Five key tax talking points before next week’s budget
Ahead of Chancellor John Healey's first budget, speculation focuses on potential changes to taxes beyond the 'big three' of income tax, national insurance, and VAT. Inheritance tax and capital gains tax are under scrutiny due to rising receipts and recent rule adjustments.
Intelligence analysis by Gemini 2.5 Flash
The upcoming budget by Chancellor John Healey is expected to feature significant discussions around tax policy, particularly concerning inheritance tax (IHT) and capital gains tax (CGT). With Labour's pledge not to raise the main income taxes, attention has shifted to other levies that have seen increased revenue and public debate, prompting a detailed look at their current structures…
Imagine the government is like the grown-ups who manage our town, and taxes are like everyone chipping in their pocket money to pay for things like schools, parks, and doctors. This story is about how the grown-ups are thinking about changing some of the rules for two types of pocket money contributions: one when someone passes away and leaves money behind (inheritance tax), and another when someone sells something valuable like a second house or some shares and makes a profit (capital gains tax). They're trying to figure out how to collect enough money fairly, without making it too hard on regular families, especially since the rules have changed a bit recently, making more people pay.
Analysis
As Chancellor John Healey prepares his inaugural budget, the focus on tax policy intensifies, particularly given Labour's commitment to avoid increasing income tax, national insurance, and VAT. This constraint necessitates a closer examination of other revenue streams, with inheritance tax (IHT) and capital gains tax (CGT) emerging as key areas of potential reform or adjustment. The article highlights the growing public and political debate surrounding these taxes, driven by rising receipts and recent policy changes that have broadened their impact.
Inheritance Tax
Inheritance tax has become a contentious issue, with Conservative leader Kemi Badenoch advocating for its abolition, arguing it disproportionately affects 'ordinary middle-class families' rather than just the 'super-wealthy.' While only about 5% of estates currently pay IHT, the sums collected have reached record levels, with £8.5bn in 2025-26 and projections of £14.5bn by 2030-31. This increase is attributed to rising house prices, frozen allowances, and recent rule changes.
The standard IHT rate is 40% on assets above a £325,000 tax-free allowance, which can increase to £500,000 with a residence allowance for direct descendants. Spouses can inherit everything tax-free and combine allowances, meaning a couple can leave up to £1m without incurring IHT. Despite the headline rate, government figures show the average effective tax rate across all paying estates was 13% in 2023-24. A significant change introduced by former Chancellor Rachel Reeves will, from April 2027, include unspent defined contribution pension wealth in IHT calculations, expected to bring 10,500 new estates into the tax net and increase bills for 38,500 others by an average of £34,000.
Capital Gains Tax
Capital gains tax has also become a substantial revenue generator for the government, with receipts surging by nearly 80% in a year to £24.3bn in 2025-26. This tax applies to profits made from selling assets like second homes or investments not held within an ISA. The increase in revenue is partly due to cuts in the annual tax-free allowance by former Conservative Chancellor Jeremy Hunt, reducing it from £12,300 to £3,000.
These allowance cuts have led to a 45% increase in the number of CGT payers, reaching an 'all-time high' of 584,000 in 2024-25. However, HMRC data indicates that nearly half of the tax raised comes from less than 1% of CGT taxpayers, specifically those with gains of £5m or more. The tax is most commonly paid by individuals aged 55-64. Rachel Reeves, in her autumn 2024 budget, increased CGT rates to 18% for basic-rate taxpayers and 24% for higher/additional rate taxpayers, with senior Labour figures now lobbying John Healey to align these rates with income tax rates (20%, 40%, and 45%) to ensure earned income is not taxed more heavily than asset gains.
John Healey's Budget
As John Healey prepares his first budget as Chancellor, the political and economic landscape presents a complex challenge. His party's manifesto pledge to protect the 'big three' taxes means that any significant revenue-raising measures or adjustments to the tax system will likely fall on other levies, with IHT and CGT being prime candidates. The detailed scrutiny of these taxes, including their current impact on different income groups and the revenue they generate, underscores the delicate balance Healey must strike. He needs to address public concerns about fairness and the burden on middle-class families, while also ensuring the government's fiscal stability and funding for public services. The decisions made regarding these taxes will not only shape the immediate economic outlook but also define the Labour government's approach to wealth and income distribution.
Key points
- Chancellor John Healey's first budget will focus on tax changes beyond income tax, national insurance, and VAT, due to Labour's manifesto pledges.
- Inheritance tax (IHT) receipts have reached record levels, projected to hit £14.5bn by 2030-31, partly due to rising house prices and frozen allowances.
- A rule change by Rachel Reeves will include unspent defined contribution pension wealth in IHT calculations from April 2027, increasing bills for many estates.
- Capital gains tax (CGT) receipts surged to £24.3bn in 2025-26, driven by cuts to the annual tax-free allowance by Jeremy Hunt.
- Senior Labour figures are advocating for CGT rates to be aligned with income tax rates to ensure fairness between earned income and asset gains.
The upcoming budget could introduce reforms that simplify the tax system, making it fairer and more efficient, potentially boosting public confidence and ensuring necessary public services are funded without disproportionately burdening specific groups. Adjustments could lead to a more equitable distribution of the tax burden, aligning with public sentiment and fostering greater economic stability.
The proposed tax changes, particularly those affecting pensions or capital gains, could be perceived as an increased burden on middle-income families, potentially stifling investment or leading to public discontent if not carefully managed. If not balanced correctly, the reforms could inadvertently discourage wealth creation or lead to capital flight, impacting the broader economy negatively.
