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).
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), including investments held in General Investment Accounts,
- Personal possessions worth more than £6,000 (excluding your car),
- Property that is not your main home, and
- 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, or
- Pass assets to your spouse or civil partner (free of CGT) for disposal in their possession to make use of their Annual Exempt Amount.
We can work with you to understand if you may be liable for CGT and the steps you might be able to 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 can pass on wealth tax-efficiently through your pension.
However, Reeves announced that from 6 April 2027, your unspent inherited pension pot will be included in your estate when calculating an IHT liability. Pension transfers to a surviving spouse or civil partner will be exempt from IHT, under the spousal exemption.
HMRC published a technical consultation on the processes required to enable this change on 30 October 2024 and we will be following this and any other announcements closely, so we are in the best possible position to discuss this change with you.
General IHT Information
The threshold for paying IHT is known as the nil-rate band and is £325,000 in 2024/25. If relevant to you, 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.
Any assets passed to your spouse or civil partner are exempt from IHT. In addition, you can pass on unused allowances to your spouse or civil partner. In effect, that means as a couple you could leave up to £1 million before IHT is 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 the IHT position of your estate.
Estates Paying IHT
Under the existing IHT rules, around 4% of estates are liable for IHT and it raises about £7 billion a year for the government. The Budget states that bringing pensions into the scope of IHT would affect around 8% of estates each year and Reeves added the changes would boost IHT receipts by £2 billion a year by the end of the forecast period (2029/30).
However, the technical consultation paper acknowledges that any figures do not take into account potential behavioural changes, such as individuals drawing down pension funds at a faster rate and/or making greater use of other exemptions or reliefs to reduce their estate’s overall IHT liability. This could include, for example, increasing demand for Inheritance Tax-relieved or exempeted assets, such as assets qualifying for Agricultural Property Relief and Business Property Relief, or more generous or frequent gifting during someone’s lifetime to pass wealth to beneficiaries (using exemptions, allowances and the ‘7-year rule’), potentially drawing down from the pension to make the gift.
Please get in touch if you would like to discuss either of these Budget announcements or any other aspects of your financial arrangements.
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.
