Autumn Budget: inheritance tax and other possible changes

Chancellor Rachel Reeves has a huge challenge on her hands trying to balance the nation’s books and will be looking at all possible ways to raise extra tax revenue in this year’s Autumn Budget.

The 2024 Budget included a raft of changes, such as applying inheritance tax (IHT) to unspent pensions and reducing tax relief on AIM shares. There has already been much speculation about tax changes we may see in 2025. Savers should remember that making changes to financial plans on the back of speculation could be very costly in the long-term and avoid making snap decisions.

Here we round up what those changes could be and how they would impact you and your clients.

Inheritance tax

Speculation around IHT changes has focused so far on gifting allowances. It recently emerged that the government is considering implementing a lifetime cap on the amount you can pass onto your heirs IHT-free in the upcoming Autumn Budget, according to speculation.

Currently, the amount that can be passed on IHT-free via gifts is essentially unlimited, provided the person lives another seven years after making the gift.

However, with a lifetime cap on the value of gifts, the situation would be very different.

If the government imposed a £100,000 lifetime cap on the value of gifts that someone can pass on before they die, assuming they hit the £100,000 limit by using up gifting allowances and then gifted another £200,000, then their heirs would pay 40% IHT on the £200,000, so £80,000.

If the cap was £200,000 and they gifted £300,000 in total (using up the full allowance), then their heirs would pay 40% IHT on £100,000, so £40,000.

If a punitive cap of just £50,000 was introduced then, in this situation, the heirs would pay IHT of £100,000 on gifts totalling £300,000. 

Again, it’s important to note, that currently this is pure speculation.

ISAs

Earlier this year the government was expected to announce a cut in the amount savers can hold in tax-free cash ISAs. Currently you can save up to £20,000 per year in either a cash ISA or stocks and shares ISA or split between the two.

Policymakers were planning to limit the cash element of that to encourage more of us to invest.

Those plans have since been temporarily shelved, but they are not off the table entirely and Rachel Reeves may use the Autumn Budget as an opportunity to revive them.

Property taxes

There are rumours the Chancellor could look to overhaul property taxes - potentially even replacing stamp duty and council tax with a new annual tax on homes worth more than a certain amount. 

Such changes would disproportionately hit those in places such as London and the South East, where property values are particularly high.

Another way to raise extra revenues from property taxes would be to introduce new, higher council tax bands.

It has been suggested that capital gains tax (CGT) could be introduced on people's main homes if they sell for more than a set amount. Currently, CGT is only applied when you sell an additional property, not your main home. 

Again, for the moment, this is pure speculation. 

Income tax

In its election campaign, Labour promised not to raise the three main working taxes – income tax, employees’ National Insurance contributions, and VAT. 

However, the government could implement a “stealth increase” by extending the freeze on income tax thresholds. As salaries generally increase each year, freezing thresholds for longer means more people find themselves falling into higher rate tax brackets.

Last year, the government said it would end the freeze on income tax and National Insurance thresholds in 2028 - but this decision could be reversed to plug the hole in state finances.

According to The National Institute of Economic and Social Research (NIESR), extending the freeze beyond 2028 could raise an additional £8.2 billion in tax revenue.

Capital gains tax

It’s likely the government will look at potential ways to increase revenues from CGT. This could include reducing tax-free allowances (currently £3,000 per tax year) or increasing rates, particularly for higher earners - perhaps bringing them in line with income tax.

Basic-rate taxpayers currently pay CGT of 18% while higher-rate taxpayers pay 24%.

Dividend tax

The amount one can receive tax-free in dividend payments has been gradually reducing for several years. The tax-free dividend allowance has been cut back from £2,000 back in April 2023 to just £500 today. But that's not to say the government couldn't reduce this further.

Dividends received within an ISA should remain tax free.

A wealth tax

Some within the Labour party have been calling for a new tax on Britain’s wealthiest citizens. This could, for example, take the form of an annual levy on individuals with assets above a set threshold, say £5 or £10 million.

However, there is not consensus among the party on whether this is a good idea and critics have suggested it could encourage wealthy people to leave the UK entirely.

Pensions

Retirement pots are a juicy area for potential government tax raids and there have been rumours that various areas will be targeted, including salary sacrifice schemes and pensions tax relief.

For more info on what potential changes could mean for you and your clients, my colleague Paul Squirrell will write more extensively when full details are made available later in the year.

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