Several clients have contacted us in alarm at what they have been reading in the media about the likely measures the Chancellor will announce in her first Budget on October 30th.

While we have no Treasury mole, we thought it might be worth highlighting a few guidelines amid all the talk of the fiscal ‘pain’ to come (from the Prime Minister) and the ‘broadest shoulders bearing the greatest burden’ (the Chancellor, rather too often). 

Capital Gains Tax (CGT)

Many commentators have suggested that CGT rates are likely to be equalised with income tax rates, i.e., the main rate applicable to most investors doubling from 20% to 40%. The same commentators have also pointed out that this is unlikely to raise much additional revenue because CGT is largely a voluntary levy, paid by only a few among the overall taxpaying public. 

In other words, it is only paid on gains that you decide to realise on the sale of an asset. Simply put, if you don’t need to transact, you don’t pay CGT.  
Of course, if you have a project or a liability that you were thinking of funding or part-covering from your portfolio in the near-term, then by all means contact us to raise the necessary funds now and you will pay ‘only’ the 20% rate on gains realised over and above the £3,000 annual exemption (and even that will not fall due until end-Jan 2026). We always offer to provision for CGT within your portfolio. 

If CGT rates are raised, then you can feel smug about having acted in advance of that. And if they are left the same, then you are in no worse position than if you had delayed.

Other tactical measures worth considering - whatever happens - include:

•    taking losses on underperforming stocks now to set against gains to be realised elsewhere in a portfolio later, especially where the balance of holdings has become skewed from desired risk profiles. 
•    making use of the current 10% CGT band for basic-rate taxpayers, perhaps by moving assets between spouses and realising gains if one is a lower-rate taxpayer
•    considering short-dated Gilts which are exempt from CGT for surplus cash or other reserves earning taxable income. Redemption yields remain attractive relative to the minimal risk assumed while interest rates remain high, but the window is likely to start closing as rates fall.
•    moving into collectives – in particular, investment trusts where many well-managed funds trade on wide discounts to their underlying Net Asset Values – which largely removes the CGT headache at the individual holding level.

Pensions

It is always our vain hope that HMRC will not touch these long-term savings vehicles because they represent the bedrock on which so many plan their long-term futures and retirements, with the obvious corollary that they, therefore, don’t become a burden on the State. 

Alas, successive Chancellors since Gordon Brown’s infamous tax raid in 1997 have been unable to resist the temptation to fiddle constantly with allowances, limits and many other rules impacting pensions. The siren voices at the Treasury have also for a long time been highlighting the ‘cost’ of tax relief on contributions (as if this was money that they would otherwise have received when, in fact, much of the time, it is relief for tax deferred until later). 

It has been widely suggested that higher-rate tax relief will be curtailed or removed completely, among other possibilities, such as the re-imposition of the Lifetime Allowance, amending the IHT status, further freezing (or removal of) the tax-free Pension Commencement Lump Sum (PCLS) and others. Who knows? 

Our first recommendation would be to make sure that you have contributed up to the maximum currently allowed, if you can afford to do so, before October 30th. 

Individual Savings Accounts (ISAs)

While the ‘BRISA’ or British ISA looks like it has died a death (probably deservedly – it was fraught with difficulty over practical implementation and policing), we earnestly hope that the £20,000 annual ISA allowance – or the total amount you can grow within ISAs - will not be touched by an avaricious Chancellor. It would surely be a huge own goal given the volume of investors who use this simple yet effective solution. (In the 2021-22 tax year, almost 12 million adults made an ISA subscription, and the combined value of accounts at the end of that period stood at £741 billion).^

It is always sensible to fund your ISAs as early in the tax year as possible in order to maximise the benefit of time spent in this valuable tax shelter. Linking to the CGT point above, it usually makes sense for long-term investors to pay some CGT now in order to ‘bed and ISA’ holdings with gains held in their General Investment Accounts and shelter them from future tax within ISAs.

It is always amazes me how some clients – not many, admittedly, perhaps because we bang on so much about it – will sit on cash in a taxable deposit or savings account until the end of the tax year before taking action to fund their ISAs. It is roughly the equivalent of walking past £500 left on the pavement with a post-it-note saying ‘extra tax-free income just for you’ on it. 

So, we would anyway urge you to take action sooner rather than later, even if ISAs do not fall victim to a ‘tax raid’.

Inheritance Tax

Inheritance Tax (IHT), too, looks like it will be caught in the crosshairs with much talk of rationalising reliefs like Agricultural Property Relief (APR) and Business Property Relief (BPR), removal of the capital gains uplift and replacing the flat 40% rate with progressive rates of 20%, 40% and 45%. It is hoped that some in-depth impact assessments are made before dismantling the scaffolding supporting so much long-term planning and entrepreneurial activity. 

Despite receipts from IHT now rising steeply, partly because of the continued freezing of allowances and limits, the UK has a relatively high rate for taxpaying estates but raises less from inheritance and gift taxes than all but one of the G7 countries that impose these levies. The distortions to behaviour and values (e.g. to agricultural land) and many well-flagged unfairness of the current IHT rules make it an area ripe for reform, as urged on the new Chancellor by the likes of Demos, The Resolution Foundation and the Institute for Fiscal Studies. 

Conclusion

As ever, while tax is always painful, it is far more important to stay focussed on long-term investment objectives and not allow these to be distorted or de-railed by short-term tax avoidance ruses. 

Beware the dinner-party strategist and sense-check the doom-peddlers in the media. Finally, remember: NOBODY ACTUALLY KNOWS YET what will finally be included in the Budget, probably not even Ms. Reeves herself. Taking panic action now in the hope of second-guessing what is coming down the line is fraught with hazard. 
Whatever the outcome, rest assured, that we will always endeavour to ensure you are mitigating tax in your portfolios where it is sensible and effective to do so. There is absolutely nothing we hate more than funding egregious or, worse still, unnecessary tax demands every January and July. This just undoes all our hard work in building up long-term value in your portfolio. 

In the worst-case scenario, remember that we have survived Labour governments threatening to ‘make the pips squeak’ before (just). Who knows, what eventually emerges may not be as bad as feared.

^ Commentary for Annual savings statistics: June 2023 - GOV.UK (www.gov.uk)

Important Information

The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment arrangements. Please note, we are not tax experts, and you should seek professional advice concerning your personal tax affairs from qualified advisers, such as tax accountants.

Please also note that the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.