Tomorrow chancellor Rachel Reeves will name the date for her autumn Budget when she looks set to launch a tax blitz on family wealth. Three main areas will come under attack.
First, Reeves is expected to target our pensions savings. She seems almost certain to scrap the ability to pass on unused pension free of inheritance tax.
The Treasury has also drawn up plans to cut higher rate tax relief on pension contributions, so everybody gets a flat rate of 30%, regardless of income. Labour could also cut the £60,000 annual allowance on pension contributions.
Some have even suggested Reeves axe the 25% pension tax-free lump sum. That could be a step too far, as it’s such a popular benefit, but we’ll see.
Either way, middle England should brace itself for a pension tax raid.
And it won’t stop there. The Treasury has drawn up plans to hike capital gains tax (CGT) rates in line with income tax.
Today, higher-rate tax payers pay CGT at 20%, which rises to 24% when selling second homes or buy-to-lets. If Reeves has her way – and following Labour’s landslide there’s little to stop her – they could pay CGT at 40% or 45%.
Her third target will be inheritances. As well as charging inheritance tax (IHT) on pensions, Reeves could attack annual IHT gifting allowances, reduce IHT thresholds or force small family businesses to pay when owners die.
Or she could go ever further by imposing what has been dubbed a “double death tax”. This would see grieving families having to pay CGT and IHT on the same money, one after the other.
Anybody trying to beat the tax grab ahead of the Budget must tread carefully, warned Julia Rosenbloom, tax partner at law firm Shakespeare Martineau. “While it is imperative to act swiftly, you don’t want to trigger problems further down the line.”
We don’t know for sure which changes Reeves will make, and whether she will enforce them immediately or wait until the start of the new tax year on April 6, 2025.
Some moves are fairly straightforward, if you can afford to make them. One option is to max out your annual pension contributions today, in case Reeves slashes tax relief or the annual allowance.
Some will be tempted to take their 25% pension tax-free lump sum but Andrew Tully, technical services director at Nucleus Financial, said it’s a complicated decision. “If you’re already planning to make a withdrawal, it may be fine to accelerate that. Otherwise money is best left to grow tax-free in a pension until you need it.”
Rachael Griffin, tax and financial planning expert at Quilter, said CGT bills could rise sharply if Reeves increases tax bands. “Transferring assets to a spouse can maximise both partners’ CGT allowance. Plus it has therefore never been more important to maximise your £20,000 Isa allowance.”
Some will be tempted to take capital gains ahead of the Budget. They haven’t got a second to lose as assets can take time to sell, particularly property, where sales may not complete in time.
More complex options include deferring gains by investing in Enterprise Investment Schemes (EIS), but these are complex and carry significant risk.
Tax planning is complicated and rushed decisions may backfire, so again, advice is essential.
The same applies to IHT planning. Making use of this year’s gifting allowances to pass money to loved ones free of IHT may be a sensible move.
All gifts become free of IHT if you live for another seven years, under potentially exempt transfer rules (unless Reeves tightens them, too).
Wealth is now a target but resist making panicky, ill thought-out moves. While rising tax bills will hurt, rushing into the wrong decision may be even more painful.
Your pension is now on the line – here are five options for protecting it against Labour tax raids.
