We know chancellor Rachel Reeves will tax us hard, but as yet we don’t know how she’ll do it. Labour has been cagey about its plans, telling us only what it won’t hike – income tax, national insurance and VAT.
The gap has been filled by endless speculation, causing panic and tempting people into making rushed financial decisions that could easily backfire.
As I wrote yesterday, the left has a huge shopping list of taxes it would love Labour to hike, but three in particular seem likely.
Capital gains tax (CGT), inheritance tax (IHT) and pensions are right in the firing line.
Taxpayers are taking your evasive action, but there’s a problem. They risk messing up their carefully laid financial plans and handing cash unnecessarily to HMRC as a result, warned Sarah Coles, head of personal finance at Hargreaves Lansdown.
“Endless speculation about the Budget has thrown people into a state of panic but be careful. Rushed decisions could come back to haunt you.”
Coles said realising capital gains today is tempting as Reeves seems likely to hike CGT rates in line with income tax. Again, there is a risk. “If the CGT rate doesn’t rise as expected, you will have paid any extra tax for nothing.”
She said it make sense to offload assets over several years rather than in one go, if you can, to make take advantage of your £3,000 annual exempt amount for CGT.
Many second homeowners and buy-to-let investors are keen to sell their properties in case CGT is hiked. But that’s hard to do in a hurry and if you accept a lower price to drive through a quick sale then you may regret doing so later.
As yet, we do not know what Reeves will do to inheritance tax. She may scrap the £175,000 residence nil-rate band, which applies when passing property to children.
Coles said that some might consider signing their home to children in the hope it won’t be counted for IHT purposes, but again, there’s a risk.
If you continue to live there without paying a market rent, for example, it could still be eligible for IHT when you die.
There are other dangers, such as your children selling the property, which would leave you with nowhere to live.
HMRC could view more complex options such as trust planning as tax avoidance, Coles added. “You could end up paying a fortune and achieving nothing.”
It does makes sense to use annual IHT gifting allowances but avoid handing over money you may need later, say, to adapt your home or fund care. “You could sorely regret making gifts you can’t afford, driven by IHT fears.”
Coles said that some may consider taking out an equity release plan on their property, and gifting the money to reduce IHT exposure.
Coles said equity release has costly upfront charges and ongoing interest that rolls up and needs to be repaid on death. “If you don’t live for seven years after gifting it, at least some of the money will be brought back into your estate anyway.”
As for pensions, anything could happen on October 30.
Reeves may axe the popular 25% tax-free lump sum and many are making withdrawals just in case, but Coles warned this could damage your income in later life.
Simply putting the money in a bank account means you miss the potential for tax-efficient growth inside a pension.
Accessing your pension will trigger the money purchase annual allowance (MPAA), and this could slash the sums you can pay into a pension in future, from as much as £60,000 a year to just £10,000.
That could seriously hamper your attempts to rebuild your pension at a later date, Coles said.
Some financial planning steps are relatively safe, she said. These include contributing more into a pension to claim higher-rate tax relief in case that’s cut, maxing out your tax-free Isa allowance, investing in Junior Isa for a child, and using your CGT annual exempt amount to take share gains.
Labour’s tax threats have left taxpayers in a tough place, but they must avoid making a bad situation worse. It may be worth considering financial advice.
