OBR error almost overshadows most anticipated budget in years

The accidental publication of the content of the budget by the Office for Budget Responsibility (OBR)  nearly made more headlines than the content of Labour’s much-anticipated budget which threatened fireworks and delivered ‘no return to austerity’ and a promise ‘the wealthiest will contribute the most’ to filling the gap in the public finances. 

After weeks of speculation and after taking the almost unprecedented step of making her ‘scene-setting’ speech, chancellor Rachel Reeves did not break the manifesto promises of no increase to income tax, national insurance or VAT. Nor was there any amendment to caps on lifetime gifting or changes to the taper rate.

Private client professionals may breathe a collective sigh of relief. Despite a further freeze of the Inheritance Tax (IHT) exemptions until 2031, which sees the nil-rate band unchanged for 22 years, the main change to IHT is a surprisingly positive one said  James Ward, Head of Private Client at law firm Kingsley Napley

“The introduction of the transferable business and agricultural nil rate band between spouses and civil partners will go some way towards lessening the “farmer’s tax”. This will particularly benefit widows whose spouses died pre-April 2026 and give them an additional £1 million exemption.”

It is, added Paul Fairbairn, Head of Private Wealth at Cripps, a ‘step in the right direction.’:

“The changes will spare many families unnecessary asset restructuring and will allow them to pass up to £3.3 million of business or farming assets to the next generation. It corrects what many viewed as an unfair anomaly and marks a rare instance of the government listening to public outcry and diluting a legislative change.

“However, it will not undo the fact that many such businesses will now be subject to inheritance tax for the first time ever, which in turn will have a significant impact on their ability to grow and generate wider economic activity. Given the relatively modest revenue this reform is expected to generate, it is a shame that the Chancellor has not acted more emphatically.”

The freeze will see IHT receipts rise to as much as £14.5 billion per year by 2030/31 predicted Rachael Griffin at Quilter, with the government accused of ‘cashing in’ on an ‘ever-expanding pool of taxpayers.’

As far as pensions are concerned the Chancellor confirmed the state pension will rise by 4.8% from April next year in line with the triple lock. But she acknowledged the government is looking at how to ease the administrative burden for pensioners whose sole income is the basic or new State Pension as the freeze in income tax thresholds means it is likely the full new state pension will breach the threshold for basic rate tax in 2027.

The previously announced inclusion of unused pension funds in IHT calculation, alongside the reduction in the ISA allowance to £12,000 for under 65’s will discourage long-term saving warned Louise Lewis, Partner and Joint Head of Trusts, Estates and Tax at  Freeths:

“Lower ISA limits reduce flexibility for tax-efficient investing, while bringing pensions into the inheritance tax net makes retirement planning more complex. Together, these measures send a signal that saving for the future is becoming less attractive.”

James Dean, Pensions Partner at the same firm added:

“The decision to cap salary sacrifice contributions to pension schemes will be incredibly unpopular across the pensions industry. Introducing this measure from 2029 risks sending the wrong signal at precisely the wrong time. With many people already struggling to save enough for their retirement, this policy could hugely discourage pension savings and undermine long-term financial security. Rather than incentivising individuals to build adequate retirement pots, it risks creating further barriers to saving.”

It could also lead to life insurance emerging as an ‘increasingly practical tool’, as pension rules continue to develop suggests Sam Grice, Founder and CEO of Octopus Legacy. People may be unsure how to best financially prepare for the future. ‘Interestingly, we may now see an uptake in life insurance policies. Cover can be set at a fixed value, placed in trust, and paid out quickly upon death or critical illness. This means families may have more certainty regarding what will be available to them, and in which circumstances.’

The rumoured overhaul of the stamp duty system failed to materialise, as did the unpopular suggestion that the highest council tax bands could be doubled. Only the proposals for the mansion tax made it into the chancellor’s measures, with a surcharge to be introduced on properties worth more than £2 million.

From 2028, an annual ‘high value council tax surcharge’ of £2,500 for properties worth between £2-5 million and £7,500 for properties worth over £5 million will be collected through the council tax system. Outlining the changes, which will affect less than 1% of properties and are set to raise over £400 million by 2031, the chancellor said a council tax band D home in Darlington or Blackpool is liable for £2,400 in council tax – ‘£300 more than a mansion in Mayfair’.

Sharing her plans for ‘a fairer system’ that would ‘cut the cost of living’, the chancellor announced a two percentage point increase in the basic and higher rate of tax on property income: ‘A landlord earning £25,000 a year will pay less in tax than tenants earning the same amount’, she pointed out.

The increase will also apply to savings and dividends, with the increase estimated to raise £2.1 billion. “Around 90% of taxpayers will pay no tax at all on savings”, the chancellor stressed, adding:

“I will ensure that the wealthiest will contribute the most.”

The legal sector as a whole will be pleased to see the rumoured tax on limited liability partnerships (LLPs) didn’t materialise either. The Law Society of England and Wales said it was pleased the government had listened to its concerns. Law Society president Mark Evans said

“The Law Society has been lobbying the government on behalf of our members to ensure that firms using LLPs will not face a new tax in today’s Budget. Leaders from across the professional services sector came together this month to write to the Chancellor to warn against such a measure and how damaging it would be for the UK economy.

“The legal sector is already contending with major regulatory changes in anti-money laundering and compliance. Any additional burdens would have created a perfect storm on firms’ ability to invest, hire, and contribute to growth, which could prove damaging to the wider economy.”

One inclusion of note for the law was the sizeable reduction in Capital Gains Tax (CGT) relief on Employee Owned Trusts (EOT); a route a number of firms have undertaken in recent years. Currently there is a 100% exemption on CGT. The budget will reduce that in half so there will now be only a 50% relief. But it may not completely put people off exploring them said Christian Wilson, partner at law firm Spencer West LLP:

“Halving the capital gains tax relief on sales to employee ownership trusts will likely cool momentum in the short term. It raises founder tax costs, squeezes headroom for deferred consideration and is likely to bring seller price expectations closer to independent valuations. That said, EOTs remain a robust succession route for good businesses because they preserve culture, jobs and independence; it’s not just about the tax. The added advantage of creating your own buyer and softer due diligence remain unaffected.”