With Rachel Reeves having hardly any margin for error to balance the books, it seems likely that further tax hikes in one form or other will be introduced on the 26th of November.
Speculation during the run-in to the upcoming UK autumn budget has been more prevalent than the previous one; however, the same areas of interest keep coming up in conversation: Pensions, ISAs and Inheritance Tax (IHT).
Pensions
An easy target for tax hikes could be pensions, as this is where most personal wealth is held. This is because historically people have been encouraged to contribute to tax efficient pensions with income tax relief being available on contributions. Whilst it was expected that Reeves would make changes to pensions in the last budget, it came somewhat as a surprise that the full value of UK pensions would fall into an individual’s estate for UK IHT purposes from April 2027.
Similarly to last time around, people are worried that Reeves will now look to reduce the entitlement to tax-free cash within pensions, which is typically 25% of the pension value. This would mean a greater proportion of pensions would be subject to income tax, raising more funds for the government, and helping Reeves balance the books.
Financial advisors can only provide personal recommendations within the current financial landscape. In most cases, it is not wise to advise significant, potentially irreversible financial decisions based on hunches regarding government policy. However, this has not deterred high numbers of individuals withdrawing the maximum tax-free cash from their pensions, with HMRC recording a flurry of activity in recent weeks. So much so, that they have confirmed that lump sum withdrawals of tax-free cash will not be able to be reversed.
In some cases, withdrawing the maximum tax-free cash could be the right course of action; however, this should be viewed independently, with the policy holder being fully informed of all the associated pros and cons specific to their own circumstances.
ISAs
For those who have already pushed the ‘go’ button early on their pension tax-free cash, they may now be looking for a new tax-efficient home for their monies. ISAs (Cash or Stocks & Shares) can be a good solution. Monies held in UK ISAs earn tax-free interest, dividend income and capital gains. The downside is that only UK tax residents can contribute up to £20,000 per annum to an ISA or across various ISAs. Further restrictions apply, as individuals cannot contribute to 2 different Stocks & Shares ISAs in the same tax year.
So, what will Reeves do with ISAs? One theory is that the contribution limit for Cash ISAs will be lowered. Reeves may wish to shift people away from saving cash and push them towards further investment. The idea is that UK investments would benefit by receiving additional funds, and over the long-term people would benefit from increased wealth on their savings by holding relatively higher risk investments compared to cash. As a secondary consequence of this, individuals who continue to save cash in standard (non-ISA) accounts may become subject to income tax on some of their interest, which will help the UK government’s coffers over the next few years.
Inheritance Tax (IHT)
Reeves has already made big changes to IHT, namely bringing pensions into personal estates from April 2027. For those unaware, IHT is only applicable to the excess funds above an individual’s IHT allowance on death. This is £325k per person (known as the Nil Rate Band) and there is a further £175k available should you pass your main residence on to a direct descendant (known as the Additional Nil Rate Band). So, you possibly have up to £500k (£1m for married couples) before IHT at 40% applies.
The price of assets continues to rise on an annual basis whilst the IHT allowance remains fixed. As a result, more people in the UK are finding that IHT may start to become more of an issue, and they want to do something about it now rather than wait. With the cost-of-living crisis and booming property market leaving a lot of young people feeling financially helpless, there is a growing trend of wealth being gifted earlier to younger family members rather than on death. More people are taking advantage of the ‘7-year gift rule’ where a financial gift is fully removed from the estate if the person making the gift survives 7 years.
If Reeves looks to clamp down even harder on IHT, this seems to be the most obvious area that could raise extra cash for the government. Reeves could potentially extend the survival period of the gift rule or cap the value of assets that can benefit from the gifting rule.
Summary
Whether you are based in the UK, Cyprus or anywhere else in the world, if you think the upcoming UK budget could impact you, we recommend you speak with a qualified financial advisor before making any decisions.
Often, the best course of action is to avoid rushing into any important financial decision.
If you need help figuring out the facts and deciding what they mean for you, we’d be happy to help. Get in touch with us via info@3dglobal.com or +357 25828292.