Endless speculation about the budget has persuaded an awful lot of people they need to take action now, to protect themselves from whatever it holds in store. Capital gains tax threats, tax on pensions and inheritance tax concerns have all thrown people into a state of panic, and there’s a risk they’ll rush into things that come back to bite them.
There are some eminently sensible steps you can take now — like paying into a pension or moving assets into an ISA. However, there are also 10 steps that could seriously backfire — some of them leaving you far worse off than if you’d left things as they were.
1. Taking tax free cash out of your pension
Rumours are swirling about whether pensions are in chancellor Rachel Reeves’ sights, with suggestions that she might look to trim back the amount of tax-free cash people can take from their pension. Ripping this out of your pension now to avoid a tax grab may seem like a good idea, but it’s something you may come to regret.
If you are going to take your tax-free cash, you need to have a plan for what you’re going to do with it. Simply taking it and putting it in a bank account paying a low interest rate means that money misses the potential for further investment growth in the pension. Investments within a pension also grow free of tax, and unless you’re taking £20,000 or less, and putting it in an ISA, you’ll lose that protection against tax.
Read more: Keir Starmer warns autumn budget will be ‘painful’
It’s also worth saying that under current rules, money in a pension is usually free of inheritance tax — this is not the case with money in ISAs or bank accounts so there’s also the chance that taking your tax-free cash now could land your family with a nasty tax bill in future.
2. Taking income you don’t need out of the pension
Deciding to take an income earlier than you intended because you’re worried about how the tax treatment might change could also come back to bite you.
Flexibly accessing your pension will trigger the money purchase annual allowance, and this could slash the amount you can pay in from as much as £60,000 per year to just £10,000. It’s a move that could seriously hamper your attempts to rebuild your pension at a later date because too much has been taken too early.
3. Realising too many capital gains now
Investors with an eye on potential capital gains tax (CGT) changes may be weighing up the benefits of realising capital gains way beyond their annual allowance right now, before the rate has a chance to rise. They’ll pay tax, but they might reason that they might end up paying less, and at least they know where they stand.
However, it comes with a risk, because you could end up paying much more tax than you need to.
Read more: How Keir Starmer’s ‘painful’ autumn budget may impact your pension
The budget is likely to keep an annual CGT allowance, so investors with stocks and shares would still be able to realise gains slowly over the years and pay no tax at all.
Alternatively, you might find that the CGT rate doesn’t rise in the way you expect, so you’ll have paid the extra tax for nothing. It’s why you need to think very carefully before signing up to paying a tax you may never need to fork out for.
4. Choosing assets to sell based on tax alone
It’s always a danger when the tax tail wags the investment dog, because it can persuade you to make poor investment choices. You might have assets that have gained a great deal, which you’re tempted to sell off in order to use your CGT allowance, and others that have made a loss, which you want to hang onto until you can get more of a tax benefit from those losses.
However, if the share that’s rising has far better fundamentals and the one that’s on the slide is in terminal decline, you risk ending up saving tax but losing money overall.
5. Not calculating CGT on Bed & ISA
Bed & ISA is a brilliant way to move investments into an ISA, to protect them from any capital gains tax and dividend tax in future.
However, when you use this option, you need to calculate the gains on the money you’re moving, to ensure you don’t bust your £3,000 annual limit on gains — or there will be tax to pay.
6. Selling and buying the same assets within 30 days
It’s worth understanding the “Bed and Breakfast” rules, which state that if you sell assets and buy them back within 30 days, for tax purposes they’re treated as if you never sold them at all. As a result, you won’t have reset the CGT, and the gain will be considered from the first day you bought those assets.
The exception to the rule is if you use Bed and ISA to sell assets and then buy them back within an ISA. The ISA is considered as a separate entity to you, so you’re not counted as having sold and bought the same assets.
7. Trying to give your property away but still using it
Rumours that inheritance tax could rise have led some people to worry that they need to take steps to protect some of their assets from the taxman after they die. Some might consider signing their property over to their children in the hope it won’t be counted for inheritance tax purposes. If you give it away and move out, and never see any benefit from it, then under the current rules, if you live for seven years, it will pass out of your estate for tax purposes.
However, if you get any benefit from it, then it’s considered as a “gift with reservation of benefits”, so it’s not counted as having been given away at all.
This can happen if you continue to live there without paying a market rent, if you give it away with conditions attached — like them not being able to sell, or you get any benefit from it. This might apply if you give away a holiday home but keep the right to stay there without paying rent. It means you could pay all the legal costs for a transfer, and not get any tax benefit from it at all.
8. Putting property into trust for inheritance tax purposes
Given that for most people, their home is their most valuable asset, you might be tempted to consider a scheme that puts your home into a trust. These are based on the assumption that the property is considered to be given away on the date you put it into trust, so the seven-year clock starts ticking.
Read more: How to make sure you’ll get the full state pension
However, you could get an immediate tax bill — alongside the cost of setting it up, and there’s no guarantee it’ll work, because the taxman may consider these schemes to be tax avoidance. You could end up paying a fortune and achieving nothing.
9. Giving money away you can’t afford
Giving money away during your lifetime gives your family a chance to make the most of it at the time that suits them best, while you’re still around to see the benefits of your gift. It also comes with inheritance tax benefits, because the first £3,000 a year falls outside your estate immediately, and any larger gifts are out of your estate for inheritance tax after seven years.
However, none of these are reasons to give away money you might need later. Some people will dip into their pension and damage their income prospects. Others might spend savings they end up needing as they get older — to adapt their home, for example, or pay for additional care. You could sorely regret making gifts you can’t afford, driven by inheritance tax fears.
10. Taking equity release out on a property
One potential wheeze people may use to avoid inheritance tax is to release equity from their home, and then give it away. After seven years there’s far less property equity to count towards the size of the estate, so the tax bill may be lower.
However, equity release schemes are expensive. They come with up-front charges, and ongoing interest that rolls up and needs to be repaid on death. If you don’t live for seven years after giving the gift, then at least some of it will be brought back into your estate anyway — so these costs may end up achieving very little.
Read more: What is seller fatigue and how can it impact you when buying or selling property?
Meanwhile, if you live much longer than you expected, the costs will mount and can end up costing you far more than simply paying the inheritance tax would have done.
Five sensible planning steps ahead of the budget
-
Make a pension contribution
-
Pay into an ISA
-
Take out a Junior ISA for a child
-
Use share exchange (Bed and ISA) for existing investments
-
Use your CGT allowance on share gains
Download the Yahoo Finance app, available for Apple and Android.