Act in haste, repent at leisure – or so the saying goes.
With the next UK Budget set for 30 October 2024 and the Government making unsubtle noises about how “painful” it will be, many business owners and investors are considering their options carefully.
Those options include taking pre-emptive measures intended to forestall the potential impact of any changes to the UK tax regime.
Such measures are, however, often fraught with risk.
Of course, we do not yet know what changes the Budget will bring, or when they might take effect.
We are short on detail about that.
It is quite possible that some things might be leaked before 30 October as previous Governments have a history of doing this.
But even then, such leaks can prove to be unfounded and are often performed to gauge public opinion rather than as definitive actions.
Taxpayers are essentially operating in a vacuum, which makes any forward planning very difficult.
All actions have consequences, and the precise consequences of any planning done this month may not be clear until after the Budget.
As far as our clients are concerned, the major motivations for trying to pre-empt any adverse moves by the Chancellor seem to be driven by concerns that:
- Capital Gains Tax (CGT) rates may be increased and/ or reliefs reduced or eliminated – taxpayers are therefore looking to realise chargeable assets (e.g. shares, property) now to ‘lock in’ existing CGT rates and benefit from existing reliefs – especially where the 10 per cent rate is available for Business Asset Disposal Relief-qualifying gains.
- The Pensions Annual Allowances may be reduced from their current levels of £60,000 and £10,000 – so individuals are looking to maximise contributions now in order to pre-empt any reduction in the Allowances.
- The Pensions Tax Free Lump Sum (TFLS) may be cut back significantly – some individuals are considering accelerating their plans to draw the TFLS.
- Income Tax relief for pensions contributions may be scaled back – some lobby groups are calling for a flat rate of relief that would significantly impact higher rate taxpayers.
- Inheritance Tax exemptions and reliefs may be reduced or removed – taxpayers with significant assets are reviewing their existing estate planning arrangements, including looking at options to gift assets to individuals or into trust before any adverse changes at the end of the month.
Transacting now offers some degree of financial certainty about the tax implications, since measures announced in UK Budgets rarely have retrospective effect.
Taxpayers, understandably, place a premium on certainty.
Potential downsides of acting early
Unfortunately, the downsides may be significant as well – individuals need to consider the opportunity costs and the impact of making decisions that may have irreversible consequences.
With the benefit of the hindsight available to taxpayers after 30 October, will any tax planning undertaken now still seem sensible?
That is a question that should weigh heavily on taxpayers’ minds before committing to any course of action.
To offer some examples of the potential downsides of pre-emptive action:
- Accelerated tax payments – if CGT rates or reliefs do not move in an adverse direction, steps taken to realise assets before the Budget may simply have the effect of accelerating the realisation of gains and the payment of tax to HMRC, without any significant tax saving.
- Irreversible loss of control – the accelerated realisation of chargeable assets such as property or shares; or the accelerated gifting of assets to family members or into trust; may have resulted in the loss of control of the assets earlier than the taxpayer might otherwise have hoped.
- Financial loss – in accelerating the sale of a chargeable asset, financial losses might be incurred due to market timing issues; missed investment returns; and transaction costs; in accelerating the withdrawal of a TFLS from a pension, future investment returns may be sacrificed.
- Opportunity costs – by locking additional funds into a pension to forestall any change in the Income Tax relief or Annual Allowances, the funds may not be available to the taxpayer (or his or her company) to deploy in other, more advantageous ways.
Whilst taking pre-emptive tax planning measures before the Budget could offer advantages to taxpayers, such actions always carry risk.
Appropriate consideration must therefore be given to both positive and negative factors before reaching any decision.
Never act in haste!
