After winter fuel shocker – here’s where Labour will tax YOU next | Personal Finance | Finance
Reees will really swing to action on October 30, when her Autumn Budget will deliver a string of tax hikes to fill what she claims is a £22billion black hole. That’s just three months away, so take evasion action if you can.
During the election, Labour pledged not to increase income tax, national insurance or VAT, but that leaves plenty she can hike. Tom Walker, partner at specialist tax advisors Wellers, has named her most likely targets.
Capital gains tax
Reeves is almost certainly going to hike capital gains tax (CGT) rates in line with income tax. This would be the first time since 1989.
Today, higher-rate and additional rate taxpayers pay CGT at a maximum rate of 24%. If Reeves acts, the charge could suddenly jump to 40% or 45%.
Walker said this is highly likely and could happen overnight. Typically, chancellors introduce tax changes at the start of the New Year, but Reeves may take a different view.
She doesn’t want people scrambling to sell assets before the CGT hike, so could hike with immediate effect.
Labour reckons the measure could raise £8billion, but it may be disappointed. Previous CGT raid have reduced tax revenues as people hold onto assets rather than sell.
Another CGT change may be even more punitive. Currently, capital gains are wiped out on death, with assets subject to inheritance tax (IHT) instead.
Reeves could change this, so that assets sold during probate are charged CGT first, and then IHT afterwards. This has been dubbed the “double death tax”.
Walker thinks there’s a pretty good chance the ‘death uplift’ for CGT could be removed. “The result would be a double tax burden for families.”
After yesterday, few would bet against Reeves doing that.
Plan of action: We don’t know for sure what Reeves will do, but many will be tempted to sell assets before the Budget. However, this won’t be easy, especially for second homes and buy-to-lets, where sales take months to complete.
Inheritance tax.
The left hate inherited wealth on principle. They think it’s fundamentally unfair, giving the children of better off parents a head start in life.
Many Labour voters would applaud Reeves for cracking down, making this a tempting way of raising billions.
Walker expects Reeves to drive up IHT revenues, already at an all-time high. “Potential IHT reforms include reducing gifting allowances and the £325,000 nil-rate band. The £175,000 main residence allowance could also be scrapped.”
Today, people can give away £3,000 a year with instant IHT exemption, plus smaller gifts of up to £250 each. These allowances have been frozen for decades, shrinking their value.
People can gift much larger sums entirely free of IHT, but only if they survive for another seven years, known as a potentially exempt transfer (PET).
It wouldn’t surprise me if Reeves swept away all these allowances, so that every single gift became subject to an immediate IHT bill. She might also axe the £175,000 main residence allowance, which applies when parents leave the family home to children and grandchildren.
The Treasury is also looking at increasing IHT on farmers and small business disposals, in moves that could wreak havoc if carried through.
Plan of action: Make full use of this year’s gift allowances while you can. You can also mop up last year’s £3,000 gift allowance, if you didn’t use it. Couples can double up to gift £12,000 in total.
Making larger gifts could be risky, as we don’t know what will happen with PET rules. Reeves is unlikely to retrospectively tax gifts made before the Budget, but it’s still a gamble. Consider specialist advice.
Pensions.
I’ve saved the worst to last because Reeves could tax our pensions in so many ways.
Her most likely move is to scrap higher rate tax relief on pension contributions, which gives higher earners relief at 40% or 45%, but just 20% for basic rate taxpayers.
She could synchronise this at 30% for all. However, I’ve a sneaking suspicion she could opt for 25%. It would save billions a year.
She may also reverse former Tory chancellor Jeremy Hunt‘s recent move to increase the pensions annual allowance from £40,000 to £60,000. She could even cut it to £30,000 or £20,000.
I think it’s almost inevitable that Reeves will impose IHT on unused pension savings. She could argue that wealthy people now use pensions as an IHT dodge, when they weren’t designed for that.
There’s a slim chance she could axe pensions 25% tax-free cash, too, but I think that would be too brutal and unpopular, even for her.
Plan of action: It makes sense to max out your pension contributions while you can, to grab today’s higher tax relief and annual allowance. Remember, you can mop up any unused relief from the last three years.
There’s not much you can do to avoid an IHT raid on pensions. And while you could take your 25% tax free cash before the Budget, you should only do that if you really need it now. At least it grows tax free in a pension and like I said, Reeves may not touch this one.
While there are some things you can do to limit your exposure to Rachel Reeves’ tax onslaught, think it through as mistakes could cost more than you save.
