The UK Autumn Budget 2024 introduced several tax increases. With the government still under pressure to boost revenue, attention now turns to what tax changes the 2025 Budget might unveil.
As summer progresses, speculation is mounting over which tax measures Chancellor Rachel Reeves will include in her Autumn Budget.
While the government remains tight-lipped so far, that has not stopped growing debate over its next tax moves. And it’s wise to look ahead. Some reforms apply instantly, leaving little or no time to respond. Last year’s immediate capital gains tax hike and the extension of the pensions overseas transfer charge to EU QROPS caught many people out.
With the Labour government keen to avoid raising income taxes on working people, the focus is likely to shift toward taxing wealth more heavily.
Will the UK impose a wealth tax?
This question is generating much debate. While a wealth tax would be a bold move for the UK, other countries impose a full or partial versions. For example, Spain levies a tax on total worldwide wealth, France used to but now limits it to real estate assets, while Portugal applies a tax on local high value properties.
After former Labour Party leader, Neil Kinnock, called on the Prime Minister to be bold and consider a wealth tax, opposition leader Kemi Badenoch accused Keir Starmer of “flirting” with a wealth tax during Prime Minister’s Questions on 9 July. Claiming it would be “a tax on all of our constituents’ savings, on their houses, on their pensions… a tax on aspiration”, she asked the Prime Minister to rule it out – and he failed to do so.
Tax Justice UK and a cross-party group of MPs have also recently proposed an annual 2% wealth tax on assets over £10 million. They calculate it would generate £24 billion per year, even if some wealthy people leave the UK. The Unite trade union suggested imposing a 1% wealth tax on those who have £4 million or more to raise £25 billion.
Another option would be to just impose a tax on high end property. The Labour Party has previously advocated a ‘mansion tax’ on properties worth £2 million or more. A similar idea was explored by the Conservative Party Chancellor, George Osborne, who had proposed increasing council tax on the most expensive homes.
Higher rates for capital gains tax (CGT)?
Both capital gains tax and inheritance tax are possible targets for further reform since they are a tax on wealth.
It would not be a great surprise if the government opts to align capital gains tax rates with income tax ones, since this idea has been floated around for several years.
Although the main rates of capital gains tax increased last year to match those applied to real estate, the top 24% rate is far below the top 45% income tax rate.
Could UK families face another double death tax?
Before the October 2024 budget rumours and speculation prevailed about a potential ‘double death tax’, and this has resurfaced again.
In this case, capital gains tax would be applied on top of inheritance tax when assets are passed on death. The Office of Tax Simplification is one of several think tanks which has suggested this in the past.
Currently, when someone dies, their estate is only liable to inheritance tax. Beneficiaries basically acquire the assets at the current market value, regardless of how much the asset may have increased since purchase. These gains are, in effect, wiped out on death, and if the beneficiary later sells the asset, they are only taxed on the gains made from the date of death.
These rules could change so that death is treated as a disposal of assets and gains arising from purchase date to date of death are taxed at CGT rates up to 24%. The net value of the whole estate would then be assessed for 40% inheritance tax.
Pensions and IHT double death tax from 2027
The last UK budget already imposed another form of double death tax: pension funds will become subject to inheritance tax from April 2027. If the pension holder dies aged over 75, when the beneficiaries draw down the pension as a lump sum or income, the drawdown is treated as income and subject to income tax at their highest marginal rate (up to 45%).
This can have a significant impact on how much your heirs actually benefit from your pensions. For example:
- Each £1,000 of pension fund chargeable to inheritance tax is subject to £400 of inheritance tax, leaving £600.
- If the £600 is taken as income and taxed at 45%, this would leave £330, instead of the original £1,000.
- This is an effective overall tax rate of 67%.
Looking ahead
Other than the pensions/inheritance tax reform, which is confirmed, the other tax rises discussed here is just speculation for now. But with weak economic growth, high borrowing costs and failed spending cuts, the government has to look for ways to raise revenue and/or cut costs. Taxing the wealthy is less likely to anger their voters than other avenues.
The risk is that some wealthy individuals and families will leave the UK. The non-dom reform has already encouraged some to move to tax friendlier jurisdictions, but the Chancellor would presumably be taking this into consideration when weighing up potential tax reforms.
While UK tax reforms of course hit UK residents the hardest, British expatriates are often impacted too. The tax on QROPS last year and IHT being applied to pension funds are prime examples.
If you are concerned about what the future holds, you need to act now. You can wait until the budget announcements for confirmed facts, but that may be too late for some tax reforms. Take professional advice for your circumstances and objectives, to determine if there any steps you can take to protect yourself.
With offices in the UK and across southern Europe, Blevins Franks can support you whether you are considering leaving the UK, have no intention of moving, or are already an expatriate. We will help you determine the best solutions to protect your wealth based on your situation and goals. If moving abroad is an option, we have in-depth knowledge of taxation in France, Spain, Portugal, Cyprus, Malta and Monaco, and how to use their tax regimes to your advantage – you may be pleasantly surprised at how much tax you could save.
Contact Blevins Franks for an initial consultation today.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.
