10 steps to Budget-proof your finances

The new Labour government’s first Budget is two weeks away on 30 October, and it’s expected to be a painful experience for many investors.

Labour committed in its manifesto not to raise income tax, VAT or national insurance (NI), among other taxes. But that means the various forms of wealth taxation are very much in the firing line, and Chancellor Rachel Reeves is rumoured to be looking closely at multiple options to see where funds could be raised.

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So what can canny investors do to protect their assets as far as possible from potential changes to the tax regime?

It’s important to remember that until 30 October we can only speculate as to how Reeves might tighten the screws. As Ben Yearsley, director at Fairview Investing, points out, “anything you do shouldn’t be something you wouldn’t do normally, as that’s letting potential tax changes alter your behaviour”.

But although it’s possible that actions taken now might be unpicked in the Budget, it’s very rare for tax changes to be made retrospectively, so it does make sense to bring forward the simple annual measures that many of us normally leave until towards tax year end in the spring.

What is it worth considering?

1. ISA allowance

Capital gains tax (CGT) – levied on gains from the sale of a range of assets, including shares and residential property that isn’t your main home – is widely regarded as a prime target for the chancellor.

There is much speculation that she may hike CGT rates, with a figure of somewhere between 33% and 39% being reported. However, Prime Minister Keir Starmer said rumours of the top end of this range were “wide of the mark”.

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Current CGT rates are considerably lower: basic rate taxpayers only pay 10% (18% on residential property gains), while for higher and additional rate taxpayers the rate is 20% (24% on residential property gains).

Even if you’re not currently in a position to maximise your £20,000 individual savings account (ISA) allowance for this tax year by buying new shares or funds, it’s well worth using any spare capacity to shelter existing investments currently liable to tax.

This process is known as Bed & ISA. It involves selling your holdings, realising any gains up to the CGT personal exemption – currently £3,000 – and then buying them back within the ISA wrapper, where they will grow free from tax on either income or gains. It’s a cheap and simple process through brokers such as ii.

2. Pension allowance

The same basic argument holds true for anyone with a pension such as a self-invested personal pension (SIPP), which they manage through a broker.

You have an annual pension allowance capped at £60,000 or your annual earnings, whichever is lower, and if that’s used up you can carry forward unused allowance from the previous three tax years.

So the chances are you have some unused allowance into which you could transfer existing investments that are currently potentially taxable. This process, unsurprisingly, is known as Bed & SIPP.

3. Crystallising gains

You may not have any personal pension or spare ISA capacity, but Yearsley advises that selling taxable assets such as shares to realise gains you’ve made or rejig your portfolio is “a no-brainer”.

By doing so and then repurchasing or switching holdings, you effectively re-set the capital gains dial on those holdings to nil.

“It’s unlikely the government will change CGT rate with immediate effect; it’s more likely to be from say the new tax year in April,” says Yearsley. “However, the rate isn’t going to be going down, so if you were planning on switching investments, do it pre-Budget.”

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4. Transfers between spouses

Married couples are allowed to transfer assets freely between them: it’s a valuable way of making the most of both partners’ £3,000 CGT exemption, and can be even more useful if one partner is in a lower tax bracket than the other.

For instance, one partner, a higher-rate taxpayer, might be the main investor and hold all the taxable investments in her portfolio. If she transfers some into the other name, a total of £6,000 of tax-exempt gains can be realised; and if the partner is a basic rate taxpayer, any additional gains from that tranche of holdings will be taxed at only 10% instead of 20%.

Transfers between spouses can also be useful if you’re worried about inheritance tax (IHT) hikes - another key area where it’s anticipated Reeves may take action.

5. IHT exemptions

The current £325,000 nil rate band (which is the value of assets you can leave on your death without potential liability to IHT) is frozen until 2028, but the chancellor may review the list of IHT exemptions.

These include, among others, pension assets, agricultural land and specific types of qualifying investments, such as shares listed on the AIM market which fall under the Business Relief exemption for IHT.

If you were planning to make use of these anyway, considering doing so prior to the Budget.

6. Gifting

Reeves may also be planning to overhaul the current gifting regime, which effectively allows anyone to avoid IHT completely on any assets they gift, provided they keep a full record of the gifts made and, crucially, survive for seven years thereafter.

Again, it’s worth making any gifts you had in mind before the Budget in case the rules change.

7. IHT insurance

In the face of widespread rumour around the outlook for IHT, Jonathan Halberda, specialist financial adviser at Wesleyan Financial Services, says he has seen growing numbers of people trying to craft ‘DIY’ estate plans.

This includes arranging a life insurance policy that will pay out to cover any potential IHT liability when they die. Halberda warns it’s crucial that people buy the right policy.

“Instead of ‘whole of life’ policies, I’ve seen many cases of people mistakenly buying ‘term’ policies that only cover a fixed period. This leaves them exposed to IHT risk when it runs out.” He therefore recommends taking professional advice if you’re thinking of taking this step.

8. Pension tax-free cash

Recent pension speculation suggests that the chancellor is not planning to tinker with the pension contribution tax relief system at the Budget.

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However, a reduction in the amount of tax-free cash that can be taken from your pension is by no means off the table. At present, you can withdraw 25% of your pension value, capped at £268,275; there are suggestions that the cap could be slashed to £100,000.

For people planning to access their pension in the coming years or months, the temptation may well be to pull out the maximum tax-free allowance prior to the Budget and stick it in a bank account.

That could pay off if the rumours are true and Reeves does raid pension tax-free cash – but it’s a gamble and an irreversible decision. If she doesn’t, you’ll be left with a pot of cash from which any future income or capital growth is taxable.

In that scenario, unless you have the cash earmarked for a specific purpose such as clearing your mortgage, withdrawing your maximum tax-free lump sum is a risk that could backfire painfully in the long term.

9. A surplus fund

In view of the extreme uncertainty as to what might be announced at the end of October, Halberda also suggests that a dedicated pot of money could be useful for unexpected expenses that might arise.

“This gives you all-important breathing room should tax or savings policy change, preventing you from being rushed into taking actions with your money that might not immediately work in your favour post-Budget,” he explains.

10. Portfolio diversity  

Although tax planning tips and tools might be uppermost in your mind, it’s also worth bearing in mind that a tough Budget could result in some market volatility. This might therefore be a good time to take a rain check and ensure your portfolio is well-diversified both geographically and across asset classes.

As Halberda observes: “Spreading investments across different asset classes is key to ensuring risk is balanced with market demand – holding some contra-cyclical assets can help maintain returns even in the face of market choppiness.”