There has been unease among many savers in light of predicted tax rises in Chancellor Rachel Reeves’ first Budget, as the new Government attempts to address a £22bn deficit in its funding.
Keir Starmer’s admission that October’s Budget will be “painful” for households has done little to reduce those fears. This article highlights which areas could see changes, and possible solutions that savers could potentially implement:
Capital gains tax
Capital gains tax (CGT) has been widely rumoured to be a target, prompting concern among investors and property owners. CGT is a tax on the profit (gain) when you sell, or dispose of, an asset that has increased in value. CGT can apply to investments that are not held within a tax wrapper, such as a pension or ISA. It doesn’t apply to the family home (and Labour has ruled out any change to this), but it does apply to second homes/buy-to-let properties.
Higher and additional rate taxpayers currently pay CGT at 20%, or 24% for residential property, on chargeable gains. Labour could opt to align CGT rates with income tax rates. This would see higher and additional rate taxpayers paying CGT at rates of 40% or 45% when disposing of chargeable assets, including shares, and buy-to-let properties. Labour could also further reduce the £3,000 annual exempt amount, which has been slashed substantially over the past couple of years.
Possible solution: With the CGT tax-free allowance now standing at just £3,000, many investors and buy-to-let landlords may see an opportunity to sell (taxable) shares and property before the 30 October Budget, to avoid paying more tax in the future if CGT rates do rise.
Pension contributions
Savers currently enjoy a generous tax relief top-up from the government, with higher and additional rate taxpayers able to claim 40% and 45% tax relief on their pension contributions (subject to certain limits and restrictions). The Treasury could implement a flat rate of relief for all taxpayers, eg. 20% or 30%.
It may also cut the standard annual allowance, the maximum amount that most savers can contribute to pensions in each tax year and benefit from tax relief. The annual allowance currently stands at £60,000.
Possible solution: There may be an opportunity to bring forward planned contributions ahead of the Budget on the 30 October 2024, with an eye on mitigating the risk of a reduction in the annual allowance and/or the tax relief for higher or additional rate taxpayers.
Pensions and inheritance tax
There has been concern in some quarters that Labour will target the death benefits that pensions currently enjoy. Under current rules, private pensions can typically be passed on to beneficiaries free from an inheritance tax (IHT) charge. Labour could opt to implement a change that would see pensions fall into the estate for IHT purposes, or remove or cut the 25% tax-free cash entitlement, which allows most savers to take up to £268,275 from their pension tax-free.
Possible solution: Savers who are concerned about possible changes to pension taxation could opt to withdraw the maximum tax-free cash entitlement, which is currently 25%, and gift the proceeds to children. Any decision should be carefully thought through and discussed in advance with a financial adviser.
Business Relief and other IHT measures
Business Relief is a tax loophole that small business owners and investors can use to negate IHT. Family businesses are often exempt from IHT because of Business Relief, so companies can be passed on to relatives without having to worry about a tax bill that could force the business to close. You can also invest in qualifying companies and take advantage of the relief. Money invested is exempt from IHT after two years if the company qualifies for Business Relief. Labour may opt to cut Business Relief rates, or close the loophole entirely.
Labour may also look to make other changes to the IHT regime. The 40% rate levied on taxable estate assets could rise, or the £325,000 IHT-free threshold per person (known as the nil-rate band), could be lowered. The £175,000 main residence nil-rate band could also be slashed.
Possible solution: If you have concerns about inheritance tax, or may be affected by changes to Business Relief, then discussing these issues with a qualified financial adviser can help you build a clearer picture of your estate planning, and potentially reduce your inheritance tax liabilities.
Next steps
It’s important to note that at the moment these possible tax changes are speculation. Until the Budget on 30 October we remain in the dark as to what Labour will do. Therefore it’s vitally important not to rush into decisions. Any decisions should be clearly thought through, and ideally you should discuss these carefully with a financial adviser. Making hasty financial decisions on the back of speculated tax changes can lead to serious and irrevocable consequences.
If you need advice one of our experts is ready to take your call – please get in touch on 03300 564 446, or via our contact form.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
