January 2025 monthly update

Read our January monthly update – a roundup of the latest financial news and economic headlines.

Government vows action on growth plan to avoid tax rises

Government borrowing costs hit their highest level in several years recently. In response, Chancellor Rachel Reeves has promised to go “further and faster” to improve economic growth. This is after turbulence in the financial markets saw the cost of servicing the country’s debt rise. Experts now expect that she will bring forward announcements about the Labour Party’s industrial strategy within the next couple of weeks.[1]

Officials claim that Westminster is adamant about avoiding further tax rises; one insider even commented that “it would just be completely disastrous”. Accordingly, governmental departments are braced for potential spending cuts in the upcoming review on 11 June 2025. Labour plans to change the process by which different departments reach a consensus on collective policymaking. They will be asked if a policy will have a beneficial impact on growth and, if the answer is yes, it will (likely) be enacted. During the review process, if departments are pushing policies that are a “drag on growth”, these will have to be “revisited”.[2]

Meanwhile, economists warn that the gilt market sell-off has exposed serious weaknesses in the government’s economy and public finances strategy. One of the main criticisms is that Labour failed to build in a sufficient margin for adverse changes into the 2024 Autumn Budget, and for being slow to detail their economic improvement initiatives.[3]

“The government desperately needs to bring forward a growth plan,” said a senior Labour MP. “That’s more important than ever for businesses which are facing higher national insurance, a new package of employment rights and a higher minimum wage.”[4]

EU open to UK joining pan-Europe customs scheme

As part of “reset” discussions between Britain and the European Union (EU), the EU’s new trade chief, Maros Sefcovic, believes that a “pan-European [customs] area is something [the EU] could consider”. In this idea, the UK could join the Pan-Euro-Mediterranean Convention (PEM). These are a set of common rules allowing parts and ingredients for manufacturing chains to be sourced from many countries in Europe, the Middle East, and North Africa. The advantage here being their use in tariff-free trade.[5]

A country qualifying for tariff-free access to the market is judged on the rules of origin in trade deals. As such, exporters must demonstrate that their products are adequately locally made (typically, around 45%). Britain has already agreed to such rules under the EU-UK Trade and Cooperation Agreement. Therefore, joining PEM would allow UK companies to use inputs from member nations in their supply chains to export goods into the EU without tariffs. Although, this would not affect other red tape such as veterinary certificates, licences, and select compliance documents.[6]

Former UK trade official, David Henig, thinks PEM would make a difference to manufacturing sectors with broad supply chains. Examples would be cars, chemicals, and the food industry. “It allows you basically not to worry about sourcing bits and pieces from around Europe, combining them and sending them around the region,” he said. “There’s really very little downside to it.”[7]

Whilst discussions are at an early stage within the government, it is “something we are open to looking at,” said Douglas Alexander, a trade minister. “We want to take a pragmatic view on where the national interest lies.”[8]

More families gifting money over fears of IHT changes

According to tax advisers, more and more wealthy individuals are gifting their money to family members. This has been driven by concerns that Chancellor Rachel Reeves could enact further changes to Inheritance Tax (IHT) rules. Statistics show that the government gained £6.3bn in IHT receipts between April and December 2024. There are worries that the Labour Party could make the tax more punitive in 2025 to increase this revenue stream.[9]

Under current rules, IHT does not apply at 40% to gifts unless the benefactor dies within seven years. Nimesh Shah, Chief Executive of accountancy firm Block Rothenberg, believes that this rule is “now up for grabs” and “seems to be the next target”. He commented: “you could widen it to 10 years. Inheritance Tax is now at the fore of concerns.”[10]

Furthermore, with recent changes to pension legislation, more individuals face the prospect of their estates falling within the scope of IHT over the next decade. For instance, unused pension funds will be included in estates from April 2027 – subject to the standard 40% IHT rate.[11]

“Many people hesitate to gift during their lifetime, leaving their estates subject to significant IHT charges,” said Ian Cook, of Quilter Cheviot. “If the tax rules do become more punitive, the cost of inaction could mean a larger portion of their wealth going to the Exchequer.”[12]

If you believe that you could be affected by potential changes to pensions and IHT, a financial planner can help you mitigate your tax liability.