The upcoming Autumn Budget has been touted to target ‘the wealthy’ with tax rises.
Many might now think they’re off the hook, because they don’t consider themselves to be really well off.
But before you breathe a sigh of relief, it’s worth considering who the government might consider to be wealthy enough to target.
This isn’t personal advice. ISA and tax rules can change, and their benefits depend on your circumstances. If you’re not sure what’s right for you, ask for financial advice.
Remember, all investments and any income they produce can rise and fall in value, so you could get back less than you invest.
What does wealthy look like?
If it’s all about the top 20% of earners, the HL Savings & Resilience tool built in July 2024 shows they have median net household income of £78,394 a year.
The government might think these higher earners have wiggle room in their budgets to pay more tax.
However, they tend to be younger than the typically asset-rich older groups in their 60s, because peak earnings come in our late 40s, when they’re still building wealth.
The Barometer shows they have an average of £35,804 in cash and £39,445 in Stocks and Shares ISAs.
It means hitting these groups with higher wealth taxes wouldn’t be as fruitful as those who have already built wealth.
If you were to qualify wealthy as having lots of assets, this tends to peak at 60-64.
If you’re in this position, and have been building assets to fund your retirement, the idea of losing it to tax could be worrying – especially at an age where you have fewer options to rebuild wealth and when social care costs are rising.
However, the government will be aware of this, so could be wary of targeting this group.
Who could the likely targets be?
All this means that rather than homing in on wealthy groups of people, the government might decide to focus on taking a bigger slice from everyone as they grow their wealth.
This could mean hiking the rate of capital gains tax (CGT).
This risks people hanging onto capital gains until they die, because under the current rules this tax resets to zero on death.
It means the government might accompany this with rules that mean CGT doesn’t reset on death, so an estate might need to pay it on top of any inheritance tax (IHT).
The government could also decide that inheritance is a useful target, because it’s levied when the individual no longer needs it.
However, this will take a toll on their family, who could be relying on an inheritance for key life milestones.
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What can you do?
Capital gains tax
If you’re worried about CGT, it could be worth thinking about selling assets to use your annual £3,000 allowance as you go along.
At the same time, you can use the Share Exchange (Bed & ISA) process to move assets from an HL Fund and Share account into an HL Stocks and Shares ISA – which shelters them from CGT in future too.
Just don’t forget about your £3,000 CGT allowance which may be used when you’re selling investments to move into an ISA. And remember, you have to stick to your overall £20,000 ISA allowance.
You should also look at losses. You can offset losses from the same year against your gains, and currently carry them forward for one year.
If you’re earlier in the process of building your assets, consider Stocks and Shares ISAs, which mean investments can grow without having to worry about CGT and dividend tax.
Inheritance tax
If you’re worried about inheritance tax, gifts are a sensible way to bring down the size of your estate and pay less IHT.
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Friends and family can add money once opened by a parent until the child turns 18 and the account then becomes theirs.
You can currently give away up to £3,000, which will fall within your annual gift allowance. A couple could combine their exemptions.
You can also give away larger sums as potentially exempt transfers (PETs) and they will be outside of your estate after seven years.
There’s currently no limit to how much you can gift as a PET, however the value of the gift would only be exempt from IHT if you survive for seven years after it’s made.
If you pass away within this seven-year period, the gift becomes chargeable and would then increase the overall tax bill. Your executors can claim taper relief, which reduces the tax payable on the excess you’ve gifted over your available nil rate band.
This relief is available between three and seven years after the gift is made. The longer the period between the transfer and your passing, the greater the taper relief and therefore the lower the tax.
This is how the rules stand right now, but of course there’s no ruling out that the government won’t change these either.
If you have children in your life who are under 18, you could consider paying into a Junior ISA for them.
This is counted as being given away for IHT purposes. But it will be tied up until they reach 18 and are ready to make adult decisions about their nest egg.
These options make sense if you were planning to give this money away anyway, and you can afford to part with it. However, it’s vital not to let tax anxiety force you into something that’s not right for you.
If you think you could benefit from getting expert financial advice from a professional, get in touch with our advisory team today. You won't get personal advice on the call, but they'll talk you through the advice service we offer, including charges and connect you with an adviser if you'd like to go ahead.
Our advisers can recommend how you can make the most of your tax allowances through financial planning. But if you need complex tax calculations, your adviser might recommend you speak to an accountant to complement their advice.