost-of-living crisis, as well as to businesses of all sectors and sizes.

Throughout the election campaign, Labour championed economic policies based on an ideology – tax the rich, protect the poor. This message struck a chord with a public fatigued by years of rising costs, austerity measures, and economic and political instability with little hope for change.

While a great slogan and popular amongst their voters, it oversimplifies the complexities of the economic landscape. Without careful policy planning, those who most need support could ultimately bear the brunt of unintended consequences. The country needs wealth and wealth generators. Wealth creation drives job growth, which in turn increases income tax revenue; fuels consumer spending (boosting VAT revenue), and supports investments that enable small and medium-sized businesses to secure the capital they need to expand.

We take a look at some of the key announcements from last week’s Budget.

Capital gains tax and business assets disposal relief

The rate of capital gains tax for most assets increased by 4% for higher and additional rate taxpayers and by 8% for basic rate taxpayers from midnight the day before the Budget.  With a whiff of retrospective legislation about it, this will have been a shock for anyone who disposed of assets on the morning of the 30^th October, thinking they knew what rate of tax would apply.

Starting in April 2025, the business asset disposal relief rate will increase from 10% to 14%, followed by a further rise to 18% from 6 April 2026. The government has confirmed that the lifetime relief rate limit will remain at £1 million.

This increase is a perfect example of a clumsy economic policy that is in contradiction with a “pro-business” stance. Despite it being a smaller increase than expected it still seems aimed at penalising business owners for accumulating wealth, without acknowledging their crucial role in supporting tax revenues, creating jobs, and strengthening the economy.

Start-ups and entrepreneurship are the bedrock of our economy and the government should reward these risk-takers. Those who are already on the path to selling their business should consider accelerating their plans before the increase in April 2025. For those where it is not possible, selling to an employee ownership trust could be a practical alternative, as this still exempts the business owner from capital gains tax.

Stamp duty land tax

Many policies also seem to lack the basic understanding that, when taxes and expenses rise, people will simply look for ways to pass these costs onto others. The increase in the stamp duty land tax surcharge from three per cent to five per cent on second homes, or buy to let properties, encapsulates this.

Announcing it to take effect from midnight the same day proves it is not just a policy, but a dog whistle, galvanising voters while demonising landlords. Inevitably these additional costs will be passed onto tenants in some way, either through higher rent or a slowdown in maintenance or improvements due to the financial impact on landlords.

Employer national insurance contributions

Another example of where this happened is the increase in employer national insurance contributions. Despite Labour’s manifesto pledges ruling out increases to national insurance, they forgot to specify this only applied to employee contributions. The sudden spike has completely blindsided business owners who were unprepared for such a drastic change, and feels a particularly slimy way of reneging on a promise with only a slight technicality, aiming to prevent it from being labelled a U-turn by the press. Consequently, many business owners are now reviewing their financial forecasts and assessing the difficult choices about promotions, pay rises, and bonuses for the upcoming year.

Inheritance tax

While previous statements focused on the ‘super-rich’ or the ‘top one per cent,’ this latest Budget now targets average business owners, entrepreneurs, and investors. This shift may reflect the government’s realisation that it wouldn’t be able to bring in any significant revenue by simply hiking air passenger duties for private jets, or abolishing non-dom status.

The changes to inheritance tax wholly demonstrate how the government missed the target of who it perceives to be ‘super-rich’, with policies that actually impact ordinary families. Capping the 100 per cent business property relief to the first £1 million in assets, with a reduction to 50 per cent on anything above, could create significant challenges for businesses when an owner passes away.

Bringing all pension funds into the inheritance tax net from April 2027 is also a kick in the teeth for savers.  Worse still, where the pension-holder dies after the age of 75, the combination of inheritance tax and income tax on that pension can mean an effective tax rate of up to 67%.

Agriculture property relief

Those entitled to agricultural property relief may face especially difficult challenges, as these changes could increase the likelihood of farms failing or being sold off upon an owner’s death, threatening the industry and increasing food prices. With relief being maintained for “investment farmers” on broadly the same terms as active farmers, it does raise concerns of a return to a feudal system where the wealthy own land and lease it out to those that work the land.  An interesting potential consequence of the policies of a party with supposed socialist leanings.

Both business owners and farmers should review their estate planning, considering ways to pass on the ownership of assets during their lifetime. Taking these steps could make the transition smoother, reduce tax obligations, and help ensure the long-term viability and stability of the business or farm.

Who does the Budget actual benefit?

At first glance these policies may appear to target only wealthy individuals, but this is actually just smoke and mirrors. When businesses and their owners face challenging measures, employees feel the impact too. Similarly, policies that strain landlords inevitably affect tenants. An economy is a delicate ecosystem, and making sweeping reforms can disrupt the balance for everyone involved. While much of the detail is still yet to be revealed, this Budget could signal hard times ahead for all.