The Guardian had the scoop about the rise in CGT before the October 2024 Budget and may have just scored another one here. Their source in the Treasury, either a leaker or someone deliberately testing the waters, has briefed that Rachel Reeves is looking at further increases to Capital Gains Tax and Inheritance Tax. This is depressing but not surprising as the deficit seems to have ballooned from £22bn to £40bn and she seems allergic to tackling the deficit by reforming the big taxes such as income tax, national insurance, and VAT.
Further CGT changes were perhaps to be expected as the rises last October from 10% to 18% and 20% to 24% seemed generous to higher rate taxpayers who had a 20% increase in their tax rate, unlike basic rate taxpayers who had an 80% increase. An increase in the top rate of CGT from 24% is perhaps to be expected and perhaps finally a move to bring private equity carried interest from CGT to Income Tax.
The proposed Inheritance Tax reforms though could well be impossible to introduce and actually reduce the tax taken in this parliament (surely not what RR wants).
The talk is of the Treasury being worried about the retired drawing their pensions and giving this money away to their kids to avoid the IHT that they applied to pension pots from 2027. There are various ways to do this but basically it would involve putting some kind of limit on the amount you can give away.
Impractical
Firstly, there is the issue of how you implement a limit on gifts. If you impose a lifetime limit, then you are relying on individuals to record all their giving. How good are the records going to be of someone who starts giving major sums when they retire at 60 and then dies at 95? How can the executors be expected to account for 35 years’ worth of giving? Would they be required to check through 420 monthly bank statements to check money movements? Would the new gift allowance ignore gifts made before this next budget therefore creating a two-tier system? Also 35 years is a long time in tax policy and how likely is it that these rules will remain in force.
Costly for HMRC
Inheritance tax takes along time to collect as RR is waiting for people to die before seeing the increased tax revenue roll in. Income tax changes on the other hand bring the money into the Treasury coffers immediately.
What is the impact of the proposed changes to charge IHT on pensions?
Well as the Treasury say and the Guardian report, people are starting to draw their pensions out aggressive and give this money away. The Treasury source quoted in the article called this a ‘concern’. What the article doesn’t say is that by drawing down on these pensions now, the Treasury will receive a major boost to income tax revenues. This is because anyone with a large enough estate for this to be a problem has a large pension pot and in a lot of cases will be drawing down at an income tax rate of 40-45%.
Imposing a gifting limit stops these pension withdrawals happening, reducing the income tax take in this parliament and possible increasing the inheritance tax take in the next parliament or the ones that follow.
Logically it makes no sense for a chancellor to bring in a reform that reduces the short-term tax they collect from the last reform they put through and haven’t enacted yet.
But when did we last see a logical tax reform from a chancellor of any party?
If you want to discuss inheritance tax and your planning options, do get in touch with our head office in Hook, Hampshire.