Protecting Your Wealth During the Autumn Budget under a Labour Government: Strategies for Safeguarding Your Assets
Just over two months into a new Labour government, the Autumn Budget 2022 has introduced or signalled several potential tax changes that could significantly impact individuals' finances, particularly in the areas of Capital Gains Tax (CGT), Inheritance Tax (IHT), and Pensions.
Capital Gains Tax (CGT)
The government has raised CGT rates in the last budget, increasing the lower rate from 10% to 18% and the higher rate from 20% to 24%. There is speculation that CGT rates could rise further or that differential rates might apply to certain asset classes, such as second properties. Additionally, the annual CGT exemption allowance has been sharply reduced over recent years and currently stands at just £3,000, increasing the likelihood that individuals pay CGT on gains.
Inheritance Tax (IHT)
The nil-rate bands (the tax-free threshold for IHT) have been frozen and extended until 2030, exposing more estates to the effects of fiscal drag. The Treasury is considering tightening gifting rules by possibly introducing a cap on the total value of lifetime gifts or modifying taper relief, which currently reduces the IHT rate on gifts made between three and seven years before death. These changes could affect middle-class estates, especially in high property value areas.
Pensions
From April 2027, pensions will be brought into the inheritance tax net, meaning pension pots may be subject to IHT on death unless careful planning is undertaken. This has prompted some retirees to consider withdrawing pension funds earlier to reduce estate value, though this can have adverse consequences on retirement finances. The government may also consider changes to pension tax relief, such as reducing or restructuring the current higher-rate tax relief on pension contributions and possibly restricting the 25% tax-free lump sum that can be taken from pensions.
In addition, the Labour government may consider ending the use of offshore trusts to avoid IHT.
Planning Ahead
Families should start planning for the extra cost now, as many private schools offer pay-in-advance schemes that may help secure a discount or protect against fee inflation. Inheritance Tax gifting allowances can help reduce the value of an estate, with gifts to spouses or civil partners being exempt from IHT. It's also recommended to use the ISA allowance before the Budget, as it offers tax protection for cash savings and investment returns.
Keir Starmer, the incoming prime minister, stated that wealth creation is the "number one priority". However, with no assurances about not changing other pension policies or taxes, it's crucial for individuals to stay informed and consider their financial planning strategies accordingly.
Some financial experts are concerned about potential increases in capital gains tax, while others fear that other tax hikes could be around the corner. The chancellor, Rachel Reeves, may tinker with the 25% tax-free cash that savers can withdraw from their pension pots from age 55. If all of the rumoured tax changes actually happen in the Budget, it could hike someone's tax bill by more than £200,000.
Experts fear that junior ISAs could potentially be targeted in the Budget, as they cost the Exchequer almost £5 billion a year in tax relief. The government has announced that they will add VAT onto private school fees from the start of 2025.
In summary, the Autumn Budget 2022 has set a path of fiscal drag through frozen thresholds, potential increases or stricter rules in CGT and IHT, and new inheritance tax rules applying to pensions from 2027, all of which could increase the tax burden on individual finances in the UK over time.
- The Autumn Budget 2022 has proposed changes to Capital Gains Tax (CGT) rates, with the lower rate increasing from 10% to 18% and the higher rate from 20% to 24%.
- Inheritance Tax (IHT) nil-rate bands have been frozen and extended until 2030, which could expose more estates to the effects of fiscal drag.
- From April 2027, pensions will be subject to IHT, potentially leading retirees to consider withdrawing pension funds earlier to reduce estate value.
- The government's focus on personal finance issues, such as Capital Gains Tax, Inheritance Tax, and pension policies, indicates a significant impact on personal-finance and general-news landscapes, particularly due to political decisions in the area of finance.
