Box clever and tune out noise over Budget
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Speculation is rampant about what the Chancellor will announce on 30 October. This has already provided lots of fun for those who like to speculate and this party will last another month.
We, however, are in the business of advising our clients based on what we know. So I’ll go ahead and give the punchline to this article right away – keep calm and carry on. Have confidence in your plan and its long-term viability. Don’t do anything hastily. Speak to an adviser about your concerns and circumstances.
In the personal finance sphere, rumours have coalesced around three main areas of concern: Capital Gains Tax (CGT), Inheritance Tax (IHT), and pensions may see rises or the removal of reliefs. Changes here have grabbed headlines largely because they can also be viewed as cash-grabbing schemes, if that’s your political standpoint. The rumoured initiatives are in line with Labour’s speaking to younger, working people, in contrast to the Conservatives’ focus on older voters.
Amidst the noise, it’s important to remember that the detail of any change in these areas may be announced as policy with immediate effect on Budget Day, measures may begin at the start of the next tax year on 6 April, 2025 or later.
It seems probable that some kind of increase in CGT is on its way. This is paid on any profit resulting from the sale of property (apart from your home), businesses, stocks, and possessions valued over £6,000 (apart from your car). CGT is currently assessed by your income tax band, with a £3,000 annual allowance, then basic rate payers paying 10 per cent (18 per cent on property) and higher and additional-rate taxpayers paying 20 per cent (24 per cent on property) on gains beyond this.
The most persistent rumour is that CGT rates could become aligned with income tax bands and allowances, as they were between 1998 and 2008, meaning that additional-rate taxpayers might pay this tax at 45 per cent. Property – especially second homes – will come under the hammer should this be the case.
Changes here could also impact investments held outside of tax-efficient wrappers such as ISAs and pensions.
On IHT, the likelihood of immediate change is smaller. But while the Conservatives once talked of scrapping IHT altogether, this is almost certainly off the cards for Labour ideologically.
Fiscally, IHT receipts are currently rising of their own accord, as home values drag estates over the threshold. Currently, a UK resident would have an IHT allowance of £325,000 on the value of their estate before the 40 per cent tax is due. This rises to £650,000 for a married couple and there is also a further £175,000 (£350,000 for a married couple) where the family home is left to a child or grandchild.
The current thresholds have been in place since 2009, and Labour may well decide to keep them frozen. It wouldn’t surprise me to see this overhauled in due course and we will be watching this closely.
Pensions are particularly fertile ground for speculation. A pensions review is currently underway, so we hear a lot about how policy can be leveraged to incentivise people to save for retirement, and how the government would like to streamline and simplify processes. These are ambitious and admirable goals.
For workplace and private pensions, there is talk about changing tax relief on contributions to a flat rate, a measure that would raise the income tax take from higher-rate taxpayers. This would be complex to implement and may not make the difference the Treasury thinks it might – many upper-rate taxpayers don’t claim back their relief on pensions contributions through their tax return.
The death benefit tax relief on pensions passed on under the age of 75 would be an easier target. We have an eye on the possibility of change to the tax-free cash allowance on lump-sum withdrawals from pension pots. This is currently set at 25 per cent and capped at £268,275. The key thing anyone tempted to make a special withdrawal of cash in the next four weeks should be asking themselves is, “what is its purpose?” There is every chance that your money may be better protected in its pension-wrapper.
So, here we are, back at the start – stick to the plan. Make decisions based on the known details of your individual circumstances. The rest is noise.
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