UNDERSTANDING THE LABOUR BUDGET

A Review Of The Critical Tax Changes And How These Could Impact You

Helen

Woods – Financial Planning

Director

at Investec Wealth & Investment (UK), part of Rathbones Group Plc.

The first Labour Budget since 2010 focused on the government’s plans for economic recovery and increased investment in public services, to be funded by changes to pensions, Inheritance Tax, and Capital Gains Tax, amongst others.

Any time there’s a change to the UK’s tax regime, it’s important to review your financial arrangements with your adviser or financial planner, since your existing arrangements may no longer be the most tax efficient.

Though I can’t offer individual advice in this article, I’ve summarised some of the key changes that might need to be addressed as part of this review.

Upcoming changes to pensions and Inheritance Tax

One of the most significant changes announced by the government is that unused pension funds and death benefits will be considered part of a deceased person’s estate from 6 April 2027. This is a part-reversal of the 2015 pension reforms, which allowed pensions to be used as taxefficient vehicles to pass on wealth. Funds passing to a surviving spouse will remain exempt from IHT (as is the case with any assets transferred between spouses). However, any funds that remain in the pension pot after the survivor’s death will then be subject to IHT at the usual rate of 40%.

For individuals with large pension pots, this is a critical shift. In effect, it means that the beneficiary of a deceased person’s pension could be taxed twice: first at 40% inheritance tax, and – if the individual died after the age of 75 – again at the beneficiary’s marginal rate of income tax on any withdrawals.

A change to Inheritance Tax and domicile

From 6 April 2025, the concept of ‘domicile’ will no longer apply for IHT purposes, making way for a simpler, residence-based tax system linked to the Statutory Residence Test.

This change will have implications for individuals with international ties, such as non-UK domiciled individuals or those who hold assets abroad. Since it’s a complex area, any who fall into this category should review the impact on their personal situation and consider what adjustments may be required.

Reductions to Business Property Relief and Agricultural Property Relief

For business owners, particularly those in the agricultural sector, the changes to Business Property Relief (BPR) and Agricultural Property Relief (APR) demand careful consideration.

Up to £1million of combined business and agricultural property will continue to qualify for 100% IHT relief, but the relief will decrease to 50% on any assets over that threshold, from 6 April 2026 (meaning that the rate of IHT payable will be 20%, rather than the usual 40%).

In addition, BPR relief for shares not listed on recognised stock exchanges (such as AIM) will reduce to 50%, down from the current 100%.

Owners of business and agricultural property should review their estate planning and business succession strategy with a professional who can advise on how to protect these assets from higher tax liabilities.

Higher rates of Capital Gains Tax

Another key change is the increase in Capital Gains Tax (CGT) rates, which took effect on 30 October 2024.

CGT applies to the sale of assets such as valuable possessions, property that’s not your home, shares, or other investments. For basic-rate taxpayers, it has risen to 18%, while for higher- and additional-rate taxpayers, it has risen to 24%. The annual exempt amount remains at £3,000 for individuals.

You may wish to consult a financial planner about how this affects your investment strategy, especially before making any significant disposals. They may suggest alternative strategies, such as transferring assets to a spouse, or propose tax-efficient investment vehicles that could help to reduce the impact of these changes.

An ongoing freeze on income tax bands

Income tax bands will remain frozen until the 2027/28 tax year. While this may not appear to be a tax increase, it has an effect called fiscal drag. As wages rise, salaried workers pay tax on a higher proportion of their income.

The Institute of Fiscal Studies (IFS) estimates that this freeze could impact up to one million people, as more are pulled into paying the basic rate and others are pushed into the higher-rate band.

How a financial planner can help

Whenever there are changes to the tax regime, there are always opportunities to minimise the impact on your finances, and a financial planner can help you to identify them. Solutions can include using tax-efficient products, changing your investment objectives, or restructuring your assets.

If you’re concerned about any of the topics in this article and feel you would benefit from a no-obligation chat about how we might be able to help you, please give me a call on 0151 237 1264.