As expected, Chancellor Rachel Reeves has announced a number of tax increases and other fiscal changes, some of which will affect private individuals.
Changes to Inheritance Tax were widely expected and the Chancellor has confirmed that AIM shares will no longer be exempt from IHT. Instead, they will attract an IHT liability of 20% if held for two years. However, the Chancellor’s decision to opt for 20% rather than the standard 40% is an attempt to take a balanced approach – recognising the benefits that investment brings. Setting an allowance of £1million for Business Relief on business investments, and a 20% rate of tax thereafter, will be a significant change for business owners to navigate moving forward as regards their estate planning.
More of a shock was the decision to bring pensions into inheritance tax from April 2027. Although changes to pensions had been expected, this is a nuanced change where the detail will need to be carefully considered and consultation about how it is implemented is underway.
The decision to freeze the £325,000 nil rate and £175,000 residence nil rate bands until 2030 means that they will have remained unchanged for 21 years. That is a lot of inflationary increases caught by what is effectively a stealth tax. Whilst the decision to extend the freeze on thresholds will be unpopular, at least it maintains the status quo and provides certainty for financial planning purposes.
Capital Gains Tax
When it comes to Capital Gains Tax (CGT), some increase in the headline rates was widely expected.
CGT is often seen as a tax on the wealthy, but this isn’t always the case.
For the many thousands of vulnerable adults living in the UK today, those with legal professionals, relatives or partners who act under a Lasting Power of Attorney, Deputies or Trustees to their estates, CGT is an important concern. Recent reductions in the allowances for individuals, which have fallen from £12,300 pa in 2022-23 to just £3,000 pa for 2024-25, mean that almost everyone with investments has had to accept that tax on gains is part of life.
The increases in the standard CGT rate to 18%, and the higher rate to 24%, are significant, but not as high as feared. For vulnerable people, who may have received sums in damages, which have been carefully calculated to meet their lifetime needs, such as those injured by an accident or due to negligence, these tax changes haven’t been factored into their awards and are therefore unfair. These individuals could also be hit by higher costs for personal care services due to the hike in Employer NICs.
These changes to the CGT regime will disadvantage this vulnerable group of people and the Chancellor should consider introducing an exemption or additional allowance for recipients of compensation awards as soon as possible.