Chancellor of the Exchequer Rachel Reeves wants to propose even higher taxes in October to cover the £22 billion shortfall in the UK’s public finances. Although the Labour Party has said that it will not raise the income tax, National Insurance, or Value Added Tax, there may be other personal taxes as borrowing reached £3. Of these about ArFt 1 billion in August 2024 this has been more than doubled from ArFt 0. 5 billion recorded in July 2023.
This article examines potential future alterations to inheritance tax, capital gains tax, and pension relief, and what these alterations may portend for you.
Table of Contents
Inheritance Tax: What Buckets Could be Inclined?
What Is Inheritance Tax?
IHT is a tax on the wealth of an individual who is dead but only where the value of the deceased’s estate is more than a set figure. The existing level where no IHT has to be paid is £325,000 and if the estate is below this amount, there is no taxation. For estates over this limit, tax is normally taken at a rate of 40% but there are several exceptions. For instance, if you write your home to your children or grandchildren and your estate is worth less than £2 million, £500,000 can be passed tax-free.
Who Pays It?
Indeed few individuals get to pay the inheritance tax. Other important events of the tax year 2021-22 include the following- In the tax year 2021-22, the value-added tax registration threshold was £85,000 only. In the year to November, forty percent of all deaths in the UK triggered an IHT bill. Indeed, across all estates that filed a return, the average IHT liability was £215,000 even though estates with larger net assets paid a much higher IHT.
How does it increase or otherwise raise its capital?
In the 2023-24 financial year, IHT generated £7. A cumulative of £5 billion for the Treasury every year.
Potential Changes
As for Rachel Reeves, she could try and target several IHT exemptions. For instance, to take the most recent example, the zero carve-out to a spouse or civil partner is currently one of the principal ways in which IHT is avoided and weakens the Treasury to the tune of £6.2 billion. It is also possible that some aspects of residence relief – the relief that applies to the majority of homes – could be amended; however, this step will meet with considerable resistance. Scrapping or reducing the number of business and agricultural property exemptions could generate an extra £1.8 billion.
Capital Gains Tax: It is therefore not surprising that Lauren has several issues in mind when that question is posed to her.
What is Capital Gains Taxes?
Thus, CGT is levied from the increment in the value of the disposed asset when one sells the asset or property. There are exemptions; one is the main residence. CGT is charged according to income tax band and basic rate taxpayers pay 10% of the gains or £12,300, which reduces to 8% on gains if the gains are from residential property; those taxpayers in the higher tax bracket pay £12,300 or 20% of the gains or £30,000 respectively, which is reduced to 18% if the gains are from dwellings.
Who Pays It?
Altogether, 369,000 people paid CGT from their gains of £80 during the financial year, 2022-23. A total estimated means value of $6 billion was recorded. The majority of tax income is paid by the carriers of democratizing gains, although they are top-end earners.
What Amounts Does It Increase?
In 2022-23, CGT generated £14.4 billion for the Treasury, a 15% decrease from that of the previous year.
Potential Changes
The chancellor may further harmonize CGT with income tax rates, so higher-rate taxpayers see a peak CGT rate of 40% and the richest up to 45%.
Pension Tax Relief: Is There More on the Card?
Pension tax relief refers to a system of tax breaks that is availed to individuals who are paying taxes and intending to save for their retirement through pension schemes.
There is pension tax relief which enables an individual to claim back some of the tax he or she owes when contributing to the pension, meaning that the amount saved is more. Standard or basic amount taxpayers are eligible for a 20% relief, 40% relief for higher amount taxpayers, and 45% relief for additional amount taxpayers.
How Much Is Spent?
In 2021-22, £44.1 billion was spent on pension tax relief, and over £500,000 of that was paid to individuals in the higher rate tax bands.
Potential Changes
Alternatively, Reeves might cut the relief for higher- and additional-rate taxpayers down to the level basic rate taxpayers get – that is, 20% or, more or less, introduce a flat rate of relief between 20% and 40%.
What These Tax Changes Might End up Doing to You
Chancellor’s changes in inheritance tax, capital gains tax, and pension relief may prove effective for those people who expect to earn higher incomes or who will be having large estates in the future. Hitting existing exemptions and realigning tax more closely with income the chancellor has set out to strengthen the UK’s public finances but in so doing these measures are likely to impact on the amount of wealth that can be transferred to future generations or saved for retirement.
The tax changes under consideration may affect your tax planning and wills and trusts strategies so try to stay up to date on them as the autumn budget approaches.
