On Wednesday 30th October, the Chancellor of the Exchequer, Rachel Reeves, delivered her first Budget.
Heavy speculation and rumours were present in the run-up to the Budget which would have been of particular interest to investors, pension savers and retirees.
But many of the rumours did not come to fruition.
We’re exploring the changes to Capital Gains Tax and to Pension Inheritance Tax, which did.
The landscape may continue to change as the industry adjusts to the new tax rules, so some information in this article may change. We will keep updating, if and when this happens.
Capital Gains Tax Changes in the Autumn Budget
For readers in a rush:
- Capital Gains Tax rates have increased from 10% to 18% for basic rate taxpayers
- Capital Gains Tax rates have increased from 20% to 24% for higher rate taxpayers
- The Capital Gains tax-free allowance remains at £3,000
Capital Gains Tax rates have changed with immediate effect.
This means from 30th October 2024, anyone disposing of assets, and making a gain from them, will be taxed at either 18% or 24% depending on their rate of income tax.
Everyone has a Capital Gains tax-free allowance. This is currently set at £3,000 and is not changing. You don’t pay any tax on assets you gift to your spouse or civil partner. But they might have to pay tax if they sell those assets later on.
You can make a gain on any assets, including shares held in an Investment Account, or residential property. When you sell these assets, the amount of tax you’ll pay on your gains depends on your income tax rate.
For higher or additional rate taxpayers, from 30th October 2024, you will pay:
- 24% on your gains from residential property
- 24% on your gains from other chargeable assets
Capital Gains Tax is calculated differently for basic rate taxpayers. And involves a bit of personal accounting. Here’s how to do it:
Step 1: Total up your income and minus your Personal Allowance from it. The standard Personal Allowance is £12,570, but yours might be different, so it’s best to check your tax code.
Step 2: Work out the total amount of your taxable gains.
Step 3: Take your £3,000 Capital Gains tax-free allowance and minus it from your total taxable gains.
Step 4: Take the sum you’ve calculated in step three and add it to your taxable income.
Once you have a final number, if it falls within the basic rate tax band (from £12,570 to £50,270), you will pay 18% on your taxable gains. But adding your taxable gains to your taxable income, might push you into a higher tax bracket. If that's the case, you will pay 24% on any gains that fall into the higher tax bracket.
Remember, these changes have immediately come into effect.
But any gains you make in a personal pension, or a Stocks and Shares ISA, are exempt from capital gains tax.
Pension Inheritance Tax rules in the Autumn Budget
For readers in a rush:
- Unused personal pension amounts will be part of your estate when you die and may be liable to Inheritance Tax (IHT).
- The change will come into effect from 6th April 2027.
- The Inheritance Tax nil-band rate (£325,000) and the residence nil-band rate (£175,000) remain fixed until 5th April 2030.
Currently, pensions are not a part of the value of your estate. But from 6th April 2027, any unused pensions could be, depending on your personal circumstances.
This means, if you have taken some of your pension pot/s, but you haven’t accessed all of your pension benefits, any pension pots or funds remaining may be subject to IHT.
The government estimates that out of 213,000 estates with an inheritable pension included between 2027 and 2028, only around 1.5% (or 10,500 estates) will be liable for Inheritance Tax. Where this tax would previously have not applied.
Here’s some background on Inheritance Tax.
When we say the ‘estate’, we mean any property, money and possessions, of someone who has died.
There’s usually no Inheritance Tax to pay if the total value of your estate is below the “nil-rate band”. This means the first £325,000 of your estate is tax-free. Anything above this amount could be taxed at 40%. However, any assets left to your spouse or civil partner, or to a charity, won’t be liable for any Inheritance Tax.
If you leave your main residence to your ‘direct descendant's ie. children (including adopted, foster, or stepchildren), or your grandchildren, there is also an additional nil-rate band available. This is known as the ‘residence nil-rate band’ (RNRB). The maximum RNRB is currently £175,000 but the amount of RNRB available is limited to the value of the home that is left to the direct descendants.
This means your total threshold before paying IHT could increase to up to £500,000 . This is your nil-rate band of £325,000 plus your RNRB of £175,000. Both these thresholds have been frozen until 6th April 2030. For spouses or civil partners, this could add up to £1million before Inheritance Tax needs to be paid.
There are different reliefs and exemptions that may be available to you if you gift some of your estate whilst you are alive. Find out more about Inheritance Tax Link opens in a new window .
How will pensions be treated as part of your estate?
From 6th April 2027, any unused pensions will form part of your estate and will become liable for Inheritance Tax.
If you die before aged 75, there is no income tax for beneficiaries to pay on your unused pension, subject to the pension allowances outlined below. But if you die aged 75 or over, the beneficiary will pay income tax at their marginal rate when they access it. The rate the beneficiary pays may also change depending on how they choose to take any of the inherited pension benefits.
Current pension allowances to keep in mind
Changes to pensions were reasonably modest in the Budget. But here’s a quick reminder of the pension restrictions when accessing your pensions funds in the 2024/25 tax year.
The maximum amount you can take from your pension savings as a tax-free lump sum is 25% up to a limit of £268,275. The remaining 75% of your pension, and any lump sums above the limit are charged at your marginal rate of income tax.
The maximum lump sum you, or your beneficiaries, are able to take and receive, tax-free, if you were to die or suffer from serious ill health under the age of 75 is normally £1,073,100 for most people. After this, any lump sum payments made during your lifetime, above this amount will be taxed at your or your beneficiary’s marginal income tax rate.
The future of pension inheritance
Although the changes announced to pension inheritance in the Autumn Budget could impact more estates, it’s important to remember these changes won’t come into effect until 2027. This will give pension savers and retirees time to consider what is best for them when it comes to their pension and their entire estate.
The tax landscape will continue to take shape over the coming weeks. More clarity and understanding of how unused pensions will be taxed will take place. For now, customers are reminded, as always, a calm and measured approach to their finances, is often the best one.