Rachel Reeves is coming for YOUR pensions, property and savings: How she could bring in a wealth tax by the back door

It’s now clearer than ever that Rachel Reeves is plotting a tax raid on those who have diligently worked to build wealth.

While the Chancellor has ruled out a specific wealth tax in next month’s Budget, she has strongly hinted that she will look to tax ‘assets’ as opposed to ‘income’.

And that has inevitably spooked anyone with property, pensions, savings and investments.

Speaking at the International Monetary Fund meeting in Washington last week, the Chancellor said: ‘I do think that those with the broadest shoulders should pay their fair share of tax, and I think you can see that through my actions last year at the Budget.

When asked how she would define a wealthy person, Ms Reeves said: ‘Wealth is obviously different from income. So, wealth is not about your annual salary.’

But how exactly could the Chancellor target our wealth? And will she just go after the genuinely rich, or are millions of middle-class savers, pensioners and homeowners in her sights?

Here, with the help of leading tax accountants, we lay out the options available to the Chancellor and how likely they are to be part of a disastrous Budget.

Council tax hikes

Reforming existing property taxes has been one of the most openly discussed ways the Chancellor could tax wealth in the Budget. One reason property taxes are on the agenda is that they are hard to dodge, the experts say.

Chancellor Rachel Reeves may target council tax in her upcoming Budget

Toby Tallon, partner at accountancy firm S&W, says: ‘Any time a Government is needing to reach for a lever to raise more money, property tends to be the one they reach for.’

He adds: ‘You can’t move bricks and mortar out of the country.’

New council tax bands for high-value properties could be on the table and those with more expensive homes could see council tax bills shoot up.

Council tax is charged in bands, from A to H, with most homes graded based on their value in 1991. Local authorities set the specific bills within these bands.

Hiking council tax for expensive properties could be done by adding extra levels on top of those existing highest bands.

Alternatively, think-tank the Institute for Fiscal Studies said an extreme move could be to double council tax bills for the top two existing bands, G and H. This would take the average band G and H bill from £3,800 and £4,560 per year to £7,600 and £9,120, respectively.

Tinkering with just the top end of council tax is seen as a more likely option at this Budget than revaluing all bands – which is a mammoth undertaking – but it could pave the way for a full overhaul later down the line.

New council tax bands would provide a cash injection for local authorities and lower the need for them to seek more money from the Treasury.

Toby Tallon, partner at accountancy firm S&W, says there will be a ‘very strong temptation’ to tinker with council tax bands as this would give a cash injection to local authorities

For this reason, Mr Tallon says: ‘I think there will be a very strong temptation to do it.’

‘My hunch is the reason it will be one they go for is that council tax bands have not been assessed since 1991 and the system is ripe for reform anyway.’

Robert Salter, a director at accountancy firm Blick Rothenberg, says any council tax reform could be sold as targeting the rich.

He said: ‘The valuation process for higher-end properties would be time consuming initially and possibly subject to challenges from homeowners. But in ways it would be quite simple to manage from a messaging perspective for the Government, as people basically understand council tax and are, more or less, happy with the system.’

Capital gains tax is charged on profits on assets including shares, investment funds and second homes when they are sold.

In last year’s Budget, the Chancellor launched a tax raid on investors by raising CGT from 10pc to 18pc for basic rate taxpayers, and 20pc to 24pc for higher and additional rate taxpayers.

Investors receive an annual tax-free allowance of £3,000 on capital gains. All capital gains are added to other income to decide your income tax banding – and therefore the tax you pay. So those making substantial profits are likely to end up paying higher-rate CGT.

Some campaigners want CGT rates to be made level with income tax rates, at 20pc, 40pc and 45pc. This would look like an obvious move – but some experts think it is unlikely the Chancellor will have a second bite.

Experts think it is unlikely that Ms Reeves will raise capital gains tax again in her Budget (picture posed by models)

This is because HMRC figures have previously indicated that raising the higher CGT rate by 10 percentage points to 34pc would lead to a £2billion decrease in the tax take by the end of Parliament. The reasoning is that investors will actively find ways to avoid paying CGT.

Meanwhile, the capital gains tax-free annual allowance was already slashed from £12,300 to £3,000 by former Chancellor Jeremy Hunt.

For this reason, Mr Tallon says: ‘If the Government were to use HMRC modelling, I would say it is unlikely they would raise CGT again. I think there’s not much more they could do with CGT in this Budget.’

Capital gains tax at death

The Chancellor could end something known as the CGT ‘uplift’ in the Budget, however.

The uplift rule currently means gains made on the value of any assets in an estate are ‘wiped out’ when they are passed over as an inheritance.

Only inheritance tax (IHT) is charged, if the estate is large enough to incur it. Everyone gets at least a £325,000 tax-free IHT allowance.

Removing the CGT uplift would capture some of the profits made by those whose estates are worth less than the inheritance tax allowance. However, it could mean double taxation for those above it – they will face IHT and CGT in future.

Paul Barham, partner at accountancy firm Forvis Mazars, says: ‘I think it’s possible this is on the Government’s radar, but it would be very difficult to implement.’ 

It would be up to the executor of the estate to calculate the capital tax gain and report it, which would give them even more work to do, he explains. The Treasury, in turn, would also have more admin as a result, as it would have to oversee and verify this process.

Lifetime gifting cap

Inheritance tax was a target in Rachel Reeves’ last Budget. Under changes announced a year ago, unspent pension pots will be pulled into the IHT net from April 2027. Entrepreneurs and farmers also had their exemptions cut.

Lucy Woodward, a partner at accountancy firm Saffery, says that ending gifts from surplus income ‘could be on the cards’

This has sharpened minds, and more families now make gifts to avoid IHT. But there are fears treasured tax-free gifting allowances could now be targeted.

Rules limit what you can give away each year without it becoming liable for inheritance tax. Individuals can give away up to £3,000, as many £250 gifts as they like (but only one per recipient), and up to £5,000 for their child’s wedding.

Gifts above these thresholds are allowed but are only fully exempt from IHT if you survive for seven years after making them.

An exemption gaining popularity is making regular gifts out of surplus income, which are fully exempt immediately. To qualify the gift must be made as ‘normal expenditure’ – so made on regular occasion – and leave you able to maintain your usual standard of living. An example is a grandparent paying private school fees.

Lucy Woodward, a partner at accountancy firm Saffery, says speculation of further changes to IHT includes curbing lifetime gifting rules.

‘Ending gifts out of surplus income could be on the cards,’ she says.

Another way wealth could be taxed is by capping the amount that can be gifted in a lifetime. For example, a cap of £200,000 or £500,000 could be put in place, with tax payable on gifts that exceed the maximum. This is considered unlikely by the accountants, as it would be very complicated to implement and track.

Few people keep track of all the gifts they hand over to friends and family over the years.

The other lever the Chancellor could pull is extending the seven-year rule on gifting to ten years, according to Ms Woodward. This would mean you’d have to live ten years after making the gift for it to fall outside your estate when it’s assessed for IHT.

Gifts you make two years before your death are taxed at 40 per cent, while those given three to seven years before your death are taxed on a sliding scale known as ‘taper relief’.

You would only need to use taper relief if you have already used your tax-free allowance of at least £325,000. 

Extending the seven-year rule to ten years would catch more people in the IHT net.

Pension wealth

The pension tax-free lump sum could be a sitting duck in the Budget, experts say.

Pension pots can be accessed at 55 – rising to 57 from April 2028 – and savers can withdraw 25 per cent tax free, up to a maximum of £268,275.

Some fear the Chancellor could curb this tax-free amount.

Ms Woodward says: ‘It would be easy for the Government to get rid of or reduce the pension tax-free lump sum.’ That is because there is already a cap of £268,275 in place, so any change would involve simply lowering that sum.

The most likely change would be a lowering of the cap. The Chancellor could say savers can still take 25pc tax-free, but only for a maximum value of £100,000, for example.

This would mean that someone with a total pension of £350,000 would still get their full 25 per cent tax-free amount (equal to £87,500), whilst those with a pension fund value of £500,000 would not be able to take their full 25pc, or £125,000, tax-free. The cut-off for getting the full 25pc would be £400,000.

A wealth ‘exit tax’

The very rich often have an international outlook and property and ties across the globe, so leaving the UK is not necessarily a huge leap.

There have been reports of a rush of multi-millionaires leaving Britain for more favourable tax treatment in places such as Dubai and Italy, over the past year. Supercar maker Ferrari last week cited the departure of wealthy individuals as playing a part in deciding to send less new cars for sale in the UK.

If wealthy people leave the UK, the Treasury loses out on most the taxes they would have paid. They are liable for capital gains when they sell UK property, but pay no other capital gains bill if they remain non-resident in the UK for at least five years.

A 2024 report by London School of Economics academics claimed that in the 2023 to 2024 tax year, people leaving the UK cost at least £5 billion in foregone capital gains tax.

It called for the UK to bring in an ‘exit tax’, similar to one already in place in Australia, Germany, the US, and France.

Wealthy people could be forced to pay capital gains on their assets when they leave the UK – likely above a threshold such as £1 million.

One of the authors, Dr Andy Summers, associate Professor at LSE, said: ‘Charging capital gains tax on people who leave the UK is not about punishing them for leaving. It’s simply saying: “you need to pay your bill on the way out”. Most of the UK’s international peers already do this, and there is no reason why the UK couldn’t as well.’

An exit tax could capture some of the wealth of the rich departing and accountants agree the UK is unusual in not attempting to do this.

Mr Barham adds: ‘Other countries have this – and it’s certainly something which is possible in the UK.’