The five tax loopholes Rachel Reeves is likely to slam shut

Tax rises in next month’s budget seem inevitable as the government scrambles to fill a multibillion-pound black hole in the public finances. But there are more ways to raise revenue than just increasing the rate of tax, and the removal of some quirky perks and lucrative loopholes in the tax system is certainly on the cards.
The prime minister, Keir Starmer, has warned of a painful October budget and said that those with the “broadest shoulders” should pay the most towards tackling the deficit. But with Labour’s election pledge to not raise income tax, national insurance or VAT — which together accounted for more than £620 billion (57 per cent) of the £1.1 trillion raised in the 2023–24 tax year — the chancellor, Rachel Reeves, will need to find other ways to balance the books.
Here are five tax reliefs that could soon be on the chopping block — saving £11.6 billion this year.
Capital gains tax (CGT) is paid on the profits made from the sale of property (other than your main home), businesses, shares and most possessions worth more than £6,000. Basic-rate taxpayers pay 10 per cent CGT on most gains, but 18 per cent on property. Higher and additional-rate taxpayers pay 20 per cent CGT but 24 per cent on property gains. There is widespread speculation that Reeves could increase the rates so that they match up with income tax, which would mean 45 per cent for additional-rate payers.
But that is not all. She could also scrap a generous relief that reduces the tax families pay when selling off inherited assets.
For assets sold during your lifetime CGT is charged on the gains made since the acquisition. But when assets are inherited, the CGT uplift rule means that their value for CGT is reset at the market value at the date of the owner’s death. Your beneficiaries will not be taxed on the historical gains you made on the asset, solely on its increase in value since they inherited it.
Say a parent bought a £100,000 house which was worth £500,000 when they died ten years later. A child inheriting that property and selling it five years later for £600,000 would only pay CGT on the £100,000 difference, not the £500,000 gain since their parent bought it.
If Reeves removes the uplift rule the child could pay CGT on the £500,000 gain, which, if they were a higher-rate taxpayer, would increase their CGT bill from £24,000 to £120,000.
Arun Advani, a professor at the University of Warwick and a research fellow at the Institute for Fiscal Studies (IFS), a think tank, estimated that abolishing the relief could raise about £1.6 billion a year. “This seems like a no-brainer for Reeves,” he said.
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Inheritance tax (IHT) is typically levied at a rate of 40 per cent on the value of an estate above the “nil rate” allowance of £325,000 (£500,000 if a main home is left to a direct descendant and the estate is worth less than £2 million). Anything left to a spouse or civil partner is exempt from the tax.
Pensions are not included in an estate for IHT purposes. This makes them an incredibly tax-efficient way of passing on money to the next generation.
This quirk has been in place since 2015 thanks to pension reforms made under the Conservative chancellor George Osborne. Changing the rules could raise up to £2 billion a year, according to estimates by the IFS.
Nimesh Shah from the accountancy firm Blick Rothenberg said: “This would be a very easy change to make. But this will likely be deeply unpopular with middle England, those who are traditionally Tory voters, who consider pensions as sacred.”
Shah said a danger could be that people with sizeable pots start withdrawing earlier and giving away the money before they die. “But this could mean that you leave yourself short with not enough to live on later,” he said. “Or it could mean people may choose not to invest in a pension to begin with.”
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Investing on the alternative investment market (Aim) can come with big tax perks. These investments are IHT-free, as long as you have held them for at least two years.
“This is a pretty heavy loophole and it doesn’t seem particularly rational or fair that this type of investment is exempt from IHT while others aren’t,” said Dan Neidle, a tax lawyer and the founder of the consultancy Tax Policy Associates.
“If I were Rachel Reeves, I would 100 per cent close this loophole.”
Neidle estimated that axing the relief would raise £1-1.5 billion a year.
But there is a risk that many people might simply get rid of their investments while they are still alive to avoid any IHT bill. The wealth manager Octopus, which specialises in helping clients invest free from the risk of IHT, is a big backer of Aim firms.
Neidle said: “We know that investors in Octopus’s IHT portfolio collectively hold 1 per cent of the entire Aim market; it’s reasonable to think that about 5 per cent to 10 per cent of the overall market is IHT-driven. What happens to the market if that exemption goes away and that 5 per cent to 10 per cent is sold? If I held Aim shares now, I’d be pretty nervous.”
• Income tax calculator
All gains and interest earned in individual savings accounts (Isas) are tax-free for life — but this relief cost the government £4.9 billion in 2022–23 and is expected to cost about £6.7 billion in 2023–24.
You can save up to £20,000 into Isas each year and there is no limit to the amount you can hold over a lifetime. Neidle said that capping tax relief at £100,000 on money held in these accounts could raise about £5 billion this tax year.
If this happened and you had £500,000 in Isas you could have to pay tax on any interest or dividends paid on £400,000 of your savings at your income tax rate.
But Neidle said any tax raid would be unlikely to be backdated. “People have saved for years into their Isa on the promise of this particular tax treatment and many would see it as hugely unfair to change this. I don’t think the government would do that.”
The Conservatives’ plans for a British Isa, which would have given an additional £5,000 tax-free allowance to those investing in British stocks, have reportedly been abandoned by the government.
This relief offers a lower CGT rate to those selling a business. You pay 10 per cent on lifetime gains of up to £1 million — it was £10 million but Rishi Sunak slashed the cap when he was chancellor in 2020. The relief cost the government an estimated £1.5 billion in 2023–24, according to HM Revenue & Customs.
It only benefits higher and additional-rate taxpayers, who would usually pay CGT at 20 per cent. Basic-rate taxpayers already pay CGT at 10 per cent on profits made from non-property assets.
Furnished holiday let owners also benefit. Without the relief a basic-rate taxpayer would pay CGT at 18 per cent and a higher-rate or additional-rate taxpayer would pay 24 per cent.
Critics have argued that there is little evidence that the relief has boosted entrepreneurial activity. In 2018 the Resolution Foundation, a think tank, dubbed it Britain’s worst tax break, saying that it was too expensive and ineffective. Chris Etherington from the accountancy firm RSM UK said making higher and additional-rate taxpayer business owners pay 20 per cent CGT “could be an easy win for the chancellor, as the relief has come under a lot of criticism. It could be something that could be changed quite easily overnight.”
Saddat Abid is considering delaying the sale of his company if Reeves targets CGT in the budget.Abid, 43, has grown his property-buying firm Property Saviour from scratch and it is expected to turn over £1 million this year.
He has a conditional agreement with an interested party to sell the business in June but as a higher-rate taxpayer, he doesn’t want a 20 per cent CGT bill if business asset disposal relief is scrapped — or to pay CGT at his higher income tax rate.
He was planning to use the proceeds of the sale to help clear his £155,000 mortgage. His monthly repayments shot up from £670 to £1,020 after his 2.43 per cent five-year fixed-rate ended in November 2022. He now has a painful two-year fix at 6.5 per cent.
“I’ve worked hard all my life and have put everything into my business,” Abid said. “Now I’ll be penalised for this with a much bigger tax bill.
“I would probably postpone the sale in the hope that another government comes along that is more pro-business.”