As the 30 October UK budget gets closer, there are signs that concerns about inheritance tax, capital gains tax and other levies are already pressuring people to adjust, such as speeding up transfer of assets and selling stakes in business.

People are speeding up their wealth transfer plans and accelerating the sale of assets to avoid being hit by a squeeze on inheritance and capital gains under the new Labour-led UK government, firms advising individuals about finances say. 

BDB Pitmans recently highlighted that it is widely expected that capital gains tax (CGT) rates – charged on the profit of a disposed asset – will be increased in the 30 October budget. There are fears that inheritance tax (IHT) reliefs will be restricted or abolished and lifetime gifts become taxable.

Shares in the UK's largest banks, notably Barclays, Lloyds and Natwest, fell last week after UK Prime Minister Keir Starmer said on Tuesday that those with the "broadest shoulders" should bear the heaviest burden for filling what Labour says is a £22 billion ($29 billion) black hole in the public finances. 

Client behaviour is already changing, BDB Pitmans said in a note.  

Inheritance tax is charged at 40 per cent above a threshold on the estate of a deceased person, currently set at £325,000. IHT receipts are continuing to grow, driven in large part by frozen nil-rate band thresholds and rising asset prices, continuing the upward trend seen over the last two decades. 

Currently, no inheritance tax is due on gifts if they are made by a person who lives for more than seven years after the gifts were made. Individuals can also claim up to 100 per cent relief on the inheritance of agricultural land if it is being actively farmed. A reason for business property relief on farms, for example, has been avoid the breakup of family-run farms. 

“Individuals are accelerating their estate planning and making gifts now to the next generation, or bypassing children in favour of grandchildren, to ensure the gifts will be tax free, provided the donor survives seven years, and/or are eligible for business or agricultural property relief,” Marilyn McKeever, partner at BDB Pitmans, said.

Another change being planned by the government is the phasing out of the centuries-old resident non-domicile (nom-dom) system, and its replacement by a temporary residence system. Depending on how the inherited wealth of such persons are treated, it could lead to a large outflow of non-doms from the UK and a shrinkage of the tax base. However, some legal advisors have suggested that it could have positive consequences.

Capital Gains Tax
“We are already seeing an impact on client behaviour. Many are selling assets now to lock in the current CGT rate in the expectation that it will increase. In the longer term, clients are likely to be more reluctant to realise investments outside the tax-free environments of individual savings accounts (ISAs) and pension schemes (assuming they remain tax free) resulting in a fall in CGT receipts,” McKeever said.

“These concerns are particularly acute among business owners. There has been speculation that CGT rates may be aligned with income tax rates. Will the lower tax rate of 10 per cent on the first £1 million of entrepreneurial gains survive? In any event, high CGT rates will be a disincentive to entrepreneurs. Why take the risk of investing in a business if nearly half of your gains will disappear in tax?" she added.

Gianpaolo Mantini, chartered financial planner at Saltus, also highlighted how in recent weeks he has seen a marked rise in the number of clients who are coming to him with questions about Capital Gains Tax (CGT).

"This isn’t really a surprise as Labour will be able to point to an Office of Tax Simplification Report that Rishi Sunak commissioned when Chancellor. That report suggested the headline rates of capital gains should be harmonised with income tax. While we can't predict what the exact decisions to be announced in the budget will be, given that this was one of the taxes not ‘ringfenced’ within the Labour manifesto, it is certain that language such as that used by the Prime Minister earlier this week about the budget being "painful" is fuelling concern," Mantini said.

Inheritance tax
“There are also fears that inheritance tax (IHT) business relief will be curtailed. Business relief, and agricultural property relief exist for a reason; without them, businesses may have to be sold, fragmented or wound up on the business owner’s death, damaging the growth of the economy as well as the finances of the family,” McKeever said.

“I have a client who owns illiquid shares in a successful family business which she had intended to pass on to her children on her death with the benefit of CGT exemption and IHT business relief,” she added. “She now has a dilemma: does she give the shares before the budget so as to secure current reliefs but lose a significant income source or does she continue with plan A and hope the reliefs are not withdrawn? If they are withdrawn, the tax is likely to exceed the value of the rest of the estate leaving the children with a large tax debt and an illiquid asset,” she said.

Whatever changes are enacted by UK finance minister, aka Chancellor of the Exchequer, Rachel Reeves, McKeever does not think they will fill the projected "black hole" in UK public finances.

“Even if CGT and IHT are reformed, and despite behavioural changes, do indeed raise more tax, the additional funds are unlikely to fill any black holes. Although IHT receipts are increasing, the Office For Budget Responsibility’s forecast of IHT receipts for 2024-25 is only £7.5 billion and the forecast for CGT receipts is £15.2 billion,” she continued. “These figures are dwarfed by the anticipated income tax receipts of £302.7 billion. The impact of any changes is likely to be modest as regards the tax take, but potentially devastating for those individuals and families who are affected,”

See more commentary here about IHT.