The Chancellor has signalled Labour’s tax direction and it may point to IHT and CGT, says ROB MORGAN
Rachel Reeves has set out Labour’s economic narrative more clearly and delivered a stark assessment of the nation’s finances. As many have long suspected it appears likely the tax burden is set to increase. In addition to the so-called financial ‘black hole’, industrial strategy and the demands of the green transition may well need additional government spending. This will need to be financed from greater tax revenue stemming from faster growth or from tax rises.
With growth hard to come by, in the short term at least due to the UK’s productivity problem, it means spending will need to be financed from extra tax revenue. This will come as a blow to those who had taken heart from Labour’s pre-election pledge of fully costed spending plans and the avoidance of sweeping tax rises.
Where the axe falls is still a matter of debate and rumour, but it would not be a surprise to see capital taxes in the spotlight. Labour has promised not to increase the main rates of income tax, VAT and National Insurance as well as making a pledge on corporation tax, so these are unlikely to be targeted, at least in the shorter term.
However, a continued freezing of the income tax bands looks highly likely, and this will continue to exert upward pressure on the household tax burden. Meanwhile, Capital Gains Tax and Inheritance Tax look set to come under the Chancellor’s microscope. Overall, it’s a time to be staying alert regarding personal finances and business affairs, especially around the autumn Budget.
Inheritance Tax (IHT)
The Labour manifesto was silent in the matter of IHT, leaving the door wide open to reform. Frozen allowances and higher house prices are pushing more estates into paying inheritance tax (IHT) and receipts are at a record high, but there is potential for the screw to tighten further. It’s possible that rule changes result in a higher tax rate or the reduction of reliefs including the ‘nil rate band’.
IHT is usually paid at 40% on the value of your estate over the £325,000 allowance. There’s an additional allowance of up to £175,000 if you pass on your family home to children or grandchildren. If you’re married or in a civil partnership, you can combine your allowances and transfer assets between each other free of the tax.
If you haven’t already, now is a very good time to consider who you want to benefit from your assets and check whether you might be affected by IHT. It may be that some forward planning can help minimise the amount of tax your estate pays or eliminate it altogether. There are simple ways to do so such as making gifts, as well as more specialist methods for larger estates.
Capital Gains Tax (CGT)
At first glance there appears to be little scope to ratchet up tax on capital gains with the CGT allowance halved to just £3,000 for the current 2024/25 tax year. Indeed, Labour previously said it has “no plans” to change CGT rates, which depend on the income tax rate you pay and whether the asset is residential property. However, with its full audit of the nation’s finances now complete those plans might well have changed.
Any moves to align CGT rates to those of income tax, as has been speculated, could catch out some investors. Once again, it’s a call to action to use all available tax shelters such as ISAs and pensions to the greatest extent possible. Investors with larger portfolios outside these wrappers may face a triple whammy of a low capital gains allowance, a higher tax rate and no account of inflation through how long an asset had been held – as was the case with the taper relief and indexation of days gone by.
There could also be more targeted ways to increase taxes on capital such as reforming the reset of capital gains on transfer of assets to a spouse on death or reducing CGT business reliefs. Again, it’s a case of ‘watch this space’, but entrepreneurs and business owners looking to dispose of stakes or assets should be on high alert to any changes that might occur.
Rob Morgan is chief investment analyst at Charles Stanley
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