What October’s Budget might mean for your wealth

Before the summer recess of Parliament, the Chancellor of the Exchequer, Rachel Reeves had set out she was having to take difficult decisions after a Treasury spending audit revealed £22 billion of unfunded pledges and urgent work is required to reduce the pressure on Public finances by £5.5 billion this year and over £8 billion next year.

Alongside the announcement that the Government will cut Winter Fuel Payments to those not in receipt of pension credits or other benefits, the Chancellor stated there would be more to come on the Government’s tax and spending plans at the Budget which will take place on Wednesday 30 October.

This has prompted frenzied speculation in the media about what taxes might be raised. Whilst it is impossible for us to know conclusively what might change, there are some areas we have been talking about since before the election where action can be considered. It is difficult to know for sure the impact on individuals but we have set out some areas below, largely around capital gains and pensions where bringing action forward may be worth considering ahead of the budget.

Please note this does not constitute advice and your financial planner can provide specific advice to you if appropriate.

While pre-election Labour were keen to dispel the traditional thought that taxes will go up under their tenure, we will have to wait and see how this works in practice now they are in power. The Labour Manifesto set out that there were ‘no plans’ to raise Income Tax, National Insurance and VAT however this is caveated by a reference to working people. When the Chancellor was asked recently what is meant by working people, she said ‘working people are people who go out to work and work for their incomes.’ This has prompted some to speculate that this signals that some of the above taxes for non-working people may rise.  There was also the intention to cap the level of Corporation Tax at 25% over their term in office.

Labour have ruled out introducing CGT on the disposal of a primary residence, but we could see increases in the CGT tax rate or annual exempt amount reduced further.

Under the Conservatives, the CGT annual exempt amount fell from £12,300 in 2022 to £6,000 last April and £3,000 from April this year.

As a result of the reduction in the annual exempt amount, we think it will be more common to pay CGT in the future. While paying any tax can be galling, this may be one of the more palatable taxes given at present it is only payable on a capital gain and the non-property related gain rates are half that of Income Taxes: 10% for a basic rate taxpayer and 20% for higher rate taxpayers. Property related gains are higher at 18% and 24% respectively. Media speculation however is that there may potentially be an increase in rates on the way, perhaps an alignment between CGT and Income Tax rates so an increase to 20% for a basic rate taxpayer and 40% for higher rate taxpayers.

As the current rates of CGT non-property related gains are relatively low, there can be a case for realising gains now. The slight risk with this approach is that if rates do not go up, tax will have been brought forward when it didn’t need to be.

As part of the management of your portfolio outside of Individual Savings Accounts (ISA) or Pension wrappers, there are cases where we may have managed gains on larger portfolios, trying to minimise tax each year by using the CGT annual exempt amount or available losses etc.  With a lower exempt amount now, there may be unintended consequences if we try and avoid paying CGT on gains. Each year, we rebalance portfolios back to your original risk profile which invariably results in a capital gain being created. In the past, such gains have generally remained within the CGT annual exempt amount but with this having been significantly cut, it is likely that more and more gains will be taxable in future. We intend to continue to rebalance portfolios in most cases as we believe the resulting differences in investment performance could easily outweigh any CGT liability.

We will be contacting you if your General Investment Account (GIA) portfolio is not in line with your risk profile due to unrealised gains and where we believe there are strong reasons to rebalance the portfolio before the budget to take advantage of current CGT rates.

There was also no reference of Inheritance Tax (IHT) in the Labour Manifesto other than in relation to offshore trusts, but it has been widely reported they are drawing up options that include significant changes to IHT.

It is rumoured this may include changes to the relief for businesses and agricultural property. This could include reducing the rate of relief or introducing a lifetime limit to cap the value of the relief.

In addition to the CGT changes above, it is possible we may see changes to the interaction of Business or Agricultural Relief with CGT. In 2019 the Office of Tax Simplification (OTS) highlighted that if you inherit a business or farm with these reliefs, they are not only exempt from IHT, but there is also a ‘CGT uplift’. The CGT uplift is where all assets are re-based when they are received by inheritance and will often reduce the tax due in the future.

The OTS judged that where a relief or exemption from Inheritance Tax applies, the CGT uplift should not be granted. This means the CGT payable by the recipient of the assets could be calculated with reference to the historic base cost paid by the original holder which may significantly increase the tax due if the asset is sold.

We assume that any of these changes, if they happen will not be retrospective.

Increases in tax paid do not have to come from direct tax rises. We have written before about the freezing of allowances, like the Income Tax Personal Allowance or the basic and higher rate tax thresholds causing a ‘stealth’ increase in the tax we all pay. Labour have stated that they will maintain the freeze on the Income Tax Personal Allowance.

Since the abolition of the Pension Lifetime Allowance (LTA) was announced at the beginning of 2023, Labour have been vocal on their plans to reintroduce it if they get into power. They have now said this is no longer their intention.

If you expect that your pension fund is likely to remain below the LTA, which was £1,073,100 before the changes, the current rules haven’t changed materially in terms of the tax-free cash you can receive so there is no need for any action to be taken.

Those with larger pension funds that are approaching or over the LTA should still consider their longer-term plans and how they may be affected by the potential change to pension rules. Although the LTA is not expected to be reintroduced, there could still be changes to limits, especially the tax-free limits – either the maximum tax-free lump sum when you draw upon your pension, or the tax-free limits when you die.

Possible actions

Any advice we provide will need to reflect individual circumstances and taking action based on speculation carries a risk, however there are some broad steps you can consider:

• If you are thinking of taking your lump sum soon, and perhaps in the next few years, then taking it before the first Labour Budget would avoid any potential changes. Our view is that it is unlikely the current 25% tax free allowance will increase.
• Retaining money in pension funds is currently attractive for Inheritance Tax purposes although there is also the possibility of reform here as well. With the exception of the tax free lump sum point above, we believe it is sensible not to take any pre-emptive action as this will likely result in significant Income Tax liabilities and the value of the pension fund being placed back into the taxable estate. The best course of action for now is to await any changes affecting the Inheritance Tax treatment of pension funds.   Once these are known and properly digested, your financial planner can advise you individually on how this may impact your financial plan and advise on any course of action you should be considering.

Rachel Reeves has been a long-time supporter of a flat rate of tax relief on pension contributions rather than the marginal rate tax relief currently in place. This means that anyone making pension contributions would get the same rate of relief – possibly 30%, rather than higher and additional rate taxpayers getting a higher rate of relief.

There have been assurances that Labour wasn’t planning to change this either. Given tax relief is unlikely to be more generous under any new rules, if you are planning on making additional pension contributions later this year, or before the end of this tax year, it would be worth considering bringing any contributions forward.

Labour may also reduce the amount you can pay into a pension which is currently set at a maximum of £60,000 a year. There is also currently the ability to carry forward unused pensions allowances from previous years which could potentially permit contributions to be paid of up to £200,000 and receive full tax relief. They may seek to change/reduce this so again bringing forward plans to take advantage of the current reliefs may be worthwhile.

While Labour was very careful to reassure people that there would not be a ‘tax shock’ if they were elected, the rhetoric since has pointed towards taxes going up. If you are approaching retirement or wish to draw upon your pension in the near future, it may be beneficial to bring this forward while we know the rules. It is certainly wise to ensure you are maximising the allowances you have ahead of the Budget, whether it be using the maximum current Individual Savings Account (ISA) allowances or gifting to your family.

While it is not certain that Capital Gains Tax will change, if you have large capital gains in assets and are able to crystalise these at a 10% rate of tax, then this may be worth considering as it is unlikely this rate of tax will be lower in any future changes. Do speak to your financial planner if you want to discuss your personal circumstances.