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It seems likely that some investors may live to regret the action they took in advance of this Budget. By accelerating decisions before having the full information, people’s financial futures may now take a different shape. Let’s hope it’s still a round rather than a square peg in the circle of comfortable retirement living standards.
In the run-up to the Budget, financial planners were busy advising wealthy clients worried about well-trailed capital gains tax (CGT) and inheritance tax (IHT) rises.
For example, Netwealth offered a free tax-harvesting service to lock in gains ahead of the Budget. The 25 per cent of clients who used this hopefully now feel justified at the news of a CGT rise from 20 per cent to 24 per cent at the top rate.
The chancellor will have done her sums by moving CGT higher — but not too high — to maximise revenue. Capital gains are hard to tax effectively, partly because investors can time when they take the gains. Just look at all those doing that in the past three months.
Many investors were braced for higher CGT rates up to 30 per cent, or even an alignment to income tax at 40 per cent. So 24 per cent, though a blow, comes as something of a relief. Could some investors, particularly those acting without advisers, have locked in gains too soon?
Counter to this is a new worry that the tax tail could continue wagging the investment dog, as investors hold on to gains in anticipation of future governments bringing CGT down again. Andrew Tully, technical services director at adviser platform Nucleus, says: “It is likely that the behavioural impact of these changes may mean more people not disposing of assets, at least in the short term.”
The other pre-Budget action that wealth managers reported was an acceleration of gifting, as clients attempted to pass on assets within the IHT rules. Families worried that potentially exempt transfer rules or gifting allowances would be tightened up.
Some of this generosity may now feel somewhat hasty as Rachel Reeves chose pensions as her way to raise IHT revenues. That possibility had been flagged, but was difficult to plan for.
Inheritance tax is one of the most hated levies among personal taxes, generating far more opprobrium than is justified considering how little it raises in revenue. This is partly because the weird world of IHT planning throws up some of the most bizarre tax anomalies.
One was that if you die before your 75th birthday, pension funds could be paid to your beneficiaries tax free. As a result, many financial advisers had a strange duty to tell clients not to draw on their pensions before that age if they could help it. Many found it bizarre to be told to fund the first stage of their retirement with non-pension assets.
That the chancellor is now bringing people’s pensions into the IHT umbrella is a sensitive subject, but it does feel more logical. As Martin Willis, partner at independent consultancy, Barnett Waddingham, says: “Pensions were never meant as tools for inheritance tax planning.”
Wealth manager Six Degrees estimates that across its client base, the pensions change will mean a 15-20 per cent increase in IHT liabilities. “Given life cover is a common strategy to enable beneficiaries to settle the bill, we anticipate a significant uptick in the levels of insurance families have in place,” says Ollie Saiman, co-founder.
However, there are many technical questions to be answered, not least whether there will be an expectation that pension schemes will pay IHT to HM Revenue & Customs before the distribution of death benefits.
Retirees and savers now have 18 months to review their long-term plans, with greater withdrawals from pension pots expected.
Though some retirees had already been withdrawing their pensions pre-Budget to hold on to their tax-free cash. Again, let’s hope they don’t regret letting fear cause them to take money out of a tax wrapper.
Looking on the bright side, Netwealth chief executive Charlotte Ransom calls the pre-Budget scramble “the biggest wake-up call to review personal finances that we’ve seen in a long time”. It’s also possible that some action taken in the past few months, for example filling up Isa and pensions allowances, may have been a better policy than doing nothing in what seemed like more friendly times.
Capital gains are now on the radar of more investors. But the good news is that the key vehicles to avoid CGT, by investing through a stocks and shares Isa or paying money into a pension, have seen their allowances remain intact.
Moira O’Neill is a freelance money and investment writer. Email: moira.o’[email protected], X: @MoiraONeill, Instagram @MoiraOnMoney