While there were concerns the UK government’s annual Budget would hit savers hard, the policies announced by chancellor of the exchequer Rachel Reeves avoided the worst fears of some.
Nonetheless, in the Budget there were a number of tax changes which are likely to have a significant impact on investors. These included reducing AIM inheritance tax relief, hikes in capital gains tax, and changes to status of pensions.
20% IHT applied to AIM shares
One of the most significant announcements for investors was the decision to reduce IHT relief on shares listed on the UK’s small-cap AIM stock exchange.
From April 2026,there will be a 20% effective IHT rate on all AIM shares. Previously, under business relief rules holding shares in qualifying listed smaller companies could be fully exempt from IHT if they were held for at least two years prior to the death of the owner.
Reeves said a 50% relief would apply in all circumstances on inheritance tax for AIM-listed shares, reducing the standard 40% IHT rate to 20%.
The move came as a relief to small cap investors who previously feared the government may abolish the IHT AIM relief entirely. In light of this, the FTSE AIM All-Share shot up nearly 4% after the announcement.
Investment bank Peel Hunt had previously calculated that scrapping AIM could cause the total value of shares in the market to fall between 20 to 30%.
You can check out our recent guide on how to invest in AIM through this link.
Capital gains tax hike
Reeves announced capital gains tax for most assets would increase to 18% from 10% at the lower rate and increase to 24% from 20% for higher rate taxpayers.
The changes to the regime, which are anticipated to raise £2.5 billion pounds, also impose significantly more tax on investors and traders who see the value of their assets rise. These can include listed securities such as shares and bonds as well as private holdings.
The raise brings the rates payable on most assets to the capital gains tax rates on property, which are set to stay at 18% for the lower and 24% for the higher band.
The current capital gains tax-free allowance is £3,000 for the r 2024/25 tax year, down from £6,000 in the 2023/24 tax year.
Pensions subject to inheritance tax
Another notable decision was to make inheritance tax (IHT) payable on pensions from 2027. Previously, only income tax was payable on pensions inherited by a nominee, and only if the owner of the pension died after the retirement age of 75.
The change in policy may have a significant impact on how people are advised to structure their estates to minimise their inheritance tax burden.
The government also announced that the £350,000 IHT threshold will remain in place until 2030, not moving upwards in line with inflation. Previously, the threshold was set to be raised in 2028.
With the Office for Budget Responsibility (OBR) forecasting inflation is likely to stay above the Bank of England’s 2% target for the next four years, and house prices continuing their seemingly relentless rise, a much larger number of people are likely to pay IHT in the future.
Still, the Budget did not see a rise in the actual IHT rate, which is 40% on assets above the threshold. The possibility of such a hike had been a source of speculation and concern for many.
Market reaction: Gilts spike on fiscal fears
The reaction by markets to the announcement has been mixed, as investors debate what to make of it all.
Gilt yields initially fell, signifying a rise in prices, as it became clear that the worst fears of punishing tax hikes imagined by the Labour government ’s critics had not transpired. However, yields shot up again to around 4.4% later in the afternoon, the highest interest rate for UK government borrowing since May.
The volatility emerged amid growing concern that there was little fiscal headroom for the Budget, meaning the government may be required to raise taxes again in the near future.
Another factor may have been the OBR’s move to downgrade its projections for economic growth for 2024 and 2025, to 0.8 from 1.1% this year and 1.9% from 2% next year.
Fidelity International fixed income portfolio manager Shamil Gohil noted: “While the Chancellor seems to have struck the right balance between higher tax hikes, higher spending and borrowing to invest in the economy, there are question marks around the fiscal headroom, which looks quite tight, both on the net financial debt rule and current budget surplus, even after easing the rules – overspend is certainly higher than the market expected.”
Robin has more than six years of experience as a financial journalist, most of which were spent at Citywire, and covers the latest developments in the investing, trading and currency transfer space. Outside of work, he enjoys reading literature and philosophy and playing the piano.
You can contact Robin at robin@goodmoneyguide.com
