What could some of the budget changes be in Oct 2024?

By / 28 August 2024

Labour’s first budget warns of pain ahead, so here is an outline of the current inheritance tax and capital gains tax regimes that are under the spotlight

With the Labour government’s first budget looming after we return from summer holiday’s there is much speculation (and dread) about the government’s long-promised tax reforms. Speaches of pain and manifesto promise to not increase income taxes, national insurance and corporation tax leave inheritance tax and capital gains tax in the spotlight. So whats the position from a personal financial planning perspective.

When is the 2024 budget?

The first budget speech of Britain’s new Labour government is supposed to be on 30 October 2024. As is customary, it will happen in the afternoon after other business in the House of Commons has finished, which is usually after 3:00 PM. Below is a countdown to the next budget announcements.

Budget Countdown

Countdown to Budget Announcement

Current Inheritance Tax and Capital Gain Tax rules

The following information relates to the tax year 2024/25 in respect of the UK.

Capital Gains Tax (CGT)

  1. Annual Exempt Amount:
    • The Tory government reduced the annual exempt amount for individuals to £3,000 (down from £6,000 in 2023/2024).
    • Trustees and personal representatives have a lower exemption of £1,500.
  2. CGT Rates:
    • For individuals, the CGT rate is 10% on gains within the basic rate income tax band, and 20% for gains above this band.
    • Gains on residential property are taxed at higher rates: 18% for basic-rate taxpayers and 24% for higher-rate taxpayers.
    • Trustees and personal representatives generally pay 20%, with residential property gains taxed at 24%.

Inheritance Tax (IHT)

  1. Thresholds:
    • The standard IHT threshold is £325,000. This means that if the value of an estate is below this threshold, no IHT is due.
    • The threshold can increase to £500,000 if the estate includes a home that is passed on to direct descendants (children or grandchildren).
  2. IHT Rate:
    • The standard rate of IHT is 40%, applied to the value of the estate above the threshold.
    • A reduced rate of 36% applies if at least 10% of the estate’s net value is left to charity.
  3. Gift Rules:
    • Gifts made more than 7 years before death are usually exempt from IHT.
    • Gifts made within 7 years of death may be subject to taper relief, reducing the tax rate on the gift over time.

So what can change in the budget?

Since mainstream taxes such as income tax, National Insurance, and corporation tax are ring-fenced from increases, the government will focus on other potential sources of additional revenue.

Lowering the Exemption Thresholds Inheritance Tax (IHT)

  1. The inheritance tax threshold is £325,000 with an additional threshold for family home that can bump this up to £500,000. Lowering these thresholds would mean that more estates have to pay IHT and, in turn, more tax revenues for the treasury.

Reducing the Capital Gains Tax (CGT) threshold

  1. In the 2024/2025 tax year, the annual exempt amount was cut to £3,000 for individuals. Setting this threshold even lower would see more people having to pay CGT on their investment profits, generating more revenues. There is a compliance balance as further reductions could create a onus on tax completion. The current

Increasing Tax Rates on capital and inheritence

  1. Increase the rate of CGT. For example, boosting CGT rates up to income tax rates (45% for the higher earners) would provide a big boost to tax revenue from capital gains.
  2. Increased IHT Rate Currently, when someone dies, the Inheritance Tax rate is 40 per cent. However, raising this overall rate could help raise not only additional funds for the government, but also the stakes of trying to avoid paying the tax.
  3. Alternative option: a higher rate for estates over a chosen threshold such as 45 per cent or 50 per cent on the portion of a value above the threshold.

Reducing or Removing Reliefs and Exemptions

  1. Business Relief and Agricultural Relief: Some business and agricultural assets can currently be passed on without IHT, or with reduced IHT.
  2. Taper relief: Currently, tax on gifts made up to seven years before death is reduced under taper relief for IHT purposes. This could be scrapped or reduced if the Government is looking to raise additional revenue.

Expanding the Scope of Taxable Events CGT on Principal Residences

  1. Capital gains tax (CGT) earned from selling your primary residence is currently tax-free. Placing a cap on that exemption (for example, the first £500,000 of gain is tax-free) will capture additional tax revenue.
  2. New wealth tax: Politically tricky, but a wealth tax (taxing individuals annually on their net worth above a certain level) would be a major new source of revenue.

Introducing New Taxes

  1. Second Home and Investment Property Surcharge: An additional tax (perhaps at the time of sale – higher CGT; or annually – as part of council tax or a new levy) could be levied on second homes or investment properties.
  2. Closing Loopholes It could target estate planning arrangements aimed at mitigating IHT. For example, tightening rules around trusts and offshore assets could prevent avoidance and increase tax revenue. Restrictions could also be placed on offshore divestments.

Change to pension tax reliefs

The government could explore some or all of the following practical changes to its pension tax reliefs and carry forward rules to reduce the expenses to the Treasury that arise from those who contribute extra sums to their pensions.

1. Reducing the Annual Allowance

  • Current Situation: The annual allowance is the maximum amount of tax-relieved contributions that can be made to a pension each year. As of 2024, this is typically £60,000.
  • Potential Change: The government could reduce the annual allowance further, perhaps back to £40,000 or lower. This would limit the amount of tax-relief that earners can claim in a single year.

2. Lowering the Lifetime Allowance

  • Current Situation: The lifetime allowance is the maximum amount you can accumulate in your pension pots without incurring extra tax charges. Although it has been frozen or removed temporarily, it could be reinstated or lowered in the future.
  • Potential Change: Restoring and reducing the lifetime allowance from its previous level (it was £1,073,100 before its removal) could help reduce the overall cost of pension tax relief.

3. Restricting Carry Forward Rules

  • Current Situation: The carry-forward rule allows individuals to use any unused annual allowance from the previous three tax years, provided they were members of a pension scheme at the time.
  • Potential Change: The government could reduce the number of years from which unused allowances can be carried forward (e.g., reducing it from three years to one year). Alternatively, they could cap the total amount that can be carried forward.

4. Introducing a Flat-Rate Pension Tax Relief

  • Current Situation: Tax relief on pension contributions is currently provided at the taxpayer’s marginal rate of income tax (20%, 40%, or 45%).
  • Potential Change: Moving to a flat-rate pension tax relief, such as 20% or 25% for all taxpayers, would reduce the relief available to higher earners, thereby lowering the overall cost to the government.

5. Reducing Relief for High Earners

  • Current Situation: High earners currently benefit significantly from pension tax relief due to higher income tax rates.
  • Potential Change: Further tapering the annual allowance for those with high incomes (currently, the allowance tapers down from £60,000 to £10,000 for those earning above £240,000) could reduce the benefits available to the highest earners.

6. Abolishing or Limiting Tax-Free Lump Sums

  • Current Situation: Individuals can currently take up to 25% of their pension pot as a tax-free lump sum upon retirement.
  • Potential Change: The government could reduce the percentage of the pension pot that can be taken tax-free or place a cap on the maximum amount that can be withdrawn tax-free.

7. Changes to Employer Contributions

  • Current Situation: Employer contributions to pensions are currently exempt from National Insurance Contributions (NICs) and are tax-deductible.
  • Potential Change: Introducing NICs on employer contributions or limiting the tax deductibility of these contributions could reduce the cost of pension tax relief to the government.
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