Move money about now to avoid future wealth raids

WHILE it is hard to find any positives in the latest national lockdown, it does offer a scrap of good news for taxpayers, as Chancellor Rishi Sunak’s anticipated tax raid now looks set to be postponed.

Middle England was bracing itself for his Budget on March 3, amid rumours that capital gains, inheritance and pensions tax relief would all be targeted, and a new wealth tax introduced.

Sunak will be reluctant to increase taxes until the vaccines have done their work, the nation is set free and the economy has started motoring again.

Laith Khalaf, financial analyst at AJ Bell, said this may only be a temporary reprieve, as the 2020/21 budget deficit is on course to hit £450billion: “While Sunak’s tax rises may be delayed, they are still very much in the post.”

If you fear being a target of the tax attack, use this extra time to see if you can take some of your wealth out of the firing line.

TAXING TIME

Capital gains tax (CGT) remains the most likely target. Currently, higher or additional-rate taxpayers pay 28 per cent on gains when selling a second home or investment property, and 20 per cent on non-isa shares, businesses, antiques and jewellery. Basic rate taxpayers pay either 18 per cent or 10 per cent.

Experts suggest these rates could be hiked in line with income tax, which would see higher-rate taxpayers charged 40 per cent and additional rate taxpayers 45 per cent.

The annual CGT tax-free allowance may also be cut from today’s £12,300 to £5,000.

Many buy-to-let landlords have been selling properties ahead of a possible CGT hike, while also hoping to take advantage of the mini-boom in house prices. They may now have more time to complete their transactions.

This would also be a good time to sell shares held outside of an Isa and shift them inside your tax-free allowance..

Salisbury House wealth director Tim Holmes said take advice in what can be a complex area: “If you get it wrong, you could end up paying more CGT as a result.”

IN YOUR GIFT

Inheritance tax (IHT) is charged at a punitive 40 per cent on any family wealth that falls above the nil-rate threshold of £325,000, plus the addition main residence allowance of £175,000 for family homes.

Now could be a time to make gifts in the hope of shrinking the size of your estate and reducing the IHT bill.

Currently, you can gift a maximum £3,000 with no IHT to pay. Couples could therefore pay £6,000. If they did not use last year’s allowance, they could double this to £12,000.

On top of this, you can make as many gifts of up to £250 per person as you wish free of IHT, provided you have not used another exemption on the same person.

Khalaf said gifts of up to £5,000 to a child who is getting married are free of IHT, or up to £2,500 for grandchildren and £1,000 for anybody else: “So are gifts made out of ‘normal’ income provided they do not affect your standard of living.”

All other gifts are only completely free if you live for seven years, under potentially exempt transfer rules.

“The tax works on a sliding scale, falling to just 8 per cent after six years,” Khalaf said. Check what applies to you.

SWEET RELIEF

Tax relief on pension contributions costs the Treasury a hefty £36billion a year, and is vulnerable to attack.

Currently, basic rate taxpayers get 20 per cent tax relief on contributions up to a maximum of £40,000 a year, rising to 40 per cent for higher-rate taxpayers, and 45 per cent for additional rate taxpayers.

There are rumours that Sunak will synchronise tax relief at 25 per cent for all, hitting higher earners.

Becky O’connor, head of pensions and savings at Interactive Investor, said savers should make full use of existing pension and Isa tax allowances while they can: “Higher earners may want to increase their pension contributions today, in case tax relief is cut in future.”

‘Tax relief on

pension contributions costs the Treasury a hefty £36billion

a year’

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WEALTH WORRY

The most radical measure would be to impose a one-off 1 per cent tax on private wealth for five years, which could raise £260billion.

Earlier this month, the Wealth Tax Commission proposed charging the levy on anyone with assets over £500,000, or £1million for a couple. This would include the value of their property, hitting many homeowners in London and the South-east.

Rachael Griffin, Quilter tax and financial planning expert, said there are practical problems: “Getting so many properties valued fairly and accurately would be a huge challenge.” She said a wealth tax is unlikely but Sunak might find it more appealing than implementing a range of small tax hikes.

There is little you can do to avoid a future wealth tax, aside from spending it or giving it away, so many will be hoping it does not happen.

With the UK now more than £2trillion in debt, painful tax rises are heading our way.

You may now have a little longer to prepare, so do not waste it.

CAUTION: Sunak will probably not rush any tax rises