Steady hands, not knee-jerk reactions; navigating the October Budget

As we approach the first Labour budget in 14 years, the anticipation and speculation around potential fiscal changes have reached fever pitch. With Chancellor Rachel Reeves at the helm, the Government has indicated that “tough decisions” are on the horizon, potentially affecting everything from capital gains tax to pension contributions.

At Holden and Partners, we understand that uncertainty can be unsettling, but with decades of experience navigating economic shifts and budgetary changes, we’re here to help you prepare and make informed decisions. In this article, we address some of the most pressing questions our clients have been asking this budget season.

Assets and wealth

Should we sell assets now to pay current rates of Capital Gains Tax (CGT) rather than risk rises?

Currently, capital gains are levied on profits of more than £3,000 in the current tax year. We don’t anticipate this allowance being increased in the forthcoming budget as the allowance has steadily reduced over the last few years. The rates range from 10% to 24% depending on the asset sold. There is speculation that the Chancellor is looking to align capital gains tax to income tax, thus increasing rates for the highest earners from 20% to 45%.

Therefore, if you are planning to sell shares or investments soon (in the next one to two years) there could be an argument for bringing these plans forward, thus securing the current rate. We’d also recommend talking to your financial adviser, as this could be a good opportunity to review any ‘legacy’ holdings and tidy them up as part of an overall review.

Where large gains are held in share or investment portfolios, it may be worth considering selling these down to trigger gains at the prevailing rate. If there are no changes to rates, you are not worse off in terms of the tax paid, other than bringing the payment forward.

Overall, concerns over possible tax increases should never drive the commercial case to sell an asset – this would be a case of expediting a planned sale rather than triggering it.

Will there be a wealth tax?

There has been some media comment suggesting Labour are considering some form of a wealth tax. If this was introduced and impacted the wider population, it would bring significant additional administrative burdens with compilation and submission of information. An alternative is a tax for the very wealthy, in particular, non doms (non dom describes a UK resident whose permanent home for tax purposes is outside the UK). Changes to non dom tax rises could lead to wealthy non doms seeking alternative places to live, with potential economic impacts. As a point of note, no G7 country charges a wealth tax, and the leading world economic bodies do not recommend one.

Inheritance Tax (IHT)

Should lifetime gifts be made before the budget?

If lifetime gifts are already planned or being considered, there should be no harm in bringing them forward to before the budget. It’s always worth acting sooner on lifetime gifts, even under the current system. This is because IHT operates on a reducing scale, with the tax tapering if the donor lives three years since the gift.

Will Inheritance Reliefs such as Business Property Relief (BPR) or Agricultural Relief be abolished? Should gift assets that qualify be transferred to the next generation now?

Labour is rumoured to be reviewing the various Inheritance Reliefs such as BPR and Agricultural Relief that apply to certain assets. These assets are usually integral to the business and cannot be easily sold or transferred. However, if there is already a thought-through strategy to gift these as part of current planning, it may be prudent to bring the process forward. Otherwise, we recommend a ‘wait and see’ approach.

Pensions

Will tax relief on pension contributions be affected? Should I make pension contributions before the budget in case tax relief is reduced?

This is an area that has attracted plenty of media attention, with alarmist headlines claiming pensions are under attack. In our view, any changes to pensions, especially around contributions, are a difficult balancing act as the Government is unlikely to want to reduce the amount paid into pensions, with so many already not saving enough for retirement.

Implementing legislative pension changes could be tricky, especially across defined benefits schemes (in particular, the public sector), with the risk that it could trigger an acceleration of senior employees bringing forward retirement. It is possible the Government could ring-fence public sector pensions and apply this to defined contributions only.

On balance, if you were considering funding your pension to use the current annual allowance and unused allowances, then bringing these plans forward would make sense as a precautionary approach.

Should I hedge a bit and take half my tax-free cash rather than all of it?

Rumours around tax-free cash always arise at budget time. Usually, not much actually changes. Withdrawing any tax free-cash should only be considered if you have a clear intended purpose for it, such as making a gift.

There are two specific areas where action might be recommended:

If you are over the age of 75 and have not yet taken your tax-free cash because you are hoping to pass on funds on death, then you may wish to consider drawing and making the gift now.
If you are considering retirement in the next few years and tax-free cash is an integral part of your retirement income strategy, then this should be reviewed. It might be appropriate to draw cash now.

Otherwise, we avoid taking any steps based on speculation.

Key takeaways

In the lead-up to this budget, as with any other, it’s essential to stay focused on your long-term financial goals rather than reacting to speculation or market noise. While the Government may introduce significant changes, careful planning and consultation with your financial adviser can help you navigate whatever comes next. Remember, the key is to stay informed, remain calm, and make decisions based on sound financial principles.

At Holden and Partners, we’re committed to guiding you through these changes, ensuring that your financial strategies remain robust and aligned with your goals, no matter what the future holds. If you would like to talk through these or any other questions, then get in touch today.