With the October Budget looming only six weeks away, and press pundits speculating on what changes it could possibly contain, you may be wondering if there are any actions you could take before any potential changes come in.
To be clear, none of us have a crystal ball. We don’t believe that there is any point in speculating exactly what will or will not be in the Chancellor’s Autumn Budget – only a select few in government have that knowledge. But based on the information we do have, including statements that the Prime Minister and the Chancellor have made over the last few weeks, it seems likely that they will be looking to generate funds by increasing taxation, in order to fill the ‘£20bn hole’ in the government’s finances. Goldman Sachs have estimated that the Chancellor will need to raise taxes by “at least” £15-20bn, with pensions likely to be a target area.
Taking drastic steps in any direction could be a mistake. However, there are a few things you may wish to consider over the next six weeks which might help to accelerate actions that would have made sense to carry out in time anyway.
Capital Gains Tax
One of the main areas that is receiving attention from those speculating on the Budget is Capital Gains Tax (CGT). If changes do indeed materialise, you may end up with a much higher tax bill on the sale of any assets you hold than you would have done otherwise. It’s not just the potential of an increase in the CGT rate, but also the possibility of not being able to carry forward losses as is currently allowed.
If you hold ‘forever assets’, it’s probably not worth doing anything with them at this moment in time. That said, if you are sitting on some big gains, it may make sense to crystallise some, based on your specific circumstances and holdings.
If you hold ‘non-core’ assets that are already earmarked to be sold at some point in the future anyway, you might consider accelerating the sale.
Property
As an example, if you had plans to sell a second home within the next year or two, you may wish to expedite the decision and sell ahead of any potential changes announced in the Budget to take advantage of the current rate of CGT. This comes with its own risks, however – what you might win on tax, you may lose on the price if you don’t have the luxury of time on your side. It also highlights the problems associated with holding illiquid investments like property compared to liquid investments that can be traded daily in investment markets.
Investment Gains
You may have heard the term ‘bed and breakfasting’ in relation to selling and repurchasing shares. This is the act of selling shares in order to create a disposal for Capital Gains purposes, before buying back either immediately or very shortly after (i.e. the next morning – hence the moniker) to continue benefitting from its growth. This was a commonly used method of minimising CGT bills at the end of the financial year, but there are restrictions on how this can be carried out, including a 30-day waiting period before you are able to repurchase the shares.
However, there is nothing preventing you from selling investments in a General Investment Account (GIA) and immediately repurchasing in a SIPP or ISA, or purchasing a different but very similar ETF – but it’s absolutely imperative to seek advice from your Wealth Manager before carrying out such a transaction, in order to ensure that all tax aspects have been correctly observed.
Inheritance Tax
Another potential candidate for tax reform is Inheritance Tax (IHT), although changes here have been rumoured for the past several Budgets in a row without anything materialising. That said, this is the first Budget under a new government, so what they will or won’t do is anyone’s guess.
There is talk of adjusting the 7 Year Rule, which currently stipulates that no tax is due on gifts if you live for at least 7 years after giving them, provided the gift isn’t part of a trust. If you haven’t already used your annual exemption, and if you’re fairly confident you’ve got 7 or more years left in you (freak accidents notwithstanding), this could be a good opportunity to do so, particularly if you have any unused exemption carried over from the last tax year.
We don’t know what changes (if any) our new government will make here, but it may be that next six weeks will be a ‘use it or lose it’ scenario. More likely is a change to taper relief, which is a sliding scale of taxation on gifts in the years following its bestowal.
Again, there is no use in acting for the sake of acting, particularly since we can’t say for certain what any potential changes will be. These are actions to consider taking only if they make sense for you within the wider context of your wealth. Remember, don’t let the tax tail wag the investment dog!
Pensions
Finally, one of the biggest targets of press speculation has been pensions. Once again, we don’t know what changes are in the pipeline, although the Chancellor is known to have considered making changes to pensions tax relief. Therefore, if you have unused allowances for this tax year or that you can carry forward to create a 40-45% tax relief, it may well be worth doing so and making a large contribution sooner rather than later before anything potentially changes. However, there has also been talk (as always) of restricting the amount of tax-free cash, so you will need to be careful not to overfund your pension – the balance of pension and non-pensions assets is important.
Further speculation includes making pensions part of the estate for inheritance tax purposes and scrapping the pre-75 death benefits that enables beneficiaries to receive the pension free of IHT and income tax. No planning points here, just an acknowledgment that pensions may be a target next month.
What Next?
In the first instance, we urge you to get in touch with your Tideway Wealth Manager to see if there is any scope in your plan to take advantage of existing allowances ahead of the Autumn Budget.
We have a simple-to-use spreadsheet available that can help you effectively plan how much capital you might need for the rest of your life, which may help you to identify any excess capital that you might like to gift or use for an additional pension contribution. Please ask your adviser for a copy if you would like to use it.
As we’ve said, we have no more insight on what’s going to change than anybody else does – however, if there are sales, contributions, or decisions that you had already in mind, it may be beneficial to act now.
If you are not yet a client of Tideway but are interested in working with us, please get in touch via info@tidewayinvestment.co.uk or give us a call on +44 (0) 20 3143 6100.
Our upcoming webinar, to be held on Wednesday 6 November at 6:00pm, will cover the impact of the Budget announcements and the results of the US election. Register to attend using the button below.
The content of this document is for information purposes only and should not be construed as financial advice.
Please be aware that the value of investments, and the income you may receive from them, cannot be guaranteed and may fall as well as rise.
Any rates of tax referred to are correct as at the date of this document and there are no guarantees of what changes these may be subject to in the future.
