There is always speculation around changes to tax legislation in the run up to elections or Budget statements. However, as Labour sweeps into government, we can now know for sure that there will need to be tax hikes to pay for some of its proposed policies.
We have had questions from clients concerned about various ways the government might raise these funds.
Income tax thresholds being frozen until 2028 is a stealth tax, of which many are now feeling the effects.
However, more recently the questions have been centred around Isa allowances, inheritance tax, pension tax-free lump sums, and increases to the headline rates of capital gains tax.
Given the silence from Labour on CGT, there has been natural speculation that rates might go up. This would not be a huge surprise; when we look back at historical rates of CGT, the current rates of 10 per cent and 20 per cent for basic and higher rate taxpayers respectively are fairly low.
However, even though the headline rates of 10 per cent and 20 per cent have been in place since 2016, the allowances that an individual is able to offset against capital gains have been reduced drastically over the past few years, from £12,300 to £3,000.
With CGT allowances reducing under the Conservative government, none of this is coming out of the blue.
Although we do hear some concerns from our clients, they are all generally well positioned for any changes, because we deliberately create plans that are flexible enough to cope with changes in taxation legislation.
Investments held in pensions and Isa tax wrappers will not be affected by changes to CGT rates, which is why it is so important for people to make use of their allowances each year where possible.
There are other ways of mitigating the risk of being overexposed to tax changes, such as using onshore and offshore investment bonds. These are HMRC-approved planning vehicles that fall under the income tax regime, which allow for tax deferral. Again, investments in these products will not be affected by CGT increases.
People who hold investments in taxable accounts such as general investment accounts may have to make a decision about whether to crystallise gains before any potential tax changes come into force. However, I feel it is premature to be making major financial decisions based on speculation.
We only need to look at the rumours that were circulating in advance of recent Budget statements to understand that some of it is just noise. At one point there were talks of IHT being scrapped, which evaporated shortly after, and even rumours that do have some basis in reality may not materialise.
When the Conservative government announced it was removing the pension lifetime allowance, the shadow chancellor Rachel Reeves immediately made a statement to confirm Labour would reintroduce the cap should the party get into power. It was only a few weeks ago that it made a much quieter announcement reversing that decision once it had fully considered the practicalities.
