State pensioners could be taxed up to £39,080 more in a typical average scenario if they are unfortunate enough to be affected by three key tax changes announced by Labour Chancellor Rachel Reeves today which could realistically be levied on retirees.
Many state pensioners own stocks and shares, buy second homes to rent them out to boost their retirement income and leave pensions in their will, and these three key areas have all been subjected to increased taxes.
A second home buyer who purchases a house worth £250,000 to then rent it out would, from April 2025, pay 7 percent Stamp Duty on £125,000 of the property value.
That’s because there’s nothing to pay on the first £125,000, then 7 percent tax – 5 percent on top of the existing 2 percent rate, because of the extra five percent levy that second home owners will pay – taking the tax bill to £8,750.
Previously, the bill for this would have been zero. This is £8,750 that pensioners will have to pay if they buy a buy-to-let property to rent out for some rental income in retirement.
The amount would be even higher if the property was worth more, although it seems unlikely that you would spend a lot more than £250,000 if you were aiming to rent it out.
Inheritance Tax thresholds will remain the same, but from April 2027, pension funds will be included in the value of someone’s estate for the first time.
Someone’s estate can be £325,000 before tax is owed, and this remains in place. However there are ways to increase that threshold – for example you can include a house, then leave it to your spouse, and there would be no tax on the first £500,000.
But assuming you stick at £325,000, if you left £300,000 to your loved ones but then added another £100,000 pension, previously that pension would have been passed on tax-free.
This would then take the total theoretical estate to £400,000. There is no tax to pay on the first £325,000, but the other £75,000 would be taxed at 40 percent, meaning a £30,000 tax bill for the estate.
The government says about this: “Around 38,500 estates will pay more Inheritance Tax than would previously have been the case. This group are forecast to have an existing average Inheritance Tax liability of £169,000, increasing by around £34,000 on average when pension assets are included in the value of the estate.”
Finally, Capital Gains Tax.
This has been increased for stocks and shares, but not, as some feared, for second homes.
This means that there is no increase in tax owed for pensioners selling their second homes and Capital Gains Tax will continue to be paid as before at the current rate with the same allowance.
However, pensioners who hold stocks and shares outside of an ISA will be liable to pay more tax.
Effectively, if you sell shares, you’ll be charged more on the profits than before.
The government says: “the main rates of Capital Gains Tax from 10% and 20%, that apply to assets other than residential property and carried interest, to 18% and 24% respectively for disposals made on or after 30 October 2024.”
This means that, if, for example, you sold shares and you made a profit of £10,000 on those shares, assuming you’re selling them at the lower rate because you have no other income, you’d pay 18% tax on those profits instead of 10%.
That would mean a bill increasing from £1,000 to £1,800, an increase of £800.
The good news is that the increase to the state pension for a full state pension recipient will see pensioners take home an extra £470 per year.
This means that a pensioner who buys a second home to let it out, who then passes on a pension pot in a typical estate and disposes of shares of £10,000 at the basic rate will lose £39,550 on average, for someone unlucky enough to be hit by all three tax changes in a typical average scenario for each.
Of course, if you don’t do any of those things, you won’t pay the extra taxes at all and you will be £470 up thanks to the Triple Lock.
