How Rachel Reeves could clobber the middle classes with a wealth tax sneaked through the back door: Money experts reveal what every family and pensioner must know now

Fears are mounting that middle-class families could face a devastating tax raid on their wealth as Rachel Reeves scrambles to find a way to fill the hole in the nation’s finances.

The Chancellor last week refused to rule out a new wealth tax, while only promising that protections will remain in place for ‘working people’.

Even if Reeves doesn’t enforce a standalone wealth tax – which would be highly controversial – there is now a strong likelihood that she imposes taxes on wealth more stealthily, for example, by increasing levies on investments, savings and pensions. If she goes down that route it is inevitable that ordinary families will be stung – not just the affluent.

Here’s what she could do – and how it could affect you.

Why is a new tax on wealth on the cards?

The Chancellor is in a bind. She set herself a rule that everyday Government spending will be paid for by tax revenues rather than taking on debt – and she doubled down on that ‘non-negotiable’ fiscal rule in her Mansion House speech last week.

But recent U-turns on axing winter fuel payments and cutting welfare make balancing the books increasingly challenging.

Unless Reeves finds savings elsewhere or raises taxes, she risks blowing a hole in her ‘rules’ come the Autumn Budget.

Labour’s manifesto ruled out increases in the main revenue raisers of income tax, National Insurance, VAT and corporation tax, so the money will have to come from elsewhere.

All eyes are on accumulated wealth, as the party also pledged it was committed to the wealthiest paying their ‘fair share’. Former Labour leader Lord Kinnock suggested imposing a 2 per cent tax on assets valued above £10 million, and other supporters of a wealth tax have chimed in.

Would a wealth tax work in practice?

A wealth tax is not a new idea. It was first explored in 1974 and again in 2020 by the independent Wealth Tax Commission, but recently it has been floated by charity Oxfam and Left-wing campaigners such as trader turned bestselling author Gary Stevenson.

In practice, it would be an annual levy on all net assets – including property, investments and savings – imposed on anyone with wealth above a certain threshold.

It could be a fixed rate or tiered according to the amount of assets that you own.

A wealth tax might seem like an easy way to raise cash, but much of the gains could be wiped out by deterring the wealthy from living in the UK, as well as the financial burden of administering.

A recent survey by wealth manager Saltus found that 28 per cent of high-net-worth individuals say they are either definitely leaving the UK permanently in the next 12 months or considering it in the face of tax changes.

So what could Rachel Reeves do instead?

If the fear of rich residents taking flight from the UK deters the Chancellor from bringing in a wealth tax, she could stage a raid in various other ways.

Capital gains

This is a tax levied on profits made when you sell assets such as shares or property other than your main home.

Reeves hiked capital gains tax (CGT) rates in her first Budget last autumn, from 10 to 18 per cent for basic rate taxpayers, and higher rate taxpayers now pay 24 per cent, up from 20 per cent.

CGT has traditionally been applied at lower rates than income tax, because profits tend to be made by people taking risks.

However, campaigners have called for it to be raised in line with income tax rates, which would see the wealthiest paying 45 per cent on the profits of their assets.

The Institute for Fiscal Studies (IFS) has previously warned that higher CGT rates ‘would increase the incentive for people to leave the UK before realising gains to avoid UK CGT’.

Alternatively, the Chancellor might consider changing how capital gains are treated after death.

Currently, CGT liability effectively ends when an individual dies. Inheritance tax is then charged depending on the value of the total estate.

However, this could be changed so that CGT is charged either when assets are sold on someone’s death, or when they are eventually sold by their beneficiary.

Council tax

Households are facing higher council tax bills after the Government gave the green light to some councils to increase rates by as much as 9 per cent in April. But Reeves could go further still.

Campaigners have long called for changes to the system, which is still based on the value of house prices in 1991, two years before council tax was introduced.

For example, in Westminster, a Band H property – worth over £320,000 – currently pays £2,034 a year in council tax. A house in the same band in Bishop Auckland, Durham, pays £4,279.

It is unlikely that Reeves will tackle wholesale reform of the system, mainly because it would involve revaluing every single home and be hugely controversial.

She could, however, introduce higher bands or bring in a minimum average council tax band that others are based on, driving up costs in areas with lower bills.

Inheritance tax

Reeves could extend the seven-year rule to ten years, which would catch more early inheritance gifts in her net.

Currently, no tax is due on any gifts you give if you then live for another seven years.

If the Chancellor wanted to discourage wealth being passed down without it falling into the tax net, she might change the gifting rules.

This could mean the gifting allowance is cut from its current level (albeit as it has not shifted since it was introduced in 1986, it is already considered stingy!). Individuals can give £3,000 annually and make unlimited individual small gifts of up to £250 per person without risking an inheritance tax bill.

Reeves is also bringing pensions into the scope of IHT from 2027. This is likely to add thousands of pounds more in tax to middle-class families who inherit unspent pensions from relatives.

Income tax thresholds

The Chancellor could further tighten the screws on income tax – without changing the headline figures – by keeping the thresholds at their current level.

The freeze on thresholds since 2021, which was introduced by the previous Government, is in itself a huge stealth tax raid, as more and more people are gradually pushed into higher tax brackets by wage inflation.

The real value of the £12,570 tax-free allowance has therefore fallen and more people are dragged into paying income tax.

 Similarly, keeping the higher rate threshold at £50,270 has pushed more people and a bigger portion of their earnings into the 40 per cent bracket. Latest figures show an extra 680,000 workers were pulled into the 40 per cent tax bracket in 2023, bringing the total to five million.

Under current plans, as the freeze continues, this is expected to soar to nine million by 2028.

Prolonging it two more years could make it ten million – double that of two years ago – according to independent economist Julian Jessop. And Reeves could honour her commitment to keep income tax at the same level – as per Labour’s election pledge – but push more people into paying more tax.

Pensions

These are a major source of personal wealth, making them a prime target for the Chancellor.

There is ongoing speculation about the reintroduction of the pensions lifetime allowance (LTA), which would limit the total amount that savers could put in a pension and benefit from tax relief. A leaked memo from Deputy Prime Minister Angela Rayner’s department called for the allowance to be reinstated. It was previously £1,073,100, after which a tax charge of up to 55 per cent was applied.

However, some experts think it is unlikely that the LTA will be resurrected, mainly because of the impact on those with large NHS pensions – the higher tax charges pushed more doctors and consultants into early retirement.

Alternatively, the Chancellor could reform pension tax relief to make it less generous overall. Currently, pension contributions are free of income tax, so for every £80 a basic rate taxpayer pays into their pension, the taxman tops it up to £100. Higher rate taxpayers only have to pay in £60 for the taxman to top it up to £100. She could, for example, introduce a flat rate of tax relief at 20 or 30 per cent, which would not affect basic rate taxpayers, but would see higher and additional rate taxpayers receive far less than they currently do.