Speculation is rife about changes in Rachel Reeves’s maiden Budget with possible changes to capital gains tax, ISAs and pensions already being suggested.
Many are worried about their savings, especially now the best deals have already taken a tumble, triggered by predictions that the Bank of England will cut interest rates in November.
For those concerned about the future of your nest egg, i has spoke to experts to offer ways you can ensure your finances are protected and shielded from any changes that the Chancellor may make on 30 October.
Increasing capital gains tax
Is she likely to increase it?
While the Prime Minister has described speculation that the highest rates of capital gains tax (CGT) might be increased to 39 per cent as “wide off the mark”, there are still concerns there will be rises.
Jason Hollands, managing director of Evelyn Partners, said: “CGT does look set to be increased with sources briefing that while CGT on second properties won’t rise, the tax on gains on shares will increase by ‘several percentage points’.”
What should I do to protect my savings?
You may have to pay CGT if you make a profit when you sell shares or other investments.
Those who own shares outside of tax-wrappers like ISAs and pensions could consider selling these ahead of the Budget, Mr Hollands said, in case the exemption goes down.
This is to both make use of their annual £3,000 tax free exemption and ensure that any taxable gain is crystallised at the current rates of 10 per cent for basic rate taxpayers and 20 per cent for those on higher and additional rates.
He added: “There are few points to consider before doing this. Firstly, if you are married or in a civil partnership, you could consider transferring some or all of the shares to your spouse before selling them, to make use of two sets of £3,000 annual exemptions.
“Where the gain will still exceed these and a tax liability will be incurred, then you may still be able to reduce the tax bill by incurring the taxable gain in the name of whichever partner might be subject to a lower rate of income tax.
“These are known as ‘interspousal transfers’ and such switches in ownership are easy to effect and do not trigger a tax event (unlike a transfer between non-married partners).”
Once you have crystallised the gain, if you wish to reinvest in the same shares outside of an ISA or a pension, you must wait at least 30 days before doing so.
When you reinvest after 30 days, this will reset the base cost of the shares at current market levels for the future calculation of CGT.
If you’re really financially savvy, you could also consider repurchasing the shares or funds that have been sold within an ISA or pension where future returns will be protected from tax on both capital gains and dividends, Mr Hollands advised.
These transactions are known as “Bed & ISA” or “Bed & Pension”. For example, with a Bed & ISA transaction, you will sell existing investments and use the proceeds to open or top up an ISA account. You can then buy the same investments back, choose other investments or simply hold the cash within your ISA.
This lets you take advantage of your tax-free ISA allowance even if you don’t have any new money to invest. You also do not have to wait 30 days to do this.
The controversial inheritance tax
What could she do to this tax?
Inheritance tax has become a victim of the rumour mill over recent weeks, with experts predicting Ms Reeves could make cuts to the nil-rate bands, reduce business and agricultural relief and tax pension pots.
The Chancellor is also reported to be considering changing the seven-year rule around gifting.
The rule, which has been in place for close to 50 years, means that any gifts to people made seven years before death are not liable for inheritance tax (IHT).
Ms Reeves is considering extending the rule to 10 years which means more people will become eligible to pay it.
Am I too late to protect myself from these potential changes to gifting rules?
In short, according to Shaun Moore, tax and financial planning expert at Quilter, no.
He said: “At the very least, you should make sure you are making use of your annual gifting allowance of £3,000 to children or grandchildren which is immediately exempt and not subject to the seven-year rule.
“The ‘gifting out of income’ exemption can indeed be a powerful tool in reducing your IHT liability, particularly for those with significant income.”
This exemption allows you to make regular gifts from your surplus income, provided these gifts do not impact your standard of living.
For married couples, both partners have individual allowances under this exemption, meaning each of you can give from your own surplus income, potentially doubling the benefit.
Mr Moore added: “It’s important to understand that for these gifts to qualify, they must be made from income rather than capital. Income includes salaries, pensions, dividends, rental income, and interest from savings.
“This will potentially reduce the size of your estate and therefore its IHT liability.”
ISA changes
What possible changes could the Government make to ISAs?
The Government may look at reducing the ISA allowance of £20,000, the total amount you can currently save in one or more accounts.
How to protect your money
Making the most of your ISA allowance now could be sensible, experts have warned.
Charlene Young, pensions and savings expert at AJ Bell said: “Over-18s get a generous £20,000 per tax year they can pay across the different types of ISA. Anything in your ISA will then be sheltered from capital gains and income tax.
“For those with investments held outside of an ISA, now might be the time to consider getting these within the ISA wrapper.
“You’ll need to check how much ISA allowance you have remaining this tax year to make sure you don’t go over the £20,000 annual limit.
“There is even a Junior ISA for under 18s too, that comes with its own £9,000 a year allowance and all the same tax benefits.
“But keep in mind that Junior ISAs are locked up until the child turns 18 and it converts into an ISA in their own name.”
Make the most of your allowances
Despite the many rumours, we won’t actually know what is in Ms Reeves’s red box until she stands up to deliver her Budget next week.
But there is some financial housekeeping you can do to put yourself in the best position to navigate any changes announced on the day and beyond.
Choose best savings accounts and be aware of your allowance
As well as a stealth tax on earnings and pay rises, frozen tax thresholds and allowances affect savers too.
If a saver is nudged into the next tax bracket, they’ll see their tax-free Personal Savings Allowance (PSA) cut in half or lost altogether if they find themselves in the additional rate tax bracket.
The PSA protects many people from paying tax on their savings interest outside of an ISA, but it has also been a victim in the big freeze of allowances – remaining at current levels since it was introduced more than eight years ago. The PSA currently stands at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.
This means it is important to decide where to put your money.
Ms Young said: “For cash savers, the good news is Cash ISA rates have more closely matched standard savings rates in recent years, meaning savers can potentially shelter their cash tax-free and still get a decent return.”
Make the most of pension contributions
The annual pension allowance is £60,000 per tax year for most people. Not only do contributions get tax relief on the way in, but a pension wrapper shelters cash and investments from tax, too.
Speaking about pension contributions, Ms Young told i: “Keep in mind that you cannot usually access them until age 55 at the earliest though.
“One particularly clever trick is to use your pension contributions to reduce your income tax band. When you contribute to a pension like a SIPP (a self-invested personal pension), the gross value of the contribution has the effect of extending your basic rate tax band.
“This is a particularly handy trick if you’ve only just tipped over into the next tax band, meaning a small pension contribution would bring you under the threshold.”
According to Ms Young, pension contributions also help lower your income for tests against other allowances and thresholds.
The two most common are for the £60,000 high income child benefit charge threshold – where child benefit starts to be lost – and the £100,000 limit over which you start to lose your tax-free personal allowance.
She added: “Lowering the taxable income that is tested against these limits can mean you recoup all or some of the child benefit or personal allowance that might otherwise have been lost.”
