Rachel Reeves is reportedly looking to make up to £40billion of tax rises and spending cuts in this month’s Budget as the Government seeks to avoid a return to austerity.
The Chancellor told ministers in a Cabinet meeting on Monday that plans to fill the “£22billion black hole” she has repeatedly cited in the UK’s finances will be enough only to “keep public services standing still”.
The Treasury is understood to have identified a far larger £40billion funding gap which Ms Reeves will seek to plug to protect key departments from real-term cuts and put the economy on a firmer footing.
Sir Keir Starmer has refused to rule out an increase in employers’ national insurance contributions at the Budget but insisted Labour would keep its promise not to raise taxes on “working people”. However, he has repeatedly warned of “tough decisions” to be made when Ms Reeves sets out the plans on Wednesday, October 30.
Despite frozen thresholds and billion-pound increases in inheritance tax takings month-on-month, it’s becoming a key and very “possible” area that Ms Reeves may target.
Experts at the Tax Policy Associates said: “If Ms Reeves isn’t going to break pre-election promises, or opt for radical tax reform, then it’s a matter of scrabbling for relatively small tax increases here and there.”
In terms of inheritance tax, Tax Policy Associates said we “probably will see” the following four solutions.
End AIM inheritance tax relief – around £100million
Firstly, the Tax Policy Associates suggested Ms Reeves may bring an end to AIM inheritance tax relief, which could raise around £100million.
The experts explained: “It’s daft that my estate would pay 40 percent inheritance tax on my share portfolio, but if I move it into AIM shares and live for two more years, there would be no inheritance tax at all.”
They noted that commercial providers sell portfolios designed “solely” to take advantage of this.
However, they added: “AIM yields are currently depressed by market valuations driven by the tax benefit, not fundamentals. This is an unhealthy state for any market to be in.”
Limit business and agricultural property relief – up to £2billion
Most private businesses of any size are exempt from inheritance tax due to business and agricultural property relief.
Tax Policy Associates experts noted that while protecting small businesses and farms “makes sense”, others make less sense, for example, the Duke of Westminster paying almost no tax.
As the Institute for Fiscal Studies (IFS) says these reliefs are costing as much as £2.4billion, Tax Policy Associates say removing them could “fairly be presented as closing loopholes”.
Tax large gifts – unknown
Reducing inheritance tax reliefs could lead people to respond by giving assets to their children.
In this context, Tax Policy Associates said that a very wealthy individual with a substantial private business could transfer ownership to their children, and if they lived for seven years, the business would be exempt from inheritance tax. They noted that while there is already significant tax planning related to gifts to children, this would increase dramatically if Business Property Relief (BPR) or Agricultural Property Relief (APR) were limited.
They also highlighted the current exemption in place for gifts which classify as “normal expenditure out of income“, which enables people with large amounts of investment income to make very large untaxed gifts.
To prevent “difficult compliance and politics”, the experts suggested that this may only be implemented on large gifts, for example, worth over £1million. They explained: “It would raise additional sums, beyond closing any loophole in new APR/BPR restrictions, but how much is hard to say.”
Pensions inheritance tax reform – £100million to £2billion
Beneficiaries inheriting a pension from someone who passed away before age 75 can receive it entirely tax-free. However, if the deceased was 75 or older, income tax is applied, with up to 45 percent deducted for lump-sum withdrawals, or a lower rate if the pension is drawn down gradually.
Tax Policy Associate experts suggested: “Simply applying the usual 40 percent inheritance tax rules could raise about £2billion in the long term, and in some cases, would be a small tax cut for beneficiaries of the over-75s.”
