While it is likely that those deemed to have the “broadest shoulders” are asked to bear the weight of any tax increases, what does this mean? In reality, this could involve those who have built up a comparatively moderate level of wealth through hard work and saving and investing over time – in pensions, property and other assets.
What could be affected? There may be adjustments to capital gains tax, to changes in pension regulations and allowances or inheritance tax may be targeted. It is therefore practical, then, for us to be somewhat prepared for potential outcomes, and maybe it is worth seeking financial advice.
While investors and clients are rightly speculating on what Labour could announce, there continues to be much ambiguity around specific policy changes. This could be holding many back from making immediate decisions ahead of the late October Budget, but what aspects of the financial landscape should you consider?
Capital gains tax
One of the main concerns our clients are coming to us with is a possible increase in capital gains tax. Currently the rate of CGT is 20% but Labour has hinted that this could go up to as much as 45% in order to bring it in line with additional-rate income tax.
If any changes do happen, it could even be before the new tax year starts – this happened before after the Conservative election win in 2010, when George Osbourne raised the CGT rate in his June Budget of that year.
Pensions
Pension changes have also been well speculated, as the pension system simultaneously undergoes a full pensions review. Possible changes for savers to be aware of include the 25% tax-free lump sum option being changed, pension tax relief being amended and inheritance tax allowances also being revised.
One of the most immediate actions we have seen clients take is accessing their 25% tax-free lump sum now, ahead of any possible changes. Being able to access these funds means that clients can then personally decide how to most efficiently invest or save for their personal financial situation. While again, possible changes to the 25% tax-free lump sum (which you can withdraw from your pension fund at age 55) are speculative, they could be enacted in two ways. Either the percentage of 25% could be lowered to say, 20%, or the current limit of £268,275 could be reduced.
Changes to pension tax relief could affect higher rate taxpayers in particular, especially if a flat rate is introduced which is likely to be lower than the 40-45% tax relief they receive now.
Inheritance tax (IHT) may also face increasing scrutiny, as a way for the government to raise extra taxes while largely only affecting those with the broadest shoulders. While pensions now are not only one of the most tax-efficient ways to save, they also bestow considerable benefits in death – as most retirement pots can be passed on free of inheritance tax if the person dies before 75. Outside of pensions, each estate gets an IHT-free allowance of £325,000 (£500,000 on most estates if a main home is left to a direct descendant).
Encouraging a thoughtful assessment of your circumstances
We would remind people to avoid making knee-jerk reactions in the face of speculation. It is also not contradictory to say that you should be prepared to make changes, because our lives evolve all the time, and we may frequently have to amend our plans. It’s the same with our finances. Yet we must be thoughtful about the changes we do make, in much the same way that we would reflect deeply before changing jobs or moving home.
If you are concerned about what the possible changes could mean for your financial situation you should consider financial advice. Financial advisers may not be able to second-guess the outcome of the Budget, but they can advise you on the possible impact to your finances both inside and outside of tax wrappers – whether through changes to pensions or capital gains tax.
Many of our clients are apprehensive about potential increases to capital gains tax and changes to inheritance rules, in particular. So it may be worth assessing whether it is worth acting ahead of any possible changes, or whether it is more prudent to pause until more concrete details are revealed.
To find out how we can give you a tailored evaluation of your circumstances, please get in touch.
Please note, the value of your investments can go down as well as up.
Netwealth offers advice restricted to our services and does not provide independent advice across the market. We do not offer advice in relation to tax compliance, personal recommendations with regards to insurance and protection, or advise upon the transfer of defined benefit pensions.
