Friend,
Clients (friends) are used to my response when asked to forecast on some future event that may zig this way or that: “I don’t have a clue, and neither does anyone else.”
And yet.
This looming Budget is causing more than a little ripple of a disturbance in The Force. Much as I try to effect a languid sangfroid, even Lincoln The Stoic finds the whole thing mildly discombobulating.
It’s not going to be a fun event. Apparently there is a black hole in the nation’s finances or something, and Labour didn’t know about this before Mr Sunak gave them his gift-and-platter combo on July 4th.
Channelling my inner Sir Humphrey, the veracity of The Hole seems askance to the actuality, especially as:
Nobody at the Treasury/Civil Service seems able to explain where The Hole is and what caused it;
All potential incumbent governments are given a thorough briefing by the Office of Budget Responsibility (stop laughing at the back) on the state of our finances before assuming office.
Regardless, we have a Hole, and by God they’re going to fill it.
The Hole and how to fill it
In short: taxes are going to go up. Having ruled out hikes to the big hitters (Income Tax, National Insurance and VAT), that leaves a bit of a dog’s dinner for Ms Reeves to pick through. She is going to have to turn her bobbed head towards these (in no particular order):
Capital Gains Tax (CGT)
Inheritance Tax (IHT)
Pensions
Dividends
ISAs.
Am I saying all of these will come under attack? No. Am I saying some of them will? Yes: like its predecessors over the decades, this Government doesn’t see its spending as the problem. The solution is never less spending. It’s always more taxes. So taxes will be higher on the 31st October.
But which ones? In the five categories above, there are countless variables.
If CGT rates rise, by how much? And when? Straight after the Budget, or from 6th April next year? And if they do rise (and of all the imponderables, this seems the most likely) so what? You only pay CGT if you sell. If you don’t need cash from your investments (more on this in a moment), maybe you’ll just sit on them and pray for lower rates in future. But that doesn’t help fill The Hole now, and “now” is about as long as most politicians see into the future.
Perhaps it’s IHT. The IHT thresholds have been frozen since 2009 (yes, 15 years ago!) and are to remain so until 2028. More and more estates are thus dragged into paying it simply through “fiscal drag” (NOT Eddie Izzard as Chancellor), with IHT receipts doubling between 2012-22. Not sure there’s a lot of scope here. Could pension pots lose their IHT-free status?
Of which, pensions are always on the table when it comes to getting other people’s money. Perhaps tax-free cash will be restricted in some way? Or rather, restricted more: it’s already capped at 25% of the value of your pension fund, or £268,275, whichever is less1. But as with CGT, fiddling with tax-free cash won’t bring in much dosh now; people who have significant pension funds - the ones who would be hit by such a change - may just defer taking their pension benefits and use the other retirement income streams such folk typically possess.
Labour has ruled out bringing back the pension Lifetime Allowance and, on this, I almost trust them. Doing so would be finickety as hell (as we finance boffins say) and, unless there were blood-pressure-raising special exemptions for the NHS, would see a resumption of our poor benighted doctors and dentists taking early retirement to avoid pension taxes.
“Nothing is certain except death and taxes”
Attributed to Benjamin Franklin, 1789
An instant winner is a flat rate of pension tax-relief, say 30% across the board. That’ll sound good to the Left, won’t further upset already pissed off pensioners, and will probably raise some revenue for The Hole. It sounds good on paper but is a little faffy to actually implement.
And dividends? The annual Dividend Allowance is a joke at £500 and might as well be scrapped. Raising tax rates on dividends - paid to those who have investment portfolios and/or own businesses and thus have only got where they are in life by oppressing the masses or something - is a possibility. It won’t really dent The Hole (if holes can be dented).
Finally, ISAs. Maybe Ms Reeves will bring in an allowance on how much one can accrue in these over the course of a lifetime, say £1M. She could also reduce the annual ISA allowance but, like nearly all the various exemptions and thresholds, this has been stuck for years (seven and counting) at £20,000. Allowing for inflation since 2017, that’s now just £15,000 in real terms. As ever, inflation is already doing the heavy lifting on behalf of our politicians.
For the love of God, Nick, give us a definitive
Well, that’s the point of this squib: I can’t give definitives. Luckily for me, neither can anyone else. If you want certainty, take Mr Franklin’s maxim above to heart.
A meaningful financial plan, marrying one’s aspirations and dreams with one’s finances, built on a detailed, personal lifetime cash flow forecast, is for the long-haul. As such, we don’t change our financial plans unless circumstances change. It’s an echo of “when the facts change, I change my mind.”2
No change to your circumstances or the lay of the land? Then no change to your plan. And vice-versa. Post-Budget, if things affect my clients, I will be in contact with them to review and refine their financial plans accordingly. But not before the event. Down that road lies madness.
If you need cash now, act now
Your financial plan should allow for known short-term expenses. Planning on purchasing/rebuilding3 that second property abroad/gifting money to the rugrats/putting the grandchildren through private education? Chances are you have been planning this for years. Now is the time to sell down from one or more of your long-term investment portfolios to fund this short-term spending need.
You are NOT doing this because of some impending Budget; you do so because you were always going to do so. You have already decided to spend the cash. The Budget is not driving your decision, your financial plan is.
Although, given the above, perhaps do it right now: The Hole won’t fill itself.
Pension saddos techies will be screaming at the simplicity of that statement; there are loads of other rules and limits around pension benefits.
John Maynard Keynes.
Hello, P & N.