When Rachel Reeves gave her first speech as chancellor of the exchequer to the Labour Party conference at the end of September, she gave nothing away about her budget due on 30th October. Despite previously making clear there are tax rises to come, there were few clues about what they will be.
Soon after Labour’s July election victory, she told the News Agents podcast that she would have to raise taxes. This followed her claim that the previous government left a £22bn “hole” in public finances, a statement widely regarded as rolling the pitch for higher taxation.
This has sparked the expectation that the budget may be the most consequential in a generation. As she searches for additional revenue, Reeves has not made it easy for herself. She has promised that there will be no increases in the four main taxes: corporation tax, income tax, national insurance or VAT. Together, these account for just shy of 75% of all tax revenues, according to the Institute of Fiscal Studies.
That leaves her with few options other than taxes on capital gains, inheritance and pensions. She could also turn to stamp duty on property sales. These are all taxes on wealth, although reassuringly she has ruled out a specific wealth tax.
At this point, though, everything is speculation and nothing more. For individuals with long term wealth planning strategies, therefore, it would be unwise to act in haste. What you could consider is accelerating any actions that you were already planning to pre-empt any possible budget changes.
What then are her options?
Capital gains tax
There has been a lot of speculation about changes to capital gains tax (CGT), a tax on the increase in value of an asset between acquisition and sale that’s currently estimated to raise £15.2 billion in 2024-2025, according to the Office for Budgetary Responsibility 1. Currently, CGT is levied at a lower rate than income tax. For example, basic rate taxpayers have a marginal income tax rate of 20% and a CGT rate of 10%.
Increasing CGT towards the rate of income tax paid could provide substantial revenue. However, people can choose when to sell assets and might simply delay sales in the hope that a future government might reverse the increase. Another possible measure would be removing business assets disposal relief, which taxes the gain on selling a business at 10% subject to a lifetime allowance of £1 million of gain.
Lastly, the budget could end forgiveness of CGT on death.
Inheritance tax
Changes to inheritance tax (IHT) have also been raised as a possibility in the media. According to the most recent statistics from HMRC, just 4% of UK deaths result in an IHT charge, raising approximately £6 billion.
The IHT nil rate tax band of £325,000 per person has been frozen since 2009, as has the residential nil rate band, resulting in the number of IHT paying estates creeping up as asset and house prices increase. They are set to remain frozen until 2028.2
The chancellor could end, or cap, exemptions for pension wealth, business assets, agricultural land and qualifying investments such as AIM shares. She might also review the seven year gifting rule, which allows a gift to be made free of tax providing the donor lives for seven years.
Pensions
Another option for the chancellor is to reduce the tax breaks on pensions. They benefit from a range of tax breaks including: no tax on the underlying investments’ growth and income, tax relief on contributions, the ability to access a tax-free lump sum in your mid-to-late 50s (up to a maximum of £268,275) and exemption from IHT.
Ms Reeves could limit the amount of upfront income tax relief on pension contributions. One reform that has been suggested in the media is a flat rate of pension tax relief of, potentially, around 25%. This would reduce the relief for higher rate tax payers.
However, these tax breaks are there to incentivise people to save for retirement and she will be careful with any changes she makes.
Conclusion
While the chancellor has indicated there are higher taxes to come, and stated which taxes will not change, everything else remains speculation at this point.
We are monitoring the situation and will provide you with a further update when the specific changes become clearer, which is unlikely to be until Budget day. For now, it’s a time for sticking to long-term plans.
Following the Budget on 30 October, we will spend time to understand its consequences for you, based on our understanding of your personal circumstances and financial goals. Should you have any concerns following the announcement, please speak with your Client Advisor for assistance.
1https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/capital-gains-tax/#:~:text=CGT%20is%20paid%20by%20individuals,per%20cent%20of%20national%20income
2In 2020-2021, according to the HMRC
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