Is the Upcoming Budget About to Hit Your Wallet Hard? Here’s What You Can Do

TAX COMPLIANCEHMRCTAX CHANGESUK GOVERNMENTBUDGET

The Tax Faculty

10/8/20244 min read

As the next UK Budget looms, many of our clients are feeling anxious about the potential changes that could significantly impact their tax affairs. With the government hinting at tax reforms, it's understandable that this worry about the unknown has caused widespread concern. At The Tax Faculty, we’ve been hearing one common question over and over again: How will the Budget affect my tax liabilities?

In this blog, we’ll explore three of the tax changes being discussed and offer some practical advice on how you can prepare for any unpleasant surprises.

Capital Gains Tax (CGT): Will the Rates Go Up?

One of the most talked-about changes is the possibility of aligning capital gains tax with income tax rates. Right now, higher-rate taxpayers pay 20% on gains after using the annual CGT allowance, but if these rumours prove true, the rate could rise to match income tax, which means you could end up paying 40%. This would be a substantial increase, especially for those who have benefited from low CGT rates on stock market investments.

What You Can Do Now:

1) Crystallise gains each year: Make use of your £3,000 annual allowance and consider realising gains in smaller chunks over time.

2) ISA Shielding: If you're looking to protect investments from future CGT hikes, consider a Bed & ISA strategy. Selling and repurchasing assets within an ISA wrapper could save you from future capital gains tax liabilities.

3) Offsetting Losses: If you’ve made losses on other investments, you can offset them against future gains to reduce your tax bill.

Income Tax: Are You at Risk from Frozen Thresholds?

Another almost-certain change is the continued freezing of income tax thresholds. With inflation steadily rising, this is leading more taxpayers into higher tax brackets without any increase in real wages. If the thresholds were to increase with inflation, many people would save thousands in tax. Instead, many middle-income earners might find themselves pushed into the higher-rate tax band as their wages rise with inflation but the tax thresholds do not.

How You Can Prepare:

1) Pension Contributions: Higher-rate taxpayers can lower their taxable income by making pension contributions, which benefit from tax relief at your highest marginal rate.

2) ISA Investments: Consider moving savings into ISAs, where the interest is tax-free and won't affect your personal savings allowance.

3) Spousal Asset Transfers: If your spouse is in a lower tax bracket, transferring income-generating assets to their name can help utilise both personal allowances more efficiently.

Inheritance Tax (IHT): Will the Nil-Rate Band Be Cut?

Inheritance tax is another area where clients are rightfully concerned. While the current nil-rate band of £325,000 provides some relief, there are growing fears that this could be slashed, leaving more estates liable for inheritance tax. The residence nil-rate band currently allows an additional £175,000 for those passing on their homes to children or grandchildren, bringing the total allowance to £500,000 per individual. If this threshold is reduced, significantly more estates will be caught in the IHT net.

Take Action Before the Budget:

1) Annual Gifts: You can give up to £3,000 per year tax-free. If you’re worried about IHT changes, consider using this allowance now.

2) Seven-Year Rule: Larger gifts can be made, and if you survive for seven years after the gift, it will fall outside your estate for IHT purposes.

3) Junior ISAs: Contributions to Junior ISAs for grandchildren or children can also be a tax-efficient way to pass on wealth while potentially avoiding future inheritance tax.

Confused About the direction to take Next?

With the Budget just around the corner, no one can say for sure what changes will be introduced. However, by asking questions and taking steps now, you can mitigate the impact of potential reforms. The most important thing is to stay informed and act quickly if the Budget brings changes to your personal tax situation.

At The Tax Faculty, we are committed to helping our clients as much as possible in these uncertain times. If you’re worried about how the Budget might affect your tax affairs, we’re here to offer tailored advice and help you make the most of available allowances.

Get in touch with us today for a free consultation and let’s make sure you’re prepared for whatever comes next.

Capital Gains Tax Expertise: The Tax Faculty LLP Managing Partner Charles Tateson Named UK Capital Gains Tax Advisor of the Year 2023

The Finance Monthly Taxation Awards recognises the achievements of tax professionals from around the globe.

Winning such an award is no small feat. It is a reflection of hard work, extensive knowledge, and an ability to navigate the intricacies of the UK tax system.

Read more about Charles and the award here.

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