• The UK Autumn Budget announcement is set for 30 October, with speculations of changes to capital gains tax, inheritance tax and pensions.
  
  
• Potential changes include increasing capital gains tax rates or reducing the allowance, reducing pension contribution reliefs or tax-free lump sums, and overhauling inheritance tax rules.
  
  
• It is important to consider all possible risks and downsides, as well as understand the individual circumstances of clients.
   

With the UK Autumn Budget announcement set for 30 October, there is growing speculation that changes to capital gains tax (CGT), inheritance tax (IHT) and pensions could be on the horizon.

We won’t know the specific details or start dates of any new policies until they’re disclosed in the Budget, but we can explore some of the rumoured changes and what they might mean for you and your clients.

Tax changes can be stressful for clients and many will lean heavily on their adviser for support. As advisers, you don’t have a crystal ball, but you do have the skill, expertise and judgement to help clients make informed decisions in the face of uncertainty.

Acting on speculation carries a high degree of risk. We don’t know if any of the rumoured changes will come to pass and any actions taken may bring about unintended consequences.

However, if clients had plans to take some action in the not-too-distant future anyway, there is logic in accelerating those plans and implementing under the legislation as it stands today. 

Capital-gains tax

There is talk that capital gains tax (CGT) will be on the Chancellor’s radar. The government might decide to align CGT rates with income tax, which could lead to a significant increase in the amount of tax that clients pay when selling assets. Another option may be a further reduction in the CGT allowance, which has already been reduced from £12,300 in 2022-23 to £3,000 presently.

If a client has material unrealised capital gains in their investment portfolio, it might make sense for them to realise these before any potential changes come into effect. This would allow them to benefit from the current CGT rate and allowance.

Before selling assets, investors should have a plan around redeploying the proceeds. One approach is to ‘harvest’ the gain and purchase a similar investment within the same (taxable) account to rebase the value of the assets to save future tax.

Where pension and ISA allowances are available, it could also be a good opportunity to consider ‘bed and ISA’ or ‘bed and pension’ transactions (using the sale proceeds from the taxable account to fund ISA and pension contributions, respectively). As well as realising the gain, this would also shift assets into a more tax-efficient account to better shield the assets from taxes in future.

Remember, though, that there are potential downsides for clients when taking action. Selling investments without a plan to redeploy the capital incurs out-of-market risk.

If CGT changes don’t materialise, some investors will have crystallised tax prematurely which may possibly have been avoided altogether. There can also be transaction and other costs associated with any sales and reinvestments.

Download our client-friendly explainers on the ‘bed and ISA’ approach and what the changes to CGT means for investors to assist in conversations with clients.

Pensions

Further rumours are that the Chancellor might scale back the reliefs available around pension contributions, such as cutting the annual allowance or reducing tax relief rates available.  Such measures would mean higher- and additional-rate taxpayers in particular may be more restricted in the tax relief they receive than they do currently.

There is also speculation that the 25% tax-free lump sum that clients can take from their pension might be removed or capped at a lower amount (for example £100,000), compared to the current level of £268,275 (25% of the former lifetime allowance).

Some clients will certainly be tempted to take action now to avoid losing out if the allowance is cut. However, there are some material downsides to consider.

If the current laws remain unchanged, cashing out the maximum pension lump sum now could prevent clients from accessing a potentially larger (tax-free) sum in the future. This is because taking the lump sum will crystallise that part of the pension, meaning further investment growth does not lead to a higher pension commencement lump sum being available.

Taking the tax-free cash also means that it has to be redeployed elsewhere (if clients currently have no plans to spend it). In the likelihood that a client has already used up all or most of their annual ISA allowance, it will be inefficient to hold the proceeds in a taxable account.

Taking the lump sum out of the pension puts the money back in the investor’s estate, where currently inheritance tax at up to 40% could apply. By contrast, in the right circumstances, money left in the pension can be passed tax efficiently to the next generation. To make matters more complicated, there are rumours of changes to taxes on death both inside and outside a pension.

Overall, taking firm action ahead of the Autumn Budget requires careful consideration and carries risks.

Inheritance tax

Some of the rumoured changes to inheritance tax (IHT) include overhauling the regime for potentially exempt transfers (PETs). Currently, gifts made by an individual prior to the seven years before their death are exempt from IHT. There are thoughts that the length of time may increase, or the amount that can be gifted during an individual’s lifetime may be reduced.

Other changes could include removing business relief; introducing more progressive rates for more valuable estates; charging CGT when inherited assets are sold; and making unused pension assets subject to IHT.

Again, we won’t know if or how IHT could change until the day of the Budget. In estate planning, reducing inheritance tax typically involves a trade-off: cost, risk or reduced flexibility. That’s why estate planning demands thoughtful consideration and knee-jerk reactions are best avoided.

That said, for those clients who have already made decisions about their inheritance plans, it may be appropriate for them to accelerate or scale-up their plans in advance of any changes to the legislation.

As with pensions and CGT, the focus should be on encouraging clients to think long term, but it is also about considering a diversified and personalised approach around estate planning  – and that’s where the benefit of advice can really come to the fore.

Summary

There are some actions which feel like they carry less risk than others, but it’s important to consider all the possible downsides of taking action as well as fully understanding the client’s circumstances.

While potential changes to tax rates may feel burdensome, they also put financial advice in the spotlight and represent an opportunity for advisers deliver greater value for clients. Vanguard’s commitment to delivering value to investors recognises the role of financial advice in helping investors achieve their financial goals.

To support you, we created the Vanguard 365 portal with a wide array of tools and resources to assist you in addressing the complex needs of clients. These include access to industry insights, continuing professional development (CPD) education and events that augment industry knowledge and expertise.

Our client-friendly explainers on the ‘bed and ISA’ approach and what changes to capital gains tax might mean for them can support your conversations over the coming weeks.