Budget 2024: Reeves announces Capital Gains tax rise
After the Budget included a £40 billion increase in taxes, including rises in Capital Gains Tax, Inheritance Tax, and National Insurance for employers, finance experts have identified how households can protect their wealth.
Experts at Hargreaves Lansdown have identified seven practical steps people can take to better manage their finances.
Its head of personal finance, Sarah Coles, said: “It’s easy to get overwhelmed by the endless post-Budget debate, but we need to cut through the noise, and do the right things for our finances right now.”
Set up savings while the going is good
Lower earners will get a significant boost from the rise in the minimum wage, while public sector workers are in line for pay increases.
The Office for Budget Responsibility says that as a result of the Budget, earnings growth will be higher than expected in 2024 and 2025 (4.7 percent and 3.6 percent). However, these positive impacts won’t dominate forever.
Over time, the impact of higher National Insurance contributions for employers will feed into business finances, and is likely to mean smaller pay rises further down the track. The OBR says earnings expectations further ahead will be lower than expected. It says, after inflation, wages will grow 2.4 percent this year and 1.2 percent in 2025, but then stall in 2026 and 2027.
The firm said: “It means it’s worth setting up a direct debit to go into a savings account on payday each month, so you do the right thing without thinking about it, and build an emergency savings safety net. That way, if your budget gets tighter in the coming months, you’ve prepared some wiggle room.”
Manage capital gains tax
Capital gains tax hikes materialised in the Budget, and the rate has risen from 10 percent to 18 percent for basic rate taxpayers and from 20 percent to 24 percent for higher rate taxpayers. It means any investors with assets outside pensions and ISAs need to consider how they will keep their capital gains tax bill to a minimum.
The firm said: “Fortunately, there are still ways to reduce a potential capital gains tax bill. You can use your annual allowance of £3,000 to realise gains gradually over the years.
“At the same time, you can use the Share Exchange (Bed & ISA) process to move the assets into a stocks and shares ISA, so you don’t have to worry about either dividend tax or CGT on these investments at any point.
“You can also offset any losses against your gains, give assets to a spouse or civil partner so they can use their annual allowance too, or defer income to next year so any capital gains tax you do pay is at a lower rate. You can hold assets for life, and the tax will reset to zero on death.”
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Plan for a remortgage
The Office for Budget Responsibility has warned that while the Bank of England interest rate will drop from 5 percent to around 3.5 percent in the final year of the forecast, this isn’t quite the fall it expected back in March – when it expected rates to hit 3 percent.
This doesn’t necessarily mean fixed mortgage rates will rise from here, because the OBR says the market had already reached a similar conclusion, so it’s largely priced in.
The firm said: “If you have a remortgage looming, you’ll already be braced for a hike in your monthly payments. The average interest rates on all outstanding mortgages right now – including rates that have been fixed for years – is 3.7 percent. By 2027, this is expected to rise to 4.5 percent.
“Around two thirds of mortgage holders have already had to remortgage since rates started rising, but it still leaves around a third to come up for a remortgage between now and 2026. If you’re in this position, you’ll need to plan for higher payments.
“Given how rates have fluctuated with expectations in recent months, it’s also worth hedging your bets. You can lock in a rate up to six months before your mortgage expires. If rates drop between now and then you can go elsewhere for a better deal, but if they rise, you will have secured a cheaper mortgage.”
Prepare your budget for higher inflation
As the cost-of-living crisis has eased, higher earners in particular may have been able to relax their household budgets and free up more cash for nice-to-haves.
The Budget isn’t going to usher in dramatic inflation overnight, but it is expected to rise to 2.6 percent in 2025 – partly because of energy bills and also partly because of higher wages and higher employer costs.
The firm said: “ It means it’s worth drawing up a budget in advance, so that you’re not caught out by price rises this time. You could even implement it early, and build up a cash cushion before it hits.
“The positive news is that inflation is still expected to drop back to 2 percent by the end of the forecast, so careful budgeting should help you keep on top of your spending in a way that was nigh-on impossible for so many people when inflation was in double digits.”
Give gifts to protect against Inheritance tax
Fears over the inheritance treatment of pensions came to fruition in the Budget, so that money left in a defined contribution pension after your death will be brought into your estate for inheritance tax purposes.
It’s expected to cost people an incredible £1.46 billion in 2029/30, and the government estimates it will affect 8 percent of estates, so it is worth planning for.
The firm said: “It might encourage people to consider giving gifts during their lifetime to lower their overall tax liability.
“Sensible gifts can help support younger family members at a time when you’re still around to see your family enjoy the money. You can give up to £3,000 away each year, which will fall within your annual gift allowance.
“There’s a separate rule that means you can give away surplus income inheritance-tax free too. You need to pay it from your regular monthly income and have to be able to afford the payments after meeting your usual living costs.
“If you give them a lump sum of more than the annual gifting limits, it becomes what’s known as a ‘potentially exempt transfer’, which falls out of your estate after seven years have passed.
It also gives you more control over how the money is given. You could, for example, put it into a stocks and shares Junior ISA for a child under 18, so you know the money will be invested carefully, and tied up until they’re an adult.”
Experts at Hargreaves Lansdown have identified seven practical steps (Image: Getty)
Consider how you take a pension income
Many more people will be being dragged into paying inheritance tax because their defined contribution pension is now counted as part of their estate. It will mean people who were planning to leave money in their pension to give tax-efficiently to family after their death will need to revisit their finances.
The likelihood is that more people will look to spend down their pensions as retirement income rather than leave them untouched, a move which could keep the rest of someone’s estate below the IHT threshold.
People could choose to give some of this money away to their family to help them with life’s milestones. More people might use their pension pot to buy an annuity, which provides a lifetime income, rather than see it plundered by IHT.
We may also see an increased interest in annuities as people look to secure a guaranteed income while also keeping their estate below the inheritance tax threshold.
Think carefully about taking tax free cash from pension pots
Anyone who took their money from their SIPP ahead of the Budget may be thinking about putting at least some of it back. However, Hargeaves Lansdown said this needs to be considered carefully.
The firm said: “Those who have only recently opened a drawdown account could be able to reverse their decision, and the money can continue to grow tax free within the pension, as they’d originally planned, without missing a beat.
“However, if it has already left, there’s the potential to breach recycling rules aimed at preventing people exploiting the system for extra tax relief and be clobbered with a fine. If you’re not sure where you stand, this could be one of the times in life when financial advice can be most rewarding.”
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