As Rachel Reeves attempts to plug the Treasury’s £22 billion ‘black hole’ while simultaneously awarding substantial public sector pay rises – there’s a growing expectation that tax increases will feature heavily in her Autumn Statement.

Changes to capital gains tax (CGT) in particular have been at the centre of conjecture. So, we take a closer look at what the impact might be for these potential changes.

We also consider whether inheritance tax (IHT) could be a target for reform. However, it’s important to remember that until the budget is announced on 30 October 2024 – these tax changes remain speculative. Ultimately, the Chancellor will reveal the specific measures required to address the financial gap.

Capital gains tax – are hikes on the way?

On coming to power the Chancellor warned that tax rises are needed – and has since given her strongest indication yet that capital gains tax (CGT) hikes might be on the cards. In an interview with Bloomberg TV, Reeves stated she needs to strike the ‘right balance’ when asked whether Labour will reform CGT at the Autumn Statement. This has added fuel to a fire that was lit after Labour omitted a pledge not to raise CGT in its election manifesto.

As a result, unverified reports have cropped up – suggesting that CGT rates could be equalised with income tax. A move that would propel the UK’s top rate on investor gains to the highest in Europe. While this could make billions for the Treasury, investors with holdings outside tax wrappers and landlords would be hit hard.

How much could CGT raise for the Treasury?

In short, the increase in yearly tax receipts would be considerable. Some studies believe aligning income tax with CGT could raise around £16 billion annually while others put the figure in the region of £12 billion – although these are probably overestimates and don’t factor in changes in investor behaviour. But given the so-called black hole, it’s easy to see why the government may view CGT as an easy and lucrative target.

What’s the potential impact on investors?

In April of this year, the CGT allowance was already cut from £6,000 to just £3,000 (from a high of £12,300 two years ago). The dividend allowance was also halved from £1,000 to £500 this year.

If the Labour government also chooses to bring CGT rates in line with income tax that would mean the UK has the highest top rate of CGT in Europe, knocking Denmark off the top spot. And it would create the strictest tax system on investor gains for almost half a century – they were previously aligned to income tax rates prior to 2008 but that was with indexation/taper relief to prevent inflationary gains from being subject to tax.

There are things you can do to reduce your tax bill

As with the previous CGT changes, there could be a sizeable impact to investors if not managed effectively. So, it’s important to remember there are things you can do to reduce your tax bill.

For now the best approach is to avoid speculation and work with what we know – and to continue making the most of the laws and tax breaks set out under the current tax system. By understanding your exemptions and learning some tax-planning tactics, you can reduce or even avoid CGT. Here are five tips to reduce your tax bill:

1.Fill up your tax wrappers

Making the most of your tax wrappers, such as individual savings accounts (ISA) and self-invested personal pensions (SIPP), is more important than ever. Both ISAs and SIPPs protect any gains from HMRC and shelter dividends from tax, too.

You can invest up to £20,000 into ISAs every year, while you can pay the lower of £60,000 or 100% of earnings, into pensions every year and get income tax relief at your marginal rate – in other words, the top rate of tax you pay, which could be up to 45%. Although, those caught by the tapered annual allowance or money purchase annual allowance may have their annual allowance reduced from £60k down to £10k – so it’s something to watch out for.

2.Use your tax-free exemption

The CGT annual exemption, the profit you can realise every year tax free, has thinned dramatically in the past few years.

However, £3,000 a year is better than nothing, so it’s important to use this allowance where you can. If you have investments in a general investment account (GIA) that aren’t sheltered from tax, it is possible to sell them and immediately re-buy them within a stocks and shares ISA in a process known as Bed & ISA. You just need to ensure you have enough ISA allowance remaining and that the amount you sell doesn’t see you breach the CGT allowance. For larger gains, it may make sense to move the money into an ISA gradually, over a number of tax years.

Alternatively, if you want to boost your retirement finances you can use similar Bed & SIPP planning to move taxable investments into your pension.

3.Team up with a spouse

One loophole is that any transfers to a spouse or civil partner are tax-free, potentially doubling the amount of tax-free allowance which can mitigate or even swerve CGT if the rate of tax they pay is also lower. Just don’t forget to use your £3,000 tax-free annual exemption before switching assets.

4.Consider this pension trick

If a gain trips you into a higher tax bracket, paying into a pension can help to reduce the amount of CGT payable.

This trick will become even more powerful if CGT rates are increased, especially as tax thresholds are set to remain frozen until 2028. It’s also worth noting that you can carry forward any unused pension allowance (£60,000 in 23/24 and £40,000 in 22/23 and 21/22) from the previous three tax years – you’d need to have the earnings to support making a large contribution using carry forward of unused annual allowance.

5.Turn your losses into a gain

It’s useful to know that current or previous losses can also be offset against gains made in the current tax year.

And interestingly, if your total taxable gain is above your £3,000 allowance after current year losses have been deducted, you can carry forward unused losses from previous tax years. If these reduce your gain to the tax-free exemption, you can hold back any remaining losses to a future tax year.

If you believe that the CGT rates are to increase it’s better to delay using carried forward losses until after the rate has changed. That way you could be sheltering gains from tax at maybe 20% or 40% rather than 10% and 20%.

If you’re not sure how best to take advantage of tax exemptions, a financial adviser can help make sure that your money is managed in the most tax-efficient way possible.

Now, onto inheritance tax

In the election manifesto, Labour said almost nothing about IHT, beyond a commitment to end the use of offshore trusts to avoid payment of the tax.

The previous Conservative government had already announced its intention to move the UK from its current domicile-based IHT system to a residence-based one from April 2025, and Labour has confirmed that will go ahead.

This means that once you’ve been resident in the UK for 10 years, your worldwide assets will potentially be liable to IHT if you die. Even if you leave the UK, that liability remains in place for 10 years.

More broadly, uncertainty and speculation as to how a wider IHT overhaul might feature in future Labour plans has been rife. A report published by the think-tank Demos in mid-July highlights the rationale for a more extensive review of IHT – concluding that IHT in the UK needs to be reformed to raise more revenue and to make the system fairer.

There’s also been growing speculation around changes to pension tax treatment on death. At the moment, pension funds on death can broadly pass on free of tax when compared to IHT, which is a flat rate of 40% on assets worth more than the nil rate band of £325,000. So, it’s not out with the realms of possibility that the government would look to tax pension assets on death.

Of course, these possibilities are only speculation at this stage – and it’s very important not to make any rash decisions based on speculation alone. Instead, seek advice if you have any concerns about how this speculation could affect you and your family.

Think about getting advice

Just as the seasons change, so do our circumstances. So, it’s possible that changes to the taxation of capital gains and inherited wealth will be introduced during Labour’s time in power – to what extent we cannot be sure at this stage.

For now, careful planning and working to our current tax system remains key to looking after your wealth, and ensuring that you and your loved ones get the maximum benefit from that wealth in your lifetime and beyond.

If you have any questions about CGT, IHT or making use of available tax breaks, speak to your financial planner.

If you don’t already have a planner, getting professional financial advice can help get your affairs in order. While there’s generally a charge for advice services, this could pay for itself in the long run by way of improved returns on your money, tax savings and, importantly, peace of mind.

Find out how abrdn's financial planning services could help you make the most of your tax allowances.

The information in this article should not be regarded as financial advice. Information is based on our understanding in August 2024. Tax rules can always change in the future. Your own circumstances and where you live in the UK could have an impact on tax treatment.

abrdn Financial Planning and Advice Ltd is registered in England (01447544) at 280 Bishopsgate, London EC2M 4AG and authorised and regulated by the Financial Conduct Authority.