3 potential Budget changes and why they matter to your clients

UK chancellor Rachel Reeves is set to deliver the first Budget of the newly elected Labour Party on 30 October.

The Financial Times reports that Keir Starmer has warned it will be “painful”, which many pundits have interpreted to mean there may be significant changes to government expenditure and taxation on the horizon.

In its manifesto, Labour committed to not raising Income Tax, National Insurance, and VAT, but didn’t make any promises about Capital Gains Tax (CGT), Inheritance Tax (IHT), or pensions. This has led analysts to speculate that the government could reform these areas in the upcoming Budget.

Changes to CGT, pensions, and IHT may require your clients to adjust their business or financial plans, making it a good time for them to consult with a financial planner. Moreover, they may also need updated legal advice depending on the measures the chancellor announces in her speech.

Read on to discover three potential changes in the upcoming Budget and why they might matter to your clients.

1. Capital Gains Tax rates could increase

The BBC reports that the chancellor recently refused to rule out changes to CGT, and this has been touted as an area that could be reformed under a Labour government.

In the 2024/25 tax year, individuals benefit from a CGT Annual Exempt Amount of £3,000. Any gains made on the disposal of an asset above this threshold are potentially subject to CGT, with the rate determined by the individual’s Income Tax band.

One possible change in the Budget could involve aligning CGT rates with Income Tax rates, meaning sellers would pay the same CGT rate as their marginal rate of Income Tax.

The current CGT rates (2024/25) are detailed in the table below.

If the chancellor decides to align CGT with Income Tax, clients from every bracket could pay nearly double the amount they would have done previously.

The chancellor could also potentially abolish or reform Business Asset Disposal Relief (BADR).

BADR allows business owners to claim CGT relief on all gains they make on qualifying assets, including the sale of a business, meaning they pay a lower CGT rate of 10%. There is a lifetime BADR limit of £1 million.

If Labour abolished BADR, the cost to business owners could be significant. It may prompt business owners to consider selling shares or making gains now in order to benefit from the current levels of relief. Indeed, you may already have spoken to clients worried about potential BADR changes, who are looking to mitigate any future tax rises.

Further changes to CGT could include:

• Removing the CGT exemption for “wasting assets” such as wine and classic cars
• Removing or reducing the £3,000 CGT Annual Exempt Amount
• Removing the CGT exemption on inherited assets.

So, if your clients are business owners or have plans to sell significant assets such as property, they could benefit from talking to a financial planner before the Budget to ensure they optimise their strategies for CGT and remain as tax-efficient as possible.

2. Various pension reforms are under consideration

The Labour government included a Pension Schemes Bill in the King’s Speech that aims to improve pension scheme efficiency, flexibility, and management. It intends to make it easier to consolidate existing pension pots and to help ensure pension schemes deliver.

Labour has also guaranteed that the triple lock will remain intact for the entirety of the next parliament. A recent report in the Guardian claims this could see the State Pension rise by £400 next year, in line with average earning figures.

The Labour Party did not, however, commit to the Conservatives’ “triple lock plus”. This scheme would have seen a pensioner’s Personal Allowance rise in the same manner as the State Pension. As a result, your clients could end up paying more tax on their retirement income.

When it comes to changing the rules concerning pensions in the upcoming Budget, Labour has several options:

• Reintroducing the Lifetime Allowance (LTA), which restricts the level of pension savings an individual can accumulate before further tax charges are due on withdrawal
• Altering the 25% tax-free lump sum that pensioners can withdraw from their pensions
• Including pensions as part of an estate, making them subject to IHT.

If Labour were to implement such changes, clients may need to adjust their financial and estate plans, potentially requiring both legal and financial advice.

A further option for the chancellor could be to increase the age at which individuals can access their defined contribution (DC) pensions without incurring a tax charge. This is currently set to rise from 55 to 57 by 2028, but the chancellor could increase this to 60 or higher.

There has also been speculation that the chancellor might implement a flat rate of pension tax relief, replacing the current system where relief is provided at the individual’s marginal Income Tax rate. For instance, a flat rate of 30% would increase the tax relief for basic-rate taxpayers but reduce it for higher- and additional-rate taxpayers.

3. Inheritance Tax rates and reliefs could change

Labour has not committed to preserving the current IHT rates, thresholds, or allowances in the upcoming Budget, and these could be revisited.

The chancellor might consider raising the IHT tax rate from 40%. She could also reduce the nil-rate band from £325,000 or the residence nil-rate band from £175,000.

Eliminating the gifting allowance or removing certain other IHT reliefs, such as Business or Agricultural Relief, could be further areas that the Labour Party reforms.

Another potential measure could be the introduction of a “double death tax”. This would mean that inherited assets would be liable for both IHT and CGT if they had appreciated in value. And there could be a move to include pensions in an estate, making them liable for IHT, as you read about earlier.

Any changes to IHT rates and reliefs might prompt your clients to make adjustments to their estate plans. A financial planner can help them navigate these adjustments, ensuring their assets are structured tax-efficiently for both your clients and their future beneficiaries.

Moreover, if your client has an estate plan in place to transfer assets tax-efficiently, they may need to update their Lasting Power of Attorney (LPA) to ensure this transfer continues if the rules around IHT were to change.

Get in touch

As one of the most-anticipated Budget speeches in recent memory, it’s likely your clients will need both legal and financial planning advice to navigate the changing landscape.

Our financial planners can help ensure your clients are well-prepared for any potential impact the Budget could have on their wealth and their long-term personal and business goals. We can also recommend they seek further legal guidance and assistance where needed.

To find out more about how a Forrester Boyd financial planner could help, get in touch.

Email info@fbwealth.co.uk or call us on 0333 1122211.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

This article is for information 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.