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Throughout the general election campaign, Labor officials insisted there were “no plans” to increase taxes beyond their manifesto promises.
However, given the precarious state of the country’s finances, the wealthy and their advisers are anticipating future tax increases now that the party has taken control of Number 10.
Labour’s landslide victory was secured in part by promising not to increase rates of income tax, national insurance, VAT or corporation tax – the “big four” taxes that make up around 75 percent of annual tax revenue.
This leaves limited flexibility if economic growth falls short of expectations. As a result, speculation about what tax levers might be deployed in the future is a hot topic among advisors and their clients.
Predicting possible changes in tax rules involves risks. However, the higher incomes and the wealthy are weighing the risks of preventative measures against the potential benefits of lower future tax bills if their strategies succeed.
Aside from moving abroad, here are four ways the wealthiest are looking to “work-proof” their finances against possible future tax increases.
Restructuring your investment portfolio
Advisers suggest changes to capital gains tax (CGT) could be a subtle way of imposing a wealth tax. Gains on investments outside pensions and ISAs are currently taxed at 20 percent: historically low for Britain and relatively low compared to the US and Europe.
Asset managers say a sell-off has begun as some wealthy clients fear Labor will increase CGT rates, potentially bringing them in line with rates charged on dividends or income tax.
“We are seeing people taking action and rebasing their portfolios, selling assets now to realize 20 percent gains in the hope that this will protect them from higher future tax rates,” said Katherine Waller, co-founder of Six Degrees, an asset manager . firm.
Many of her clients, entrepreneurs, have large allowable tax losses to offset profits, making a preventative CGT hit more palatable. Another strategy is to save any allowable losses for future use if CGT rates rise, although Waller fears Labor could impose a time limit on this. “It is also possible that future capital losses will be limited,” she adds.
Christine Ross, client director at Handelsbanken Wealth, notes that her clients are also carefully rebalancing their investment portfolios. “Generally they sell [a shareholding] and immediately purchase similar investments to pay the current capital gains tax rate,” she explains. “The shares must be different because UK tax rules negate this form of planning if the same shares are repurchased within 30 days of sale.”
Investment platforms report that customers are selling shares in general investment accounts and buying them back within ISAs, using their spouse’s £20,000 annual allowance, in addition to their own.
Advisors aim to ensure that reconstructed investment portfolios maximize tax benefits for the entire family, although this raises questions about control. Holding assets in the name of a spouse or civil partner in a lower income tax bracket can be beneficial, provided there is confidence that they will not spend it.
Fears of future CGT increases are also increasing financial pressure on smaller landlords, pushing many to sell their properties. CGT is charged at 24 per cent for higher rate taxpayers selling second homes or buy-to-let properties. Larger landlords, who often own rental properties within corporate structures, are less affected. However, advisers say potential changes to CGT could accelerate planned exit strategies and reduce investment levels, neither of which bodes well for a government aiming for growth.
Labor insists there are no plans to raise additional taxes. However, if future CGT changes do arise, tax experts expect they will be implemented with little warning to avoid massive pre-emptive disinvestment. Meanwhile, asset owners selling off bloat coffers, potentially delaying the reckoning.
The changing role of pensions
The very wealthy often view their pensions as a vehicle for intergenerational wealth transfer, rather than for their own expenses. Ending the favorable inheritance tax (IHT) treatment of defined contribution pensions could be an easy target in a future Budget, prompting advisers to consider mitigation strategies.
Pensions used to be attractive targets for the Labor chancellor. However, former Pensions Secretary Sir Steve Webb believes that if Rachel Reeves, the new Chancellor, has to focus on pensions, she will do so “with a minimum of fuss”.
Webb predicts she will avoid changes to tax-free lump sums, higher tax credits or bringing forward increases in the state pension age – at least in Labour’s first term. Still, advisors say clients are very concerned.
For over-55s planning to draw on their pensions, withdrawing tax-free cash sooner or later may seem like a tempting hedge against future rule changes. The maximum tax-free lump sum most people can take is capped at £268,275, which is equivalent to 25 percent of the historic lifetime pension benefit (LTA).
Fears rose two weeks before the election when Sir Keir Starmer wrongly said the LTA would be abolished in the future.
Financial advisors report that older clients with plans for their tax-free money, such as paying off a mortgage or financing children’s property, are the most motivated to take their full lump sum payment. However, they urge caution: taking a quarter of a pension and then reinvesting it in a general investment account puts future CGT accounts at risk and puts money into the estate for tax purposes.
Those with large pensions were relieved when Labour’s manifesto abandoned plans to reinstate the LTA. Reeves was demolished by former Chancellor Jeremy Hunt last March and initially promised he would reintroduce it if Labor were elected, but dropped it last month.
“That doesn’t mean this won’t happen in the future,” says Webb, now a partner at LCP, pointing to the general feeling within Labor that pension tax relief is “too tilted towards the top”.
Since last March, advisers say some clients have chosen to withdraw small amounts to materialize their pension benefits, fearing the LTA would be reintroduced by Labor. “This is because changes to the rules have historically only affected non-crystallized pensions,” explains Adam Walkom, founder of Permanent Wealth Partners.
Much has been made of Reeves’ previous support for a flat-rate tax credit for pensions, but Webb does not believe she will end the higher 40 percent tax credit, especially as another 3 million workers are expected to join in the coming period will be included in this tax bracket. the next five years. He expects Labour’s promised “pension review” to focus on targeting more institutional investment in British companies.
For now, employees in the ‘accumulation phase’ can benefit from the increased annual benefit of £60,000 in pension contributions while it lasts. Even if Labor cuts this to £40,000, advisers expect no changes before the April 2025 tax year.
With many already feeling the impact of budget pressures, making additional pension contributions to reduce income tax is an efficient strategy, especially for parents earning over £100,000 who can retain valuable childcare benefits when the system is expanded in September .
Accelerate your legacy strategy
Advisers have long recommended ‘giving while you live’ to reduce estate taxes and start the seven-year clock ticking for potentially exempt transfers. Political changes have increased the urgency, with some wealthy families accelerating the transfer of assets to younger generations amid fears of changes to IHT under Labour.
“Many families who were already planning to make substantial gifts to their children or to a trust are moving ahead with their plans,” Ross reports.
Advisers are concerned that any future changes to the IHT rules could make it less advantageous to inherit a pension or remove the business property exemption on certain AIM-listed shares held for more than two years – one common but risky tactic to reduce IHT bills. The IFS estimates that removing this aid could save almost £3 billion annually.
Ollie Saiman, co-founder of asset manager Six Degrees, has noted a growing interest in taking out insurance policies to cover future IHT liabilities. “If you are in your 50s or 60s and in good health, lifetime cover to provide liquidity for any tax bill may be cost-effective,” he says. “Probate cannot be granted until IHT bills have been paid, and beneficiaries who inherit a large, illiquid estate with lots of assets or interest may struggle to do so.”
Saiman also reports an increased interest in setting up pensions for children and grandchildren. A maximum of £2,880 per year can be invested, topped up to £3,600 with a 20 per cent tax reduction, and can only be accessed until retirement age. “Wealthy families understand the power of compounding,” he says.
Family investment companies are also becoming increasingly popular. Family members become shareholders and can receive dividends. “This could be a very tax-efficient way to cover college expenses for children and grandchildren, who will be subject to a low tax rate on their dividends,” Saiman added.
The use of tax-deferred vehicles, such as offshore bond portfolios, is also increasing. These are subject to the recipient’s income tax rate, making gifting a portion to a child in college a popular move. However, keep in mind the upfront costs and consultancy fees for setting up these structures.
Another easy way to avoid CGT bills for investments is to donate them to charity. Charities can dispose of shares free of capital gains tax. Although they cannot claim Gift Aid on the value of the donation, individuals can offset the gross value of the gift against income tax, potentially solving two problems in one.
School fees: grandparents to the rescue?
Labour’s plans to impose VAT on private school fees were one of the few tax-raising measures consistently maintained throughout this year’s campaign.
Chancellor Rachel Reeves has stated that changes will not be introduced for boarding and day schools until next year, meaning they will not affect the start of school