Article last updated 10 October 2024.
With Labour having flagged a large hole in the government’s finances, and Prime Minister Keir Starmer suggesting that those with the “broadest shoulders should bear the heavier burden”, what could the new government’s first Budget mean for your personal financial situation?
Labour has pledged not to increase the four taxes that raise the most revenue. As a result, capital gains tax (CGT), pensions and inheritance tax (IHT) are in the spotlight. Here we’ll spell out these and other tax changes that might be coming.
None of this is meant to be taken as advice, and of course we don’t know what will be in the Budget. So please speak to your investment adviser or wealth planner if you have any questions or concerns.
Capital Gains Tax rates
Of the potential tax changes being mooted in the press, the one with the greatest potential to impact the finances of a typical Rathbones client would an increase in CGT. Relatively few people pay CGT — usually less than 0.5% of the population in any one year — though this proportion has increased noticeably over the past decade. The tax liability has jumped more than 300% in that time to £16.7 billion (as of the 2021/22 financial year).
While Labour officially has “no plans” to raise CGT rates (and there’s little wiggle room on allowances, as the tax-free allowance halved to £3,000 on 6 April 2024), many people think changes could be coming. Raising CGT too much could result in less revenue being generated overall. Although no mention was made of it in the manifesto, changes to CGT can’t be ruled out.
In order to raise the money needed to fulfil its plans to improve a range of public services, Labour will have to flex its fiscal rules or make changes to long-standing taxes, allowances, investment schemes and other rules. Here are some of the possibilities:
Breaking into the pensions piggy bank
Labour pledged to maintain the triple lock for state pensions (increased in line with inflation, wage growth or 2.5%, whichever is highest), and committed to a review of pensions aimed at ‘improving outcomes’ and encouraging investment in UK markets. However, this doesn’t rule out changes such as changing or reducing pensions tax relief, or tax-free lump sums that can be withdrawn, or removing exemptions from IHT for pension savings. While Reeves had previously said she would reintroduce the lifetime allowance, media reports suggest Labour has backed away from this, and although not ruled out, it wasn’t mentioned in the party’s pre-election manifesto.
Inheritance tax
Although IHT is an unpopular tax, Labour has pointed out in the past that a very small proportion of the population actually pay it — less than 5% of deaths during the 2020/21 tax year resulted in IHT charges. With an IHT-free band of £325,000 available to all, and another £175,000 for some who leave a residence to their children, there is scope to reduce allowances, exemptions or even change the overall rate that currently sits at 40% for most.
Non-domicile status
Labour has stated it will introduce new rules from 6 April 2025. No further details were given, other than pledging to go further than the changes announced in Budget 2024. Currently non-UK domiciled individuals are broadly able to live in the UK for 15 years before their worldwide income and assets fall into the scope of UK tax. However, this allowance will be significantly reduced to just four years for capital gains and income tax.
For IHT this will be reduced to 10 years. But with only 55,500 non-doms who were UK resident in 2022 it’s unlikely to be a big earner for Labour.
Planning can help
If you have any questions or concerns, please get in touch with your usual Rathbones contact to see if they can help.
