Strategies for Increasing Inheritance and Capital Gains Taxes upon Death through the Budget
Headline: Labour Budget 2025: Proposed Changes to Inheritance Tax and Capital Gains Tax
The upcoming Labour Budget, scheduled for 30 October 2025, is set to bring significant changes to the UK's tax system, particularly in the areas of Inheritance Tax (IHT) and Capital Gains Tax (CGT).
Inheritance Tax Reforms
Labour's proposed IHT reforms aim to make the system more progressive and reduce avoidance. The key changes include:
- Removing the seven-year gift rule, which currently allows most gifts to leave the donor's estate after this time period.
- Introducing a lifetime cap on gifts to prevent people from avoiding IHT by giving away wealth ahead of death.
- Revising taper relief rates applied to gifts made between three and seven years before death, which currently reduce the tax rate from 40% down to 8% depending on timing.
These measures are expected to make it harder for wealthier individuals to avoid IHT [1].
Capital Gains Tax Changes
Regarding CGT, Labour is reportedly considering increases, including rises in rates and adjustments to how gains are calculated, particularly for investment assets and pensions. These changes are part of a broader set of Labour's tax plans for 2025 aimed at increasing taxes on wealth and investment income to fund public services [3].
Pension Inheritance Tax Reforms
The government has previously announced reforms on pension inheritance tax, making most unused pension funds subject to IHT from April 2027. This measure is expected to reduce incentives to use pensions for tax planning [5].
Impact on the Exchequer
The total cost to the Exchequer in 2023/24 for agricultural relief was estimated at £365 million, and an estimated £1.3 billion for business relief. The residence nil-rate band, an additional IHT allowance for the main home left to direct descendants, is estimated to cost the exchequer £1.8 billion in 2023/24 [2].
Challenges and Controversies
The annual gifting limits are very modest and have been frozen for over four decades, providing limited wriggle-room. Charging CGT on top of IHT could lead to a "double death tax" of 54%. Some critics argue that certain reliefs available from IHT, such as business and agricultural reliefs, are too generous [4].
Key Points to Watch
- The chancellor could crack down on gifting rules to make it more difficult for families to avoid paying IHT.
- The chancellor could look at restricting the rules around "potentially exempt transfers".
- Defined contribution pension pots could potentially be counted as part of someone's estate for IHT purposes.
- Aim shares, which currently qualify for business relief for IHT purposes, could be under review.
- The RNRB (Residence Nil-Rate Band) is significant enough to be on Rachel Reeves's radar.
- Charging CGT at death could be an attractive option for Reeves, potentially raising a decent amount.
The Labour chancellor is expected to unveil these changes in the upcoming Budget on 30 October, providing a clearer picture of the future of the UK's tax system.
[1] https://www.ft.com/content/38135d2a-a589-4f0a-a6f9-e3260b1734e2 [2] https://www.gov.uk/government/publications/inheritance-tax-statistics-2023-to-2024/inheritance-tax-statistics-2023-to-2024 [3] https://www.bbc.co.uk/news/business-58657162 [4] https://www.telegraph.co.uk/personal-finance/inheritance-tax/article/inheritance-tax-changes-what-to-expect-from-the-budget/ [5] https://www.gov.uk/government/consultations/inheritance-tax-and-pension-savings-consultation/inheritance-tax-and-pension-savings-consultation
Investing in properties or businesses might be impacted by the proposed changes to the UK's tax system, as the Labour chancellor is expected to review certain reliefs, such as business relief, which could potentially impact the taxation of these assets. Pension income could also face changes in the inheritance tax landscape, as previously announced reforms are set to make most unused pension funds subject to IHT from April 2027. Furthermore, the Labour budget in 2025 is said to include plans to increase taxes on wealth and investment income, which could affect finance-related businessoperations.
