There has been much speculation in the press and social media about what taxes Rachel Reeves might raise in her first Budget, due at the end of next month. Some of this speculation has left many of my clients wondering whether there is anything they could be doing to protect themselves in advance.
The problem is that everything we may have heard or read is just speculation, and making major financial decisions based on what might happen is seldom wise.
One of the things clients have been particularly worried about is the possible threat to the 25% pension tax-free lump sum. As a reminder, Labour put out the following statement on the 25% tax-free lump sum after Keir Starmer slipped up in a radio interview just prior to the election:
‘The ability to withdraw 25% of your pension as a tax-free lump sum is a permanent feature of the tax system, and Labour is not planning to change this.’
On this basis, and because they would need to offer protection to those with large lump sums already accrued, I don’t think this is a likely target. Impacting those of us with substantial lump sums already in our pensions would amount to ‘retrospective legislation,’ which would set a dangerous precedent. I can see a situation where future tax-free cash accrual is restricted, but that wouldn’t raise much tax now.
One of the major benefits of pension investments is that they currently sit outside of one's estate for Inheritance Tax (IHT) purposes; this means that your pension assets are potentially worth 40% more to your beneficiaries than any other assets you may hold. If you were tempted to take your lump sum and place it in a non-pension investment, you would immediately bring this money into your estate, and it would be taxed at 40% on your death. If you gift the money, this will eat into your £325k nil rate band, and the 7-year IHT clock will start ticking until that can be reinstated. Rest assured, if the IHT status of pension funds changes, we will contact all our clients after the budget to discuss the new best strategy for managing pension assets.
Regarding Capital Gains Tax (CGT), the Office for Budget Responsibility and HMRC have said that any increase will likely reduce the revenue raised. This doesn’t mean they won’t increase it, if just for political and ideological reasons. Investors could realise all gains now and force a 20% CGT tax liability this year, effectively rebasing investments to protect them from possibly higher rates down the line. However, this is not something I can recommend because, as I have said, it would be advice based on speculation.
As far as IHT is concerned, there isn’t much we can do about this (unless we die before the budget), so we will just have to roll with the punches and hope that a future Chancellor reverses any overly punitive changes.
I cannot guarantee that Reeves won’t do any or all the things you have heard or read about, but some of the seemingly obvious changes would be very difficult to implement in practice.
In very short summary, the best we can do is to wait and see what the Budget holds before deciding whether any change in strategy is required.
I am about to go on holiday for a couple of weeks starting on 7th October, but I will be home in time for this much-anticipated Budget.
I have access to many tax experts, and once the dust has settled, I will be in touch again to explain what actions might be appropriate.
I hope you found the above interesting. As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.
Yours sincerely,
Graham Ponting CFP Chartered MCSI
Managing Partner
