Budget speculation grows

The Chancellor is in expectation management mode this week, lifting the already miserable £22 billion black hole to a £40 billion funding gap. Gulp.

The message is filtering through. We track investor sentiment with large monthly surveys and sentiment fell significantly in September. People are anxious about what lies ahead in the Budget at the end of the month.

Fiscal drag is going to be redefined as taxpayers, investors, second home owners, those planning inheritances, farmers and entrepreneurs falling over the threshold of the pub on the evening of the 30th October, dragging their weeping selves towards the bar for an enormous drink, only to realise that she’s taxed the bejaysis out of that too.

Oh shut up, Holly! Enough speculation! Let’s look at what we know...

First up, people are voting with their feet and there is a significant amount of money being shoved into the tax efficient accounts that are ISAs and pensions. October is normally a fairly sleepy month, but yesterday Vanguard confirmed that 43% more clients have maximised their full £20,000 annual ISA allowance compared to this time last year – and a similar number of people have maximised their full tax-free £60,000 annual contribution into a pension. This is a common picture reported by all investment firms.

People are responding to speculated Capital Gains Tax (CGT) increases, potential changes to ISA lifetime allowances, rumoured pension reforms and potential changes to Inheritance Tax.

CGT is 10% (or 20% for higher rate taxpayers) on shares or assets you make money on, sitting outside an ISA. And this rise to 18% (or 24%) on second properties or buy-to-lets. People selling a business also pay CGT but the bill is currently reduced to 10% for most, up to a lifetime limit of £1 million, if they qualify for Business Asset Disposal relief. Our guide to CGT will fill you in if you want to learn more.

It’s speculated that the top level of CGT could potentially rise to somewhere between 25% and 33%, according to all the noisy self-important people who claim to have a hotline to the Chancellor. However it's suggested that second homes may be exempt from any hikes. No-one knows yet is the reality.

As for Inheritance Tax (IHT), currently around 4.4% of deaths lead to an IHT charge, which is set at 40% on anything above £325,000. You don’t pay tax on money left to a spouse or civil partner. If your main home forms part of your estate, this threshold goes up to £500,000 per person. There are some exemptions around farmland, family businesses, investments in adventurous early-stage businesses and gifts which could be tinkered with. And pensions can currently be left free of Inheritance Tax.

Our guide to IHT will give you the current rules on how this all works.

When might this happen?

Not clear. Some changes could be immediately, but complexity means that many changes made in the Autumn will likely kick in at the start of the next tax year, on 6th April 2025.

This all sounds painful. What to do?!

It’s important to make the distinction between observing behaviours happening as a result of speculation – and advocating this. I’ve covered enough Budgets to know that we can’t always tell what’s coming and the ‘experts’ can get it wrong. Some publications with a political agenda can fuel the flames. And planning based on speculation can go wrong.

ISAs

As a rule of thumb, saving as much as you can, as early as you can, in a diversified mix of fairly priced investments is a boring but proven recipe for success. Paying money in the tax quarantined ISA is generally a good idea, if you don’t have expensive debt or other shorter-term priorities. It means you shelter future gains from tax. And the good thing is that if you change your mind, or need to get your hands on the money at any stage, you can.

If you don’t have spare cash to put in an ISA, but have some shares outside an ISA, read up on ‘Bed and ISA’ or ‘Bed and SIPP’ for pension. This is a way of shoving shares into a tax-protected account, using your annual allowances this way, and is worth investigating.

Pensions

Paying money into a pension is more complicated. You cannot take this out before you're in your mid to late 50s (the dates will slowly edge upwards). So before you rush to squirrel any money away here, just make sure that you're OK to lock this away for this amount of time.

We’re also hearing about a small rush of people taking out their tax-free lump sums from a pension, in anticipation of a potential reduction in the amounts. Under the current rules, savers who are 55 or older can take 25% of their pension without having to pay any tax, up to £268,275. There are rumours that this might be reduced to a maximum level as low as £100,000.

Taking out tax-free cash is more problematic than paying money into an ISA or pension, I think. If you’re tempted, make sure you understand the recycling rules around pensions money which we cover here. You can’t just automatically bung it all back in later if the Budget doesn’t follow the rumour mill script.

And then what will you do with this sum of money? Leave it under the mattress? And what would any other consequences be? If you have an adviser, do make sure you speak to them to understand the full picture. Or check out our new article looking at your options around the 25% tax-free lump sum.

Inheritance Tax

As for Inheritance Tax, one option is to consider gifts. You can give away up to £3,000 a year and there is also a separate rule on ‘surplus income’ too. Any other lump sums gifted now will fall outside of your estate after seven years. If the Chancellor does suddenly include pensions in people’s estates, I would buy shares in cruise operators as some retired people think ‘stuff it’, drawdown their pensions and go on a splurge instead.

If you want to do some more reading, we have new content on potential tax changes and their impact and how things called VCTs and EISs might be interesting ways to mitigate CGT for those more confident investors happy to allocate a bit to these more risky vehicles.

Over and out for this week, folks. Have a great weekend.

Holly

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