QUESTION. With just hours to go before the Budget, should I be trying to take any action to mitigate tax?
ANSWER: The tax measures that will be announced on October 30 are unlikely to take effect from midnight that day except for changes in duty such as fuel and alcohol duties. Changes to the main taxes (income tax/CGT etc) normally take effect from the beginning of the new tax year (April 2025).
Nevertheless, there have been instances where quite significant changes did take effect from budget day in the past. One of the most significant of these was the reduction in the lifetime limit of entrepreneurs relief from £10m to £1m on March 11 2020 (budget day). This type of potential action has caused certain taxpayers to take action in relation to their tax affairs before October 30.
On literally the eve of the Budget, there are a limited number of actions that you can take if you fear a midnight rule change.
You could make the maximum pension contribution to your pension scheme, provided your pension provider could facilitate the contribution. This would secure tax relief at your highest rate.
There is speculation that the Chancellor may curtail pension tax relief to the basic rate of income tax - 20% and/or reduce the annual maximum contribution from the existing £60,000 to a lesser amount. Another immediate action that you could try, and take is to access your maximum tax-free pension cash of £268,000 if your fund is at or above the limit for maximum tax-free cash.
Again, it is rumoured that tax free cash could be limited to £100k or even lower in the future. Wealth managers are advising against this course of action as once the cash is accessed it will start growing outside of the tax-free environment that a pension offers.
There are some capital gains tax measures that you could enact such as making sure that any business sales are completed on an unconditional basis before Budget day.
CGT is currently charged at 20% with a very generous 10% rate for disposals of qualifying business assets. CGT is the most widely tipped tax to increase, and the rate increase could occur from midnight on the 30th as could the eradication of business asset disposal relief (entrepreneurs’ relief). Gifts of assets between connected persons will also trigger a CGT liability and such a gift made now would be charged at 20% (residential property is 24% for higher rate taxpayers). If the asset qualifies (broadly business assets), the CGT can be deferred or ‘held over’ by both parties making a joint election. If you were contemplating any such gift, then it would be prudent to make the election prior to Budget day in case this relief is removed.
Inheritance tax (IHT) is also expected to be the subject of change. At present assets can be gifted and if the donor survives the gift by seven years, then the asset falls out of their estate for IHT purposes. This is called a potentially exempt transfer or PET. Some tax commentators believe that this seven-year rule may be extended to 10 years and that the current rate of IHT (40%) may be increased.
There is nothing that you can do about a rate change, however a gift before Budget day would fall into the seven-year rule as any such change in the PET rules could not be retrospective. A trust could be set up before Budget day and the £325,000 per person (£650,000 per couple) IHT free amount could be placed in trust as the ability to do these every seven years may also be stopped.
- Paddy Harty (paddy.harty@aabgroup.com) is tax partner at AAB Group Accountants Ltd (www.aabgroup.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
