How stock market turmoil may cause another tax receipt hole

Following the recent global stock market turmoil, which wiped billions off global share prices, the Office for Budget Responsibility (OBR) may have been recalculating its forecasts for the public finances. Rachel Reeves has insisted she will stick to her fiscal rules in future budgets, but the significant downgrading of British economic forecasts continues to make this more challenging.

One area in which this will have a particular impact is in inheritance tax (IHT). Rachel Reeves made major changes to IHT in the October budget, and the OBR pointed out in its October 2024 report that it was very difficult to forecast the potential tax receipts attributable to these changes. In particular, it made major caveats to its forecasts on the revenue raised as a result of the changes to IHT on pensions, which it described as ‘particularly uncertain’. 

However, many with a pension pot, large or small, may have noticed with dismay the fall in value of their pension over the past few weeks. Experts have suggested that major downturns have historically been followed by strong recoveries but bear markets can often take two years for the stock market to recover to its previous levels. Events such as this could have a significant impact on the revenue collected by the Exchequer, not least for IHT purposes, where asset values are crucial. The OBR initially forecast that the pension IHT changes would generate additional tax receipts of £640m in 2027/28, growing to £1.46bn by 2029/30. This could be significantly compromised by recent events. A black hole is probably overstating things but Rachel Reeves may feel like she is frequently having to plug leaks in the country’s tax receipts. 

Any holes in IHT receipts will need filling and the same is also true of capital gains tax (CGT) receipts, which were also forecast to grow in line with growing equity values. This comes after the OBR issued data last week showing income tax and National Insurance receipts for 2024/25 were also below forecast. There is likely to be a big jump in CGT receipts in the current financial year, as many transactions were pushed forward ahead of last year’s budget in response to speculation around a rate change at the time. That tax will mostly become payable on 31 January 2026. The risk is whether CGT receipts drop off again sharply afterwards, which is likely to depend on whether the market for selling unlisted businesses in the current tax year catches a cold from the wider economic storm.

Furthermore, the OBR released supplementary information regarding the IHT changes in January 2025, where they described the behavioural response to the pension changes as ‘highly uncertain’. This can be taken to mean that they anticipate individuals could undertake all manner of steps, which could significantly impact the forecasts, and the government could be yet again searching down the back of the sofa for a few more pounds to fill the hole.

How might the Chancellor respond? It is possible that Rachel Reeves could attempt to fill this hole by further restricting pension income tax reliefs available to individuals. These have been restricted significantly over the past decade, but they still cost the exchequer around £30bn every year. Alternatively, she could target the schemes themselves, imposing taxes on scheme investment returns, although that seems much less likely as it could significantly undermine pension saving. Speculation was rife last summer that she may target some of these costly reliefs, but she chose not to do this in October. However, her hand could be forced this autumn, as some of her IHT changes may not raise the tax receipts needed.