It’s countdown time, but unlike the television programme with the same title, the country’s middle classes have 60 days – not 30 seconds (thank goodness) – to get smart and beat some of Labour’s impending tax rises.
Last week, standing in the garden of 10 Downing Street, a sombre Prime Minister warned that households face short-term financial pain as Labour steers the country onto a new course. Those with the ‘broadest shoulders,’ he said, would suffer the most.
Although Keir Starmer refused to reveal how the ‘pain’ would be inflicted, it doesn’t take the IQ of former Countdown presenter Carol Vorderman to work out what he and the Chancellor have up their sleeves – a vicious assault on personal wealth that has not been witnessed in this country for more than 50 years.
Although the Government’s pre-election pledge not to raise rates of income tax, National Insurance and VAT is intact, a tsunami of other tax increases is on the cards. Hikes in inheritance tax and capital gains tax – and a cutback on incentives available to savers who contribute into a pension – are more probable than possible.
The details of Labour’s tax grab will be announced by Rachel Reeves in her Budget on October 30. But as Nigel Green, chief executive of the deVere Group of financial advisers, warns, now is not the time to sit on your hands. ‘Safeguarding your investments against potential tax hikes is essential,’ he says. ‘Don’t wait until the Budget is announced – proactive planning is key.’
Spot on. With that in mind, Wealth has come up with ten smart ideas which you might want to act upon in the run-up to the Budget. They will not suit everyone – and some readers may be best advised to speak to a financial adviser.
Also, not all of Reeves’s tax changes will come into effect immediately – some will bite from the start of the new tax year on April 6, while others (for example, any changes to pension contribution tax relief) could take longer.
Of course, only the PM, Chancellor and Treasury flunkies really know what is heading our way.
Inheritance tax
1 Gift to loved ones
THE value of someone’s estate when they die is potentially liable to 40 per cent inheritance tax (IHT) if it exceeds a nil-rate band of £325,000 – and there is an additional residential band of £175,000 for those who leave their home to their children or grandchildren.
Yet there are a series of ‘gifts’ that people can make now while they are alive which will reduce the value of the estate they leave behind when they die – thereby reducing any potential IHT bill (and mitigating the impact of any punishing hikes in the Budget).
For example, you could make an ‘annual gift’ of up to £3,000 before October 30 (for example, to your children and grandchildren). Higher fees apply to gains from second property sales.
If you didn’t use last year’s annual gift allowance, you could also utilise that before October 30. So, in effect, a couple could potentially pass on £12,000 of gifts – and in so doing take it out of IHT range.
Sarah Coles, head of personal finance at wealth manager Hargreaves Lansdown, says: ‘Giving with a warm hand is better than giving with a cold one. Not only is there an opportunity to save IHT, but you will also be around to see your family benefit from your gift.’
Capital gains tax
2 Utilise your Capital Gains Tax allowance
Currently, £3,000 of capital gains on the sale of shares can be crystallised tax-free this tax year. Surplus gains attract capital gains tax (CGT) – with basic rate taxpayers typically paying 10 per cent (maybe more), while higher-rate and additional-rate taxpayers pay 20 per cent.
While the £3,000 nil-rate allowance could be axed by Reeves, it is more likely that CGT tax rates will be aligned with income tax rates. That would result in a 20 per cent CGT levy for basic rate taxpayers (potentially more) and 40 and 45 per cent respectively for higher-rate and additional-rate taxpayers.
Jason Hollands, managing director of wealth manager Evelyn Partners, says that any CGT rate hike is likely to take effect immediately to avoid people having five months to dispose of shares – and other assets such as businesses and properties – at lower current CGT rates.
So, for investors who have been mulling over selling some of their share portfolio for a while, action before the end of next month may prove shrewd. ‘Shares are easy to sell, so realising gains now may make sense from a tax point of view,’ says Nicholas Hyett, investment manager at adviser Wealth Club.
3 Transfer investments to your spouse
Capital gains tax bills for those selling shares ahead of the Budget can be mitigated by first transferring some of them to a spouse or civil partner.
Such a transfer, known as an ‘interspousal transfer,’ is not a taxable event. Hollands explains: ‘In doing this, a couple can then use two CGT allowances – £3,000 each. Any crystallised gain above the nil-rate band can be realised by the spouse who is the lower rate taxpayer, reducing any CGT bill.’
He says interspousal transfers make sense even if investors are not contemplating selling shares in the next 60 days.
This is because their portfolios will be better set up to counter higher future CGT rates. If you and your partner have accounts with the same broker or investing platform, an interspousal transfer can be easily arranged – just send them a written instruction to reallocate the shares to your husband or wife’s account. Most companies don’t charge for this.
It is important to know that your spouse will become the full, legal owner of any investments switched into their name.
4 Look into Bed and Isa shares
Investors should also consider moving any shares into the tax protection provided by an Individual Savings Account.
This is done through ‘bed and Isa’ – where shares are effectively sold and then bought back inside the Isa. The amount that goes into the tax-friendly Isa counts towards your £20,000 allowance.
Investing platforms provide this service, although they charge for it (the platform Bestinvest levies a £4.95 fee on UK share trades). Investors should be aware that the bedding may incur a CGT charge if the gain exceeds £3.000.
Yet this can be countered by first transferring the shares to a spouse on a lower rate tax band, then selling them and repurchasing the shares within an Isa in the spouse’s name.
Hargreaves Lansdown’s Coles says: ‘Bed and Isa may be a ridiculous name, but it is a sensible approach for those with portfolios stretching beyond Isas.’
As well as the investments transferred into the Isa being CGT-protected, any dividends are tax free. Dividends earned outside an Isa in excess of £500 a year attract tax as high as 39.35 per cent.
5 & 6 Use the Isa allowances
Utalising your annual Isa allowance – £20,000 – is a smart way of avoiding CGT and shielding investment wealth from hikes announced in the Budget.
Says Coles: ‘You might think that saving [on] tax has to be clever and complicated, but for most people it’s straightforward.
‘Isas were designed to help people save and invest tax-efficiently. So use them.’
Investors can also take out a Junior Isa for a child – subject to a maximum annual allowance of £9,000.
Duncan Bailey, a partner at law firm Brabners, says: ‘Junior Isas are an effective way to give while living and in turn help build the financial resilience and future of a child.’
7 Consider CGT-friendly investments
Investments such as Venture Capital Trusts, Enterprise Investment Schemes and Seed Enterprise Investment Schemes are all CGT friendly (and also offer generous up-front income tax relief). But as they invest in early-stage British companies, they are fraught with risk and only suitable for wealthier and more experienced investors.
Given Reeves’s desire to see more money invested in UK growth companies, these schemes are unlikely to be culled in the Budget. But they should only be considered after taking financial advice.
Pensions
8 Put money into one
It is likely the Chancellor will introduce a flat rate of tax relief on pension contributions – thereby ending the advantages higher and additional-rate taxpayers currently enjoy.
They receive 40 and 45 per cent tax relief respectively, compared to 20 per cent for basic-rate taxpayers.
This flat rate relief could be set at 25 or 30 per cent – but it is unlikely to kick in straight away.
At the earliest, it could come at the start of the new tax year on April 6 – but it might be later.
Says Evelyn Partners’ Hollands: ‘The number of people drawn into higher or additional rates of tax has skyrocketed in recent years because of frozen thresholds.
‘These taxpayers should now consider additional pension contributions in case tax relief becomes less attractive in the near future.’
The annual amount (allowance) that can be paid into a pension is currently up to £60,000, depending on your earnings. But Hollands says it is possible to ‘mop up’ unused annual allowances from the previous three tax years – under so-called ‘carry forward’ rules. He adds: ‘Use of carry forward gives someone the opportunity to make a large pension contribution ahead of any possible changes to pension tax relief.’ Anyone thinking about this should take professional advice.
Although basic-rate taxpayers may understandably consider reducing pension contributions until they can benefit from a higher flat level of tax relief, experts are not so sure.
William Stevens, head of financial planning at wealth management firm Killik & Co, says: ‘Pension tax relief is as close to free money as you are likely to get from the taxman. Take advantage of it.’
9 Think twice before taking cash
FINANCIAL experts say some investors are accessing tax-free cash from their pensions ahead of the Budget – for fear that the Chancellor is going to restrict the amount that can be taken.
For some people – for example, those who want to use tax-free cash to pay off a mortgage – it might make sense. But anyone going down this route should seek financial advice.
Mr Bailey, of Brabners, says: ‘Understandably people are worried about losing this lucrative pension benefit. But it’s important to remember that at the moment it’s all speculation. It’s tempting to move quickly, but getting the right advice is key.’
10 Start a pension for a child
Most people are unaware that a pension can be taken out by parents and legal guardians on behalf of a child.
Up to £2,880 can be contributed to a pension each year for a child which will then be topped up by basic-rate tax relief, worth up to £720 a year, resulting in a gross annual contribution of £3,600.
Says Hollands: ‘It may seem bonkers to be saving into a plan that your child will only be able to access when they are retired, but it could be one of the best financial gifts you ever give them.
‘I doubt whether Reeves would have the gall to scrap this.’ Grandparents can also contribute.
I hope you will find some of this tax management advice helpful. The one smart move I haven’t mentioned here, however, is emigration. I will leave you with that final thought.
