As summer progresses, speculation is mounting over which tax measures Chancellor Rachel Reeves will include in her Autumn Budget. And it’s wise to look ahead. Some reforms apply instantly, leaving little or no time to respond. Last year’s immediate capital gains tax hike and extension of the pensions overseas transfer charge to EU QROPS caught many out.
With the Labour government keen to avoid raising income taxes on working people, the focus is likely to shift toward taxing wealth more heavily.
Will the UK impose a wealth tax?
This question is generating much debate. While a wealth tax would be a bold move for the UK, other countries impose a full or partial versions.
After former Labour Party leader, Neil Kinnock, called on the Prime Minister to be bold and consider a wealth tax, opposition leader Kemi Badenoch accused Keir Starmer of “flirting” with the idea during Prime Minister’s Questions on July 9. She asked him to rule it out – and he failed to do so.
Tax Justice UK and a cross-party group of MPs have also proposed an annual 2% wealth tax on assets over £10 million, while Unite trade union suggested imposing a 1% tax on those who have £4 million+.
Another option would be to impose a tax on high-end property. The Labour Party previously advocated a ‘mansion tax’ on properties worth over £2 million. Conservative Party Chancellor, George Osborne, also explored increasing council tax on expensive homes.
Higher rates for capital gains tax (CGT)?
Both capital gains tax and inheritance tax are possible targets since they are a tax on wealth.
The government could opt to align capital gains tax rates with income tax ones, an idea that’s been floated around for years. Although the main capital gains tax rates increased last year, the top 24% is far below the highest 45% income tax rate.
Could UK families face another double death tax?
Rumours and speculation about a potential ‘double death tax’ have resurfaced again. In this case, capital gains tax would be applied on top of inheritance tax when assets are passed on death. Several think tanks have suggested this in the past.
Currently, an estate is only liable to inheritance tax on death. Beneficiaries basically acquire the assets at current market value, regardless of gains made since purchase. These gains are effectively wiped out on death, and if the beneficiary sells the asset, they are taxed on gains made since that date.
These rules could change so that death is treated as a disposal of assets and gains arising from purchase date to date of death are taxed at CGT rates up to 24%. The net value of the whole estate would then be assessed for 40% inheritance tax.
Pensions and IHT double death tax from 2027
The 2024 budget imposed another form of double death tax: pension funds will become subject to inheritance tax from April 2027. If the pension holder dies aged over 75, when the beneficiaries draw down the pension as a lump sum or income, it is subject to income tax at their highest marginal rate (up to 45%). For example:
- Each £1,000 of pension fund chargeable to inheritance tax is subject to £400 of inheritance tax, leaving £600.
- If the £600 is taken as income and taxed at 45%, this would leave £330, instead of the original £1,000.
- This is an effective overall tax rate of 67%.
Looking ahead
Other than the pensions/inheritance tax reform, which is confirmed, other tax rises discussed here is just speculation for now. But with weak economic growth, high borrowing costs and failed spending cuts, the government must look for ways to raise revenue and/or cut costs. Taxing the wealthy is less likely to anger voters than other avenues.
The risk is that some wealthy people will leave the UK. The non-dom reform has already encouraged some to move to tax friendlier jurisdictions, but the Chancellor would presumably take this into consideration when weighing up potential reforms.
While UK tax reforms hit UK residents the hardest, British expatriates are often impacted too. The tax on QROPS last year and IHT being applied to pension funds are prime examples.
If you are concerned about what the future holds, act now. You can wait until the budget announcements for confirmed facts, but that may be too late for some tax reforms. Take professional advice for your circumstances and objectives, to determine what steps you can take to protect yourself.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.
