In her first important speech as chancellor, Rachel Reeves accused the previous Conservative government of creating a £22 billion “black hole” in the public finances.
She announced certain measures to cut spending right away, including cancelling proposed changes to care funding, scrapping infrastructure projects, and introducing a new means-tested winter fuel payment.
However, she warned that these measures would not save enough to account for the full £22 billion and that there would be “difficult decisions ahead” to balance the books.
Reeves reiterated the party commitment that they would not raise taxes on “working people”. This includes Income Tax, National Insurance (NI), VAT, and Corporation Tax.
However, they did not make the same commitments where other taxes are concerned. As a result, there is a chance that they could make changes to Capital Gains Tax (CGT), Inheritance Tax (IHT), or pension tax rules in the future.
While we currently cannot know the specific changes the new government will make, if any, it is useful to be prepared.
Read on to learn three key ways to protect yourself from potential Labour tax changes.
1. Consider the Capital Gains Tax you could pay on your investments
There is much speculation that Labour could change the rate of CGT to bring it in line with Income Tax.
In the 2024/25 tax year, you can earn profits of up to £3,000 from selling or transferring ownership of qualifying assets without paying tax. This is known as your “Annual Exempt Amount”. Any gains that exceed this amount may be subject to CGT at a rate of:
- 10% for basic-rate taxpayers (18% when selling a property that is not your main home)
- 20% for higher- and additional-rate taxpayers (24% when selling a property that is not your main home).
If the government does increase the rate of CGT, you could pay more tax when selling non-ISA investments in the future. Fortunately, there are several ways to potentially reduce the tax you pay.
You might decide to sell investments now, so you pay CGT at the current rate. However, there is no guarantee that the government will increase CGT, and cashing out investments now could mean that you miss out on potential growth in the future. That is why it is important to consider your financial plan and long-term goals before making any decisions.
It could also be beneficial to explore other ways to mitigate CGT. For example, you do not pay CGT when selling investments held in a Stocks and Shares ISA. So, you may benefit from using your full ISA allowance of £20,000 in the 2024/25 tax year before investing elsewhere.
If you do need to sell non-ISA investments, it may be useful to spread the sale across several tax years. That way, you may be less likely to exceed your Annual Exempt Amount, meaning you do not trigger a CGT charge.
You could also transfer ownership of investments to your spouse or civil partner to sell. This allows you to benefit from both of your Annual Exempt Amounts, meaning you may be less likely to trigger a CGT charge.
Considering how you hold and sell investments in this way could protect you against a potential increase to the rate of CGT in the future.
2. Use your pension allowances while you can
On 6 April 2024, the Conservative government abolished the pension Lifetime Allowance (LTA). Previously, this allowance limited the total amount you could accrue in your pensions without triggering an additional tax charge. At last count, this was £1,073,100 but you may have had a higher LTA if you previously applied for LTA protection.
The Conservative government also increased the “Annual Allowance”, the total amount you can contribute to your pension each year without triggering an additional tax charge, from £40,000 to £60,000 in April 2023.
These changes mean that you may be able to make more tax-efficient pension contributions than you could previously. However, when the government first announced the policies, Labour stated they would reverse the abolition of the LTA if they won the election.
During their election campaign, they reversed this decision, but many experts believe that Labour could still change pension tax rules again in the future.
Consequently, you may want to use as much of your Annual Allowance as possible now, in case the government reduces it.
Additionally, if the amount in your pensions is higher than your LTA, and Labour reinstates the LTA in the future, you could trigger an additional tax charge when drawing flexibly from a defined contribution (DC) pension.
To avoid this, you may decide to draw small amounts from your pension now to crystallise your savings. However, this could mean you miss out on potential growth unless you re-invest the funds outside your pensions. In this case, you will need to consider the potential CGT implications.
The government is planning a review of the pensions industry and landscape, and it could take some time before they implement any changes. So, you might want to take full advantage of the tax benefits of your pensions now.
3. Explore options for transferring wealth while you are alive
IHT is another area where the Labour government could potentially make changes to increase tax revenues. In fact, they have already announced plans to end the exemption on assets held in overseas trusts.
The government could also change the tax treatment of pensions after you pass away, meaning they are no longer exempt from IHT. Additionally, they may change the rules around the Business Relief exemption, which makes certain business assets and shares exempt from IHT. Currently, you may be able to mitigate IHT by holding more of your wealth in qualifying assets. Yet, the new Labour government could change the rules and limit the exemptions in the future.
These adjustments could mean that it is more difficult to mitigate a large IHT bill in the future.
That is why you may want to explore options for transferring wealth while you are still alive, so you can potentially reduce the IHT that your family pays.
In 2024/25, the first £3,000 you gift automatically falls outside of your estate for IHT purposes. You can also give a further £5,000 to a child or £2,500 to a grandchild for their wedding without paying IHT.
Any additional gifts may also be exempt from IHT provided you survive for seven years after giving the gift. This is known as a “potentially exempt transfer”.
You might be able to make further gifts using specific exemptions such as the “small gifts rule” or the “gifts from income rule” too.
If you are concerned about potential changes to IHT rules, which could make it harder to mitigate IHT in the future, you might want to consider gifting wealth soon.
However, the rules around IHT and gifting can be very complex and any mistakes could be costly. Fortunately, we can help you find the most tax-efficient ways to pass wealth to your loved ones while you are alive.
Get in touch
We cannot know what changes Labour might make in the future before they are announced, but we can help you prepare, so you can quickly respond to any changes and protect your wealth.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
