Rachel Reeves unveils historic £40bn Budget

Rachel Reeves made history yesterday, delivering the first budget by a female chancellor and marking the first Labour budget in 14 years.Opening her speech, Reeves encouraged girls and young women to break barriers and reach their ambitions. She then addressed and challenged the previous government's economic policies, presenting a bold, far-reaching agenda.

Shifting away from austerity

Amid weeks of speculation, Reeves’s budget promised an end to austerity, focusing on supporting working people, addressing NHS needs, and rebuilding Britain.

Tackling economic foundations

Headlined as "Fixing the foundations of our economy," Reeves acknowledged the need for difficult choices due to a £22bn deficit left by the former government. This led to a "painful" £40bn tax-raising budget designed to stabilize finances, invest in public services, and stimulate growth.

A wealth-based approach to taxation

Staying true to her election promise, the chancellor avoided increases in income tax, national insurance, or VAT for working people. Instead, the focus shifted to wealth-based levies on capital gains, inheritance, and stamp duty on second homes. VAT on private school fees and an overhaul of non-dom status to a residency-based system also featured in the budget.

Changes in capital gains tax

Effective immediately, capital gains tax (CGT) rates have increased: the lower rate has risen from 10% to 18%, and the upper rate from 20% to 24%. Business Asset Disposal Relief and Investors’ Relief rates will be held until April 2025, rising to 14% and then 18% in April 2026.

Stamp duty adjustments for landlords and second homeowners

Landlords and those purchasing second homes will face a higher Stamp Duty Land Tax (SDLT), with the surcharge increasing from 3% to 5% as of 31 October 2024.

Reforming inheritance tax

For inheritance tax (IHT), the ‘loophole’ which had allowed pension pots to pass on tax-free will be closed from April 2027, and the government will reform agricultural property relief and business property relief from April 2026, with a 50% relief on combined agricultural and business assets beyond the first £1m.

IHT thresholds were already due to be frozen until April 2028, but this is now extended to April 2030, meaning the IHT nil rate band will remain at £325,000, and the residence nil-rate band at £175,000, with the residence nil-rate band taper starting at £2 million.

This means each person can pass on a maximum of £325,000 in assets tax free when they die, including shares and property. There is an extra £175,000 allowance when the main home passes to a direct descendant.  If someone is in a marriage or civil partnership, they can leave everything free of IHT to their partner, and when the second partner dies, two allowances are added together when calculating whether tax is due on the combined value of the estate.

Impact on income tax thresholds

While Reeves has avoided increasing income tax for working people, the personal tax threshold freeze from the previous government remains, delaying inflation-linked adjustments and bringing additional revenue to the Exchequer as more individuals enter higher tax brackets.

National living wage increases

A positive development sees the National Living Wage increase by 6.7% to £12.21 per hour, benefiting eligible full-time workers over 21. Other National Minimum Wage rates, including for those aged 18-20 and apprentices, also see substantial rises.

Employer contributions and corporation tax

While corporation tax rates remain stable, employer costs will rise with a 1.2% increase in national insurance contributions, along with a reduction in the threshold for contributions, expected to raise £25bn. Smaller businesses will see the Employment Allowance double to support national insurance contributions.

Redefining fiscal rules for infrastructure investment

The chancellor has redefined fiscal rules to allow increased borrowing, funding capital investments in infrastructure. Using public sector net financial liabilities (PSNFL) as a metric has freed substantial funds for new projects.

NHS and public investment

To combat NHS backlogs and delays, £1.5bn will go to new surgical hubs and scanners, with £70 million allocated for radiotherapy machines.

Additional budget highlights

Fuel duty remains frozen, with an extension to the 5p cut, providing relief at the pumps. Duty on pints in pubs is also reduced. Retail, hospitality, and leisure properties can expect reduced business rates from 2026-27, while new anti-fraud teams will focus on recovering funds from Covid grants, welfare, and tax avoidance.

In summary

This  budget introduced significant structural changes, requiring a major financial commitment. It included much-needed support for the NHS to address waiting lists, but it also places additional cost pressures on employers due to national insurance adjustments.

For individuals with more complex financial situations—such as non-residents, landlords, and those planning to pass on inheritances—this is a time to reassess strategies. Consulting with a professional may be necessary to decide if any adjustments are needed.

On the plus side for inheritance planning, some thresholds and exemptions were preserved, including the ability to make gifts that become exempt if you survive seven years—contrary to expectations of potential cuts in these areas.

Ways to reduce the size of an estate for inheritance tax purposes while someone is alive include making gifts, either into a trust or to individuals.  A gift to an individual made out of capital is not taxed at the time of the gift and will become wholly exempt if you live for seven years after the date of the gift.  A gift into a trust is taxable at the time of the gift if its value is over the nil rate band - though the life-time rate, at 20%, is much lower - and again the value of the gift will drop out of account after seven years.  Gifts can also be made out of surplus income, where someone is able to maintain their normal lifestyle without the cash, or by making use of the automatic allowances, which include an annual exemption to allow gifting of up to £3000, together with a separate small gifts allowance of up to £250 per person.

The full autumn statement is available here

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