The £22bn black hole: Will Reeves ‘boldly go where no Chancellor has gone before’?

The UK’s first-ever female Chancellor Rachel Reeves began her mandate with a bang – only two months into the new role and she has already forewarned the country of “painful” and “difficult” decisions ahead of the October Budget.

Prime minister Keir Starmer announced in his speech of the 25 August that his recently appointed government has inherited a “£22bn black hole”, forcing Labour to ask us all to “accept short-term pain for long-term good”.

Starting with the immediate removal of winter fuel payments for 10 million pensioners, he confirmed more “difficult decisions” are afoot.

As wealth managers, we do not have a crystal-ball, nor do we receive advance notice of Rachel Reeves’s agenda. However, as with any Budget, we do have the ability to take an educated guess and predict where we see changes happening.

In Labour’s manifesto, simply entitled “Change”, they lauded the fact their plans were fully costed and that no tax rises were required. They promised “no tax rises for working people”, specifically outlining no rise in Income Tax, National Insurance or VAT.

Fast-forward two months and the smoke seen from the rapid back peddling is almost palpable, with forecasted tax pain for everyone on the cards, working people or not.

In the manifesto there were two glaringly obvious omissions: Capital Gains Tax (CGT) and, to a lesser extent, Inheritance Tax (IHT). Labour’s only comment on IHT was to confirm it will “end the use of offshore trusts to avoid inheritance tax”, mainly targeted at non-doms.

But what about the majority of the UK population who are concerned about IHT on their estate? As history has shown time and time again, silence is never a positive when it comes to taxation promises.

What areas are predicted to change?

• Capital Gains Tax rates are seen by some in Westminster as a benefit for the wealthy, with the rates of 10%/20% literally half that of Income Tax rates. With no mention or promise in the manifesto, this is widely predicted to be the first area of focus, with the “equalisation” of CGT rates to Income Tax levels predicted to generate an additional £8bn for the public finances. There is also the possibility of removing CGT rebasing on death, potentially resulting in double taxation with IHT.

• Inheritance Tax has previously been described by Roy Jenkins, former Chancellor of the Exchequer, as a “voluntary tax” due to the opportunity to avoid it by planning. This tax raised £7.5bn in 2023 which is a relatively low figure, primarily due to families taking planning advice. If Reeves wished to significantly raise this figure, she could impose an immediate tax charge on gifts of a certain size, similar to Chargeable Lifetime Transfers (CLTs), or perhaps introduce a lifetime transfer limit to cap the amount of wealth passed down tax-free.

• Pension contributions are one of the most tax-efficient methods of investing, especially for higher earners. One area which is predicted to be targeted is the level of tax relief allowed for higher earners on contributions made into pensions. At the time of writing, pension contributions generally receive full tax relief. However, there is talk of restricting this relief to basic rate.

Pre-Budget planning: what can be done

Below is a handy list of things that you may want to consider, but as always it’s important to take financial advice to ensure this is the right course of action for you.

Capital Gains Tax

• Use your CGT allowance and carried-forward losses by selling down assets with gains
• Consider “clearing the decks” and selling down all gains, paying 10% and 20% before the rates potentially rise
• This includes Buy-To-Let property, where the rates are 18%/24%
• Consider reinvesting the proceeds into a more tax efficient investment, providing you with more control over the taxation and reporting in the future.

Inheritance Tax

• Consider gifting assets now pre-budget, starting the “seven-year clock”.
• Utilise all available allowances where possible.
• Consider regular gifting from excess income.

Pension Contributions

• Maximise contributions pre-Budget, including Carry Forward where available.
• Consider salary sacrifice, commencing before the budget.

As with all periods of uncertainty, the best results start with planning. Amid such clear signs that the government might make significant changes to tax and pensions rules, now is the time to assess your finances and ensure you’re in the best possible position to weather any adversities.

Please get in touch with a 7IM adviser – we’d be delighted to help.