Chancellor Rachel Reeves delivered the new Labour government’s first Budget on 30 October 2024. Amid the announcements were key changes to Capital Gains Tax (CGT) and Inheritance Tax (IHT) that could affect your financial plan.
Ahead of the Budget, prime minister Keir Starmer said it would be “painful” as there was a £22 billion black hole in the public finances. Indeed, Reeves went on to announce measures that would raise annual tax revenues by £40 billion by 2030.
Some of these taxes will be paid by businesses, but others could affect your personal finances. Here are two changes you might want to consider when reviewing your financial plan.
1. The main rates of Capital Gains Tax have increased
There was a lot of speculation that Reeves would announce changes to CGT. In the Budget, she revealed the rates would indeed rise. It could mean you pay more tax than you expect when selling assets.
CGT is a type of tax you pay if you make a profit when you dispose of assets such as:
- Investments that are not held in a tax-efficient wrapper, like an ISA
- Personal possessions worth more than £6,000 (excluding your car)
- Property that is not your main home
- Business assets.
In 2024/25, you can make profits of up to £3,000 before CGT is due. This is known as the “Annual Exempt Amount”. If profits exceed this threshold, you may be liable for CGT.
The changes Reeves announced to CGT rates came into effect immediately on 30 October 2024. The rate of CGT you pay depends on your other taxable income. If you’re a:
- Higher- or additional-rate taxpayer, your CGT rate has increased from 20% to 24%
- Basic-rate taxpayer, you may benefit from a lower CGT rate of 18%, which has increased from 10%, if the taxable amount falls within the basic-rate Income Tax band.
So, it might be more important than ever to consider how to reduce your CGT liability as part of your financial plan. For example, you may:
- Spread disposing of assets over several tax years
- Focus on increasing investments held in a tax-efficient wrapper
- Pass on assets to your spouse or civil partner to make use of their Annual Exempt Amount.
We could work with you to understand if you may be liable for CGT and the steps you might take to mitigate a large or unexpected tax bill.
2. Your pension may form part of your estate for Inheritance Tax purposes
Currently, your pension isn’t usually included in your estate for IHT purposes. As a result, you may have planned to use other assets to fund your later years so you could pass on wealth tax-efficiently through your pension.
However, Reeves announced she would close this “loophole” that gives pensions preferable IHT treatment.
From 6 April 2027, your unspent pension pot will be included in your estate when calculating an IHT liability. The change could mean the number of estates that pay IHT doubles.
Under the existing rules, around 4% of estates are liable for IHT and it raises about £7 billion a year for the government. However, the Budget states that bringing pensions into the scope of IHT will affect around 8% of estates each year. Reeves added the changes would boost IHT receipts by £2 billion a year by the end of the forecast period (2029/30).
So, if you haven’t previously considered IHT as part of your estate plan, you may need to now.
The threshold for paying IHT is known as the nil-rate band and is £325,000 in 2024/25. In most cases, you can also use the residence nil-rate band if you pass on your main home to a direct descendant. In 2024/25, the residence nil-rate band is £175,000.
In addition, you can pass on unused allowances to your spouse or civil partner. In effect, that means, as a couple, you could leave behind up to £1 million before IHT may be due.
It’s important to note that both the nil-rate band and residence nil-rate band are frozen until 6 April 2030 and will not rise in line with inflation.
As a result, you might need to consider how the value of your assets will change and whether growth could affect what you’ll leave behind for loved ones.
Previously, you may have increased pension contributions to build up a tax-efficient nest egg that you could leave to your family when you pass away. A financial review could help you assess if it’s still the right option for you in light of the changes.
Get in touch to talk about the impact the Budget could have on your plans
If you’d like to discuss how the Autumn Budget could affect your finances and how you might keep your plans on track, please get in touch. We can work with you to create a tailored plan that reflects the changes and aligns with your aspirations.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning.
