The speeches of the Prime Minister and Chancellor of the Exchequer at the Labour Party conference in Liverpool this week were more along the lines of ‘Getting Better’ than ‘Here Comes the Sun’ (apologies to the Beatles).
Yet while promising no return to austerity (we’ve all had enough of that), long-term national renewal (really?) and the introduction of free breakfast clubs in every primary school in England (a good idea), we are still none the wiser as to what nasties await us in Rachel Reeves’ Budget on October 30.
Especially when it comes to how our hard-earned wealth – from pensions and investments to second homes – will be taxed.
No big clues were given by either Sir Keir Starmer or Ms Reeves in their respective speeches, although tax hikes on wealth are coming our way as sure as eggs is eggs.
When Sir Keir talked about ‘tough’ times ahead in the short term, he paved the way for Ms Reeves to rake in bucketfuls of new tax receipts – buckets filled by the prudent and hard-working who have done the right thing and saved all their lives.
With the clock ticking, Money Mail examines what could be heading our way and what can be done to mitigate the impact of an impending tax grab.
Capital gains
A dead cert in the Budget is a hike in tax charged on gains made from sales of shares and second homes, including buy-to-lets.
Currently, capital gains tax (CGT) on profits from the sale of shares (including investment funds) and personal possessions is 10 per cent for basic rate taxpayers and 20 per cent for higher-rate taxpayers.
On second properties, the respective tax rates are 18 and 24 per cent.
Ms Reeves could increase CGT rates so they are aligned with income tax rates, meaning new charges of 20, 40 and 45 per cent.
However, financial experts believe this would be a step too far. So a halfway house approach may be adopted – with rates rising across the board, but not to the level of income tax rates.
She could also compound the CGT misery by getting rid of the annual exemption which allows £3,000 of profits to be taken free from tax.
Although this exemption was cut to the bone under the Tories (from £12,300 in the tax year ending April 5, 2023), the Chancellor could do away with it.
While such a move could not be introduced until the new tax year, there is nothing to stop Ms Reeves raising CGT rates from October 30.
Jason Hollands, a director of wealth manager Evelyn Partners, says: ‘In 2010, Chancellor George Osborne held an emergency Budget.
Among the measures he took was an increase in CGT from a single rate of 18 pc to a two-rate regime of 18 per cent for basic rate taxpayers and 28 per cent for those on higher tax rates.
That came into effect from midnight following the Budget, so a mid-year change has happened before.’ Scary.
Another radical measure that can’t be ruled out is to charge CGT on gains made from investments held by someone when they die. Currently, no CGT is charged on any gain. If implemented, this would sit alongside any potential inheritance tax liability.
How you can fight back...
For some investors, especially higher-rate taxpayers, it may make sense to utilise their £3,000 annual CGT exemption by taking profits from shares or funds ahead of the Budget.
Simon Rothenberg, at tax adviser Blick Rothenberg, says it might also pay for these taxpayers to take gains above £3,000 and lock into in a 20 per cent tax rate – ahead of an anticipated hike.
He adds: ‘Investors may prefer to accept the 20 per cent tax on their capital gain now rather than face uncertainty.’
For those currently offloading a second home or a buy-to-let, time is of the essence. Elsa Littlewood, a private wealth partner at accountants BDO, says: ‘To avoid the impact of an immediate CGT tax hike on October 30, contracts on a sale would need to be exchanged before that date.’
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.
Mr Hollands explains: ‘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 coming weeks as their portfolios will be better set up to counter future higher CGT rates. It is important to understand your spouse becomes the full, legal owner of any investments switched into their name.
Investors should also consider moving shares into a tax-friendly Individual Savings Account.
This can be done through ‘bed and Isa’ – where shares are sold and then bought back from inside the Isa.
The amount that goes into the tax-friendly Isa counts towards your annual £20,000 allowance. Investing platforms provide this service.
Anyone contemplating ‘bed and Isa’ should understand that the bedding may result in 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.
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.
Pensions
Whenever Budgets loom, the rumour mill on potential cuts to the tax breaks that pension savers enjoy goes into overdrive. This time, it seems the rumours are well grounded: significant changes are on the way.
First, the tax relief on contributions, which currently favours higher and additional-rate taxpayers, could be replaced by a flat rate.
So, rather than receiving respectively 40 and 45 per cent tax relief on contributions, while basic-rate taxpayers get just 20 per cent, Ms Reeves could replace the three rates with a flat rate – 30 per cent, maybe 20 per cent.
The amount of tax-free cash that people can access from their pension – in some cases, from age 55 – may also be curbed.
It is capped at £268,275 and some think-tanks such as the Institute for Fiscal Studies argue it should now be trimmed to the lower of £100,000 or 25 per cent of the pension pot’s value.
Other ideas doing the rounds include cutting the £60,000 annual allowance – the maximum you can contribute into a pension in a single tax year and get tax relief on it.
How you can fight back...
Although flat-rate tax relief may be announced in the Budget, it is unlikely to come in straight away.
Evelyn’s Mr Hollands says such a change would have big ‘implications for both employer payroll systems and pension providers’ – and be ‘nigh impossible to put into immediate effect’. It might not even be introduced until the tax year starting April 6, 2026.
More likely, he says, is a reduction in the £60,000 annual allowance to £40,000 (as it was for the tax year ending April 5 2023). This would probably not come in until the start of the new tax year.
Sarah Coles, head of personal finance at wealth manager Hargreaves Lansdown, says higher earners may want to up their contributions now while they know where they stand.
She adds: ‘We have seen a surge in people maxing out their contributions into self-invested personal pensions (Sipps) – up 71 per cent from the same period last year.’
Those with Sipps, Ms Coles says, do not have to invest their contributions right now. ‘While many will have an investment plan in place, it can help to separate the decision to pay money in, which you can do immediately, from the decision of where to invest. That can wait.’
Any reduction in the cap on tax-free cash would prove controversial because most people who have saved into a pension over many years did so in the expectation of taking 25 per cent of their final fund as a tax-free lump sum. Some, for example, will have earmarked it for paying off an outstanding mortgage.
Those eligible for tax-free cash, and with debts they would like to clear promptly, may wish to do so in the coming weeks – though they should take professional advice.
Inheritances
The Chancellor is expected to launch a tax assault on inherited wealth.
Most of this is likely to be focused on restricting – or ending – the tax reliefs available to families and farmers who wish to pass on their businesses through the generations without being stung by big inheritance tax (IHT) bills.
Yet other allowances could be curbed. The value of someone’s estate when they die is potentially liable to 40 per cent IHT if it exceeds £325,000.
There is also an additional £175,000 ‘residence-nil rate band’ available to those who leave their home to children or grandchildren – for estates below £2million. Experts believe this additional nil-rate band could be reduced or scrapped.
The other move Ms Reeves could spring upon us is to bring pensions into the IHT net. Currently, if you die before age 75 with a defined- contribution pension plan, it is not considered part of your estate.
This means beneficiaries can receive the proceeds free of IHT.
Labour-leaning think tanks such as the Resolution Foundation believe it makes no sense to exempt pension pots from IHT.
How you can fight back...
If you have spare cash available and are worried about your future estate being hit with a big IHT bill, it makes sense to use the various gift allowances available ahead of the Budget.
Rachael Griffin, tax and financial planning expert at wealth manager Quilter, says the £3,000 annual gift exemption is a ‘great place to start’. This allows you to give money to one or more people – for example, children and grandchildren.
She adds: ‘If you didn’t use the exemption in the last tax year, you can also draw on that. In effect, it means a couple can pass on £12,000 of gifts between now and the Budget – and in so doing take that money out of IHT reach.’
For those who want to make additional gifts, they can make a cash gift to a loved one free of IHT provided they live another seven years.
Says Simon Rothenberg: ‘Such gifts are known as potentially exempt transfers. If Ms Reeves was to change the rules on such transfers, it would come in at the earliest on October 30. So people should consider making such gifts in the weeks running up to the Budget.’
Hargreaves Lansdown’s Ms Coles adds: ‘Currently, there’s no limit on how much you can gift under this rule, so there might be a limit introduced. It might also extend the period of seven years before the gift has deemed to have left your estate.
‘If either of these changes were introduced, there would usually be some sort of transitional arrangements, so you might want to get in ahead of the Budget.
‘There’s no guarantee this will protect you completely, but if you were planning to give these gifts anyway, and you can afford to give them, you may have nothing to lose from acting now.’
Other permitted gifts that take money out of the IHT net include small gifts of £250 (per recipient) – and wedding or civil ceremony gifts to a child (£5,000), grandchild or great-grandchild (£2,500) and £1,000 to anyone else.
A final thought
Although Money Mail’s Budget mitigation plan is based on sound, sensible advice, Quilter’s Ms Griffin says that people should not be ‘spooked into a bad decision out of fear of potential changes which might not materialise’.
She adds: ‘Seeking financial advice is key to ensuring you make the best possible decisions for your long-term financial health.’
Absolutely.
