Five tax changes Rachel Reeves is likely to make on October

Introduction

As the budget delivery date approaches at the end of October, discussions intensify around potential tax changes that may impact individuals and businesses alike. Recent reports indicate that Rachel Reeves may target several tax loopholes, which could significantly alter the financial landscape. Below, we examine five key areas of focus.

1. Capital Gains Tax

One major change could involve the capital gains tax, particularly the uplift rule. Currently, this rule allows an inheritor to inherit an asset at its market value at the time of the original owner's death, rather than at the time of sale. For example, if a parent bought a house for £100,000 and it's valued at £500,000 when they die, the child would only pay capital gains tax on the gain made after the parent’s death. If the uplift rule is abolished, the child would owe capital gains tax on the full £500,000, potentially raising their tax bill from £24,000 to £120,000. This change could generate an estimated £1.6 billion annually for the government. There are varied opinions on whether this is a fair measure, especially considering the historical property value increase benefitting older generations.

2. Inclusion of Pensions in Inheritance Tax

Another proposed change is the inclusion of pensions as part of an estate subject to inheritance tax (IHT). Currently, pensions are exempt from IHT, allowing individuals to strategically use their pensions to avoid depleting their estates. If implemented, this change would likely provoke widespread discontent, particularly among Conservative voters who consider pensions sacrosanct. It could also result in individuals withdrawing funds from their pensions early, risking their future financial security.

3. Tax Relief on AIM Stocks

The government is also rumored to be considering alterations to tax relief associated with Alternative Investment Market (AIM) stocks. The AIM market comprises smaller companies that generally attract investors seeking tax breaks on shares held for a minimum of two years. If the government removes these tax incentives, it could dampen investment appeal, potentially destabilizing the AIM market. Although the removal may not be as politically charged as pensions or capital gains changes, it could still negatively impact small businesses reliant on such investments.

4. Business Asset Property Relief

In contrast, changes to Business Asset Property Relief (BAPR) may be more favorably received. This relief currently allows those selling their business to pay a reduced capital gains tax rate of 10% on lifetime gains up to £1 million. Discussion around modifying this tax incentive could stir debate, as it directly impacts business owners and entrepreneurs. Although it was previously set at £10 million, it was substantially cut by former Chancellor Rishi Sunak in 2020.

5. Changes to ISA Tax Rules

Last but not least, there are proposals to impose a £100,000 cap on tax-free capital gains from Individual Savings Accounts (ISAs). Currently, any gains within an ISA are tax-free, which incentivizes saving and investing. Implementing a cap could raise approximately £5 billion for the government but may lead to significant public backlash, especially if such changes are applied retroactively.

These proposed changes, if enacted, will undoubtedly provoke a wide range of reactions. Some may view them as fair adjustments, while others will perceive them as punitive measures targeting responsible savers and investors.

Keyword

capital gains tax, uplift rule, inheritance tax, pensions, AIM stocks, Business Asset Property Relief, ISA tax rules, Rachel Reeves, October budget

FAQ

1. What is the proposed change to capital gains tax?
The proposed change involves abolishing the uplift rule, which would require inheritors to pay capital gains tax based on the total increase in value from the original purchase price.

2. How might pensions be affected by the upcoming budget?
There are discussions about including pensions in the estate for inheritance tax purposes, which would subject them to a 40% tax.

3. Why are AIM stocks significant in this discussion?
AIM stocks currently receive tax perks to attract investment in smaller companies. Changes to these tax incentives could impact investor interest and the companies themselves.

4. What is Business Asset Property Relief?
Business Asset Property Relief allows business owners to pay a reduced capital gains tax rate when selling their business.

5. What changes are proposed for ISAs?
The government may impose a cap of £100,000 on tax-free capital gains from ISAs, which has raised concerns over its retroactive application.