Why consumers must not panic over Budget rumour mill: Sarah Coles

Ever since Reeves emphasised she wanted to avoid increasing taxes for working people, tax on assets have been in the frame. The options cranked out of the rumour mill so far include capital gains tax (CGT), inheritance tax (IHT), pensions tax relief and a change to pensions tax-free cash. I realise I risk firing up my own mini rumour mill here, but it’s worth going through what might happen with each, and how you can protect yourself.

The threats

One of the suggestions doing the rounds is that CGT rates could rise to match income tax. At the moment, CGT on stocks and shares is charged at either 10% or 20%, depending on your tax rate, and CGT on property is charged at 18% or 24%. If this was raised to match income tax it would mean stock market investors paying basic rate or higher-rate tax would see their tax rate double.

This would add insult to injury for investors, who’ve already been clobbered with horrible hikes in CGT after the amount of profit you can make each year before paying the tax was cut from £12,300 to £3,000.

Another potential tax hike is IHT. This is only paid by around one in 20 estates and the vast majority is paid by the wealthiest, which could work on a political level. However, it’s the UK’s most hated tax, because even those who never end up paying a penny tend to worry about how it might affect them.

The government has all sorts of options - including increasing the rate or cutting the nil rate bands – which together mean married couples can give away £1 million before they have to worry about IHT. Alternatively, there could be changes to specific tax breaks, like agricultural or business property relief. It could choose to reconsider the way capital gains tax resets to zero on death, or the government might revisit rules that mean inherited pensions can be left free of inheritance tax.

Another rumour during the election was that there could be a change to pensions tax relief. At the moment, you get tax relief at your highest marginal rate – so a basic rate taxpayer gets relief at 20% and a higher-rate taxpayer at 40%. There were suggestions this would be replaced with a single rate of relief. If a flat rate of 33% was introduced, it could mean more tax relief for basic rate taxpayers, but a higher rate taxpayer earning £95,000 and putting £40,000 into their pension would lose £2,800 of tax relief a year.

There was also speculation that a Labour government could cut the amount of tax-free cash you can take from your pension. They emphasised that tax-free cash would remain part of the picture, but it didn’t stop people worrying it could be cut from 25% of the pot to something less generous.

In this kind of environment, there’s always a concern that the government could cut tax-efficient allowances too – like annual allowances for things like ISAs and pensions. This would be a disastrous move at a time when we know most people aren’t on track with retirement savings and most aren’t investing enough either. It would fly in the face of efforts to encourage people to prepare for the future, but at this stage it can’t be ruled out.

Protect yourself

There are some things you can do right now, ahead of any potential changes. If capital gains tax is a worry, you can use your annual allowance to realise gains gradually, free of tax. You can sell investments and reinvest the money, effectively resetting your gains to zero.

You could invest up to £20,000 in a stocks and shares ISA ahead of the Budget, while you know where you stand – or move existing investments into one. This will protect your investments from CGT forever, so you don’t have to worry about what any Chancellor does with this tax rate.

If you don’t need the assets until retirement, you could pay into a pension sooner rather than later. Not only will it grow free of CGT, but you’ll also get tax relief at your highest marginal rate. It’s vital not to base your plans on guesswork, but if you are intending to put money into your pension this year, and you have it available now, it may make sense to do ahead of the Budget, so you can be certain of tax relief – and the annual allowance.

If you’re married or in a civil partnership, you can plan as a couple too. One option is to transfer the ownership of some assets to your spouse or civil partner, so they can take advantage of their CGT allowance ahead of the Budget too.

If you’re worried about inheritance tax, you can give gifts during your lifetime. This helps support younger family members and gives you more control over how the money is given. You could, for example, put it into a stocks and shares Junior ISA for a child under 18, so you know the money will be tied up until they’re old enough to make sensible choices with it.

The risk

However, all this talk of potential tax hikes comes with major risks. Sensible tax planning is always a good idea, but panicked reactions in an effort to avoid tax could come back to bite you.

One major worry is that people who are concerned about cuts to pensions tax-free cash might rush to take it before the Budget. It’s vital to remember that this money has been invested tax-efficiently - and might be for another 20 or 30 years. Taking it out could leave you with an ongoing tax drain for decades. Plus, if you put it into a savings account, it’s going to miss out on decades of potential investment growth. You could sorely regret the decision to pay tax and put up with low levels of growth on the basis of speculation.

Similarly, there’s a risk that people who are concerned about IHT will give away more than they should, which could leave them short if they need care later in retirement.

Then there may be those who decide to sell big chunks of assets now, well above their annual allowance, so they pay 10% or 20% CGT. They might be worried that realising it all later will mean paying more tax. However, they’ll miss the opportunity to realise it gradually, which over a number of years could mean your allowance soaks up the gain and you pay no CGT at all on it.

When you’re considering your options, be careful of knee-jerk reactions. Your priority should be the ‘no regrets’ changes: those things that make sense for your finances overall, and you’ll be happy with even if tax rules don’t change. Don’t let the power of the rumour mill force you into making a mistake.

Long-term sickness

Figures out this week showed long-term sickness is still increasing for all age groups. However, most of those affected are aged 50-64. It means everyone needs to consider what they would do if they were too sick to work in the later stages of their career.

Being forced to stop work early doesn’t just hit hard day-to-day, it can also have a massive impact on our ability to prepare for a decent retirement. The latest data from the HL Savings and Resilience Barometer shows only 38% of households are currently on track for a moderate retirement income, so there is already a mountain to climb. It means we can’t necessarily rely on working later to close any gap in our pension savings, and need to save whatever we can afford – as soon as we can afford to do so.

SARAH COLESHead of Personal Finance and Podcast Host for Switch Your Money OnHeadline Money Press Team of the YearHargreaves Lansdown