Chancellor Rachel Reeves recent ‘spending inheritance’ announcement revealed a projected overspend for 2024/25 of £21.9bn and offsetting measures of £5.5bn, leaving a gap of £16.4bn for the current financial year.
For 2025/26, the offsetting measures are forecast to deliver savings of £8.1bn, but the spending figures will have to await the first part of the Spending Review, due alongside the Autumn Budget on 30 October.
In her speech, Reeves said: “I have to tell the House that Budget will involve taking difficult decisions to meet our fiscal rules across spending, welfare and tax.”
Nevertheless, she went on to confirm the Labour “manifesto commitment that we will not increase National Insurance, the basic, higher or additional rates of income tax, or VAT.”
In a subsequent interview with The News Agents podcast, Reeves said, “I think we will have to increase taxes in the Budget.”
So, what could we see announced?
I want to look at what the chancellor’s options are in relation to the two main capital taxes – capital gains tax (CGT) and inheritance tax (IHT). Along with pensions and other possible tax changes that could be borne by ‘non-working individuals’ – aka pensioners – it is these that have attracted most media speculation.
CGT
Increases in CGT have been on most hitlists since Labour refused to rule them out in pre-election interviews.
CGT is due to raise £15.2bn in 2024/25 and £16.2bn in 2025/26. The HM Revenue & Customs (HMRC) ready reckoner is pessimistic about the benefits of a significant increase in rates. For example, it says a 10 percentage point increase in all rates would reduce revenue by about £1.35bn, as greater income (£710m) from the disposal of assets qualifying for business assets disposal relief (BADR) would be more than offset by a reduction of tax (£2,055m) on unrelieved gains as investors waited for a more tax-friendly climate (or death).
A 5 percentage point increase would yield £420m, according to HMRC. These numbers are at odds with some think tank calculations. For example, a recent Resolution Foundation report suggested raising CGT rates to 16% (basic), 32% (higher) and 37% (additional) and reintroducing indexation relief would produce £7.5bn a year.
The quick and dirty option would be to simply scrap BADR, which HMRC estimates cost £1.5bn in 2023/24. However, this wouldn’t align well with the encouragement of business and accompanying economic growth.
The general rebasing of values on death for the purpose of calculating future gains is also something that has gained attention as an area for tax-raising reform, particularly when agricultural or business relief also applies.
Applying CGT at death was an idea floated in the Office of Tax (OTS) IHT Simplification Review. The OTS estimated that, for 2015/16, CGT levied at death would raise £1.3bn and affect 55,000 estates (against 24,500 paying IHT). Those numbers, particularly in terms of taxpayer numbers, would skew higher for CGT now, given the reduction in the annual exemption.
Two halfway houses are possible – removing the “on death” uplift if business or agricultural relief is claimed or simply not resetting the base cost for the recipient of an inheritance.
That would mean the deceased’s base cost would pass across to the new owner in the same way as holdover relief currently operates. The drawback of this would be a much smaller immediate tax boost.
IHT
IHT is the second manifesto-unmentioned tax to attract media speculation as a Budget target, especially as it arguably does not impact on ‘working people’. IHT is projected to yield £7.5bn in 2024/25 and £7.7bn in 2025/26, meaning, in total, it raises about as much as 1p on the basic rate of income tax.
A recent Institute of Fiscal Studies (IFS) paper provides a good summary of the areas that could provide extra revenue:
- Business and agricultural reliefs: The IFS put the cost of these reliefs at £1.4bn and £0.4bn respectively. HMRC data shows business relief claimants typically number fewer than 5,000. The IFS proposals were to:
1) Scrap business relief entirely for Aim shares, saving £1.1bn in 2024/25, rising to £1.6bn by 2029/30.
2)Cap the two reliefs to a transferable £500,000 per person. As much of these reliefs is currently claimed by the largest estates, the IFS estimates the change could generate £1.4bn in the current tax year, rising to £1.8bn by 2029/30. The IFS does not distinguish between ‘working’ and passive asset owners. This would be an option for the government, but would add complexity while reducing tax receipts.
- Defined contribution pensions: The IFS, along with many others, favours bringing pension death benefits within the ambit of IHT. It also thinks income tax should be levied at a minimum of basic rate on any funds withdrawn by a successor/dependant, regardless of the age at death of the pension owner. To take account of this additional tax the IFS proposal would apply IHT to 80% of gross funds. The IHT raised would initially be small beer – £0.2bn in 2024/25, rising to £0.4bn by 2029/30.
More radical reform, such as a switch to taxing recipients rather than donors, could raise more money, but would involve a major legislative overhaul.
Tony Wickenden is managing director of Technical Connection
I would be curious to know how much additional ‘potential’ revenue would be generated by lowering the level at which property relief for IHT is applied; for example, bringing the cap down from £2 million to £1 million?
Other low hanging fruit is the potential for increasing petrol duty. It has been capped for over 10 years and will play well to the government’s green credentials. The other thing to watch out for is an increase in council tax, which in effect is nothing other than a wealth tax. CGT is voluntary. If you don’t cash in there is no tax. IHT is also to an extent a voluntary tax. Rule one – don’t die! Rule 2 spend it or give it away and that’s not even addressing the loopholes. More holes than gruyere cheese.