By Justin Rourke, head of advice, Armstrong Watson Financial Planning
Ahead of Labour’s first budget on October 30, speculation in many news reports has gathered pace – suggesting that it could be especially grim – and Rachel Reeves, Chancellor of the Exchequer, has now laid the groundwork to ensure we won’t be surprised by tax hikes.
What does remain a surprise is exactly how the Chancellor will go about this, and uncertainty is no one’s friend when making long term financial plans.
Below are just some of the potential changes being speculated about.
Speculated pension changes
Tax relief on pension input
There is speculation the government might introduce a flat rate of tax relief on pension contributions, potentially around 25%.
This would benefit basic rate taxpayers but reduce the relief for higher rate taxpayers.
Lump sum allowance
A commonly asked question at this time is will the lump sum allowance (tax free cash) be reduced?
This area of pensions has already changed significantly with the abolishment of the Lifetime Allowance (LTA), and has become quite complicated with transitional allowances applicable.
We may see some simplification in this area, but I am not convinced that this helps the government achieve its objectives of raising revenue.
The fear of change could see a number of people take their lump sum allowance, that in turn could give the economy a boost as there will be more cash available to spend, but it also creates a significant risk of people running out of money later in retirement.
Bringing pensions into the inheritance tax (IHT) regime
This move would be especially controversial and unpopular as pensions are generally exempt from IHT.
Anything that discourages people from saving for retirement, in my opinion, is creating a long-term problem.
There is already a significant shortfall in pension/retirement planning, and this would only serve to exacerbate that.
Rachel Reeves may apply the logic that bringing pensions into the IHT regime is a way of reconstructing the LTA.
Pension death benefits (pre-75)
At present the pension legislation states that if you die before turning 75 the successor can draw down from your pension, income tax free.
However, if you die at age 75 or over, they will pay income tax on the funds drawn down.
Capital Gains Tax (CGT) hike?
Property and business sales tend to dominate the discussion around CGT.
Often those who hold private share portfolios (outside of an ISA or pension) are the forgotten victims of CGT legislation.
Many have chosen to hold onto portfolios and assets to avoid triggering CGT on the basis that CGT will be rebased on death.
This runs the risk of the investment portfolio being dictated by the tax, not the best investments, but also leaves the investor susceptible to a potential change such as abolishing the CGT uplift on death.
Some commentators are suggesting that CGT rates are likely to increase, and the allowances will not become more generous. This is leading some investors to sell assets and start again in a different investment wrapper such as an onshore investment bond.
ISA increase
Some are saying that one potential upside of the budget could be an uplift to the annual ISA allowance, which was last increased in 2017/2018 to £20,000.
An ISA shelters the assets from income tax and CGT, but the ISA concept has become over complicated with various versions (cash, stocks and shares, AIM, innovative finance, lifetime ISA, the now defunct Help to Buy and the proposed British ISA).
IHT speculation
As detailed above, pensions and CGT may well become embroiled in the IHT regime.
Some speculation suggests the residence nil rate band is set for a review or perhaps even removal, on the basis it is complicated (and will raise a good level of income for the treasury).
Both Agricultural Property Relief (APR) and Business Property Relief (BPR) are also under the microscope.
They are complex areas of tax planning, and the aim of any reform may be to target those who are deemed to be investing only for the tax relief and not to punish real farmers and business owners.
Both the Alternative Investment Market (AIM) and Non AIM BPR investment solutions will also be under scrutiny. These packaged solutions allow investors to benefit from BPR subject to holding for two years minimum, and the underlying assets being BPR qualifying.
Government budgets often bring change and lots of noise and finger pointing.
The Chancellor may feel that with a four-year term and a majority secured this is the time to be bold, but this needs to be balanced with ensuring the UK economy can thrive and encouraging people to plan and save responsibly for their own long-term future.
