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    Chancellor picked our pockets, but it was no full-scale mugging

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    Chancellor Rishi Sunak just picked our pockets – but at least it wasn’t a full-scale mugging

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    Smiling assassin: Chancellor Rishi Sunak

    Let’s be honest, it could have been worse. For weeks, we (the great British public) had been primed to fear the worst. Middle England’s pensions and investments, we were told, would be raided to pay for the Government’s stoic financial support of the economy – businesses and households – through lockdown. Tin hats at the ready. Tax relief on pension contributions – especially generous for higher rate taxpayers – would be cut back while taxes on capital gains from share sales and second-property sales would jump like leaping salmon. 

    We braced ourselves for the tax hit to our savings and investments – and to our surprise (and delight) it wasn’t quite as painful as we feared. One commentator described Sunak’s tinkering with our pensions and investments as a ‘case of quietly picking our pockets rather than a full-frontal mugging’. 

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    Laith Khalaf, a financial analyst at wealth manager AJ Bell, was more articulate, stating that many savers would have probably reacted to the Budget with a ‘little fist pump’ – à la tennis great Andrew Murray in his prime. ‘Things,’ he added, ‘could have been a lot worse.’ 

    Khalaf is right, although do note the warning at the end of this article. As far as savers and investors are concerned, there was little in the Budget that could be described as horrible. But it doesn’t mean that we should now become complacent. 

    I have a sneaky feeling that Sunak has not quite finished with those who are committed to building long-term wealth. 

    Future tax rises on our investments, plus a possible curbing in generous tax reliefs (on pensions), cannot be ruled out as Sunak seeks to rebuild the country’s finances, ravaged by the coronavirus fallout. 

    So, here’s where we stand on the wealth-building front post Sunak’s Budget – and more importantly, here’s a wealth of invaluable tips that could help protect your investments from any future nasty surprises residing somewhere up Sunak’s sleeve.

    CAPITAL GAINS TAX

    Many experts believed that Sunak would use the Budget to announce a hike in capital gains tax. Indeed, it seemed on the cards following a report last year from the Office of Tax Simplification into CGT reform. 

    Among a number of recommendations it made at the time was pushing up CGT rates in line with those on income. 

    Yet Sunak chose not to act – for the time being at least. Instead, he said he would freeze the annual CGT tax-free allowance of £12,300 (that runs from April 6 to the following April 5) until 2026. 

    It means that any profits from annual share sales (held outside an Isa or pension) in excess of £12,300 will continue to be taxed at 10 per cent for basic rate taxpayers – and 20 per cent for higher or additional rate taxpayers. 

    The respective rates on second-property sales (buy-to-let or holiday) remain at 18 and 28 per cent. 

    Jason Hollands, investment expert at wealth manager Tilney, says investors can now sleep a little bit easier as a result of Sunak’s decision not to launch a ‘Viking-like’ raid on capital gains – reminiscent of what Jeremy Corbyn wanted to do if he had won the December 2019 General Election. 

    Yet Hollands urges investors not to be complacent. 

    He says: ‘It is clear the tax environment is going to be challenging for the next few years and there is always the potential for the Chancellor to come back for more tax revenue if the public finances worsen. So the decision to keep CGT rates as they are may only turn out to be a temporary reprieve from more punitive measures further down the line. People must therefore organise their savings and investments as tax efficiently as possible.’ 

    There are tax-mitigation strategies investors can employ. These include using your annual £12,300 CGT allowance a little more aggressively than maybe previously. By doing this, you can crystallise profits on investment gains you have made outside of a pension or Isa – heading off a possible CGT bill further down the road when maybe tax rates are higher. 

    The profits could then be used to fund future payments into tax-friendly investments such as pensions and Isas. 

    An alternative approach is an arrangement called ‘bed and Isa’ whereby shares you hold outside an Isa are sold and then immediately repurchased inside your Isa. Although there are charges involved – including stamp duty – it results in more of your portfolio sitting inside a tax-friendly wrapper. 

    For example, AJ Bell charges £9.95 for a ‘bed and Isa’. So, on £5,000 of UK shares, an investor would pay £34.95 – £25 stamp duty plus £9.95. 

    The deadline for doing a ‘bed and Isa’ in the current tax year varies across brokers and platforms (not all are offering it as a result of lockdown staffing issues). Interactive Investor has a March 22 deadline. 

    For those who are married or in a civil partnership, investments held by one partner can be switched to another through an ‘inter-spousal transfer’. 

    This then allows couples to benefit from two capital gains tax allowances when it comes to selling investments – and can save CGT if any taxable gain is shouldered by the partner who is eligible for the 10 per cent (rather than 20 per cent) rate of tax. 

    Your fund platform or broker should be able to arrange such a transfer which triggers no tax charge. But a warning from Hollands. ‘Remember, when you transfer assets to your partner, they become the legal owner, so only do it if your relationship is strong.’ 

    Alex Shields, a chartered financial planner at financial adviser The Private Office, says: ‘Using the annual CGT allowance will now be key for many investors, especially as we know it will not be increasing until 2026. 

    ‘There is also the concern that at some stage capital gains and income tax rates could be aligned.’

    PENSIONS 

    Many investors will have breathed a huge sigh of relief at the Chancellor’s decision not to tinker with the tax relief available on contributions made into work or personal pensions. 

    In the run-up to the Budget, it was touted that a flat rate of relief (set at 25 per cent) may replace the current system that rewards higher rate taxpayers the most. But Sunak chose not to touch this hot potato. 

    Yet he couldn’t resist cramping our ability to build a pension fund without fear of falling foul of tax traps. He chose to freeze a key allowance that will result in thousands more people facing extra tax charges on their pension funds in the future. 

    The offending allowance – the pensions lifetime allowance – acts as a cap on tax-efficient investing. If someone accumulates pensions with a fund value above £1,073,100, any surplus attracts a tax charge of up to 55 per cent. This cap will no longer rise at the start of every tax year, but will remain at £1,073,100 until 2026. 

    Sean Jones, financial planner at James Hambro & Partners, says its freezing will not just hit the wealthy but ‘ordinary people who have worked for a long time in skilled jobs’. 

    According to its data, someone with a pension worth £900,000 today would hit the frozen cap in less than four years’ time – assuming annual investment returns of five per cent and no further pension contributions. Someone with an £800,000 fund would hit the cap in just over six years. 

    James Norton, senior investment partner at Vanguard, warns: ‘Any one with a pension pot worth around £850,000 or more should now be cautious about making further contributions. They should also keep an eye on any investment growth taking their fund past the allowance limit.’ 

    It’s a point also made by AJ Bell’s Khalaf. 

    He says: ‘Those who think they are at risk of hitting the allowance might consider switching out of growth investments within their pension, or reducing or eliminating pension contributions. It’s quite a complex area though, and the stakes are high, so it may be worth getting financial advice to avoid any costly mistakes.’

    The Government-backed Money and Pensions Service provides assistance to those who believe the lifetime allowance could become an issue. Call 0800 011 3797. 

    INHERITANCE TAX 

    Finally, Sunak froze the amount of someone’s estate that escapes tax. Currently, if someone dies, the first £325,000 of their estate – property, shares and cash minus debts – is exempt from inheritance tax. Any sum above this nil-rate band is usually taxed at 40 per cent. 

    For married couples and civil partners, the rules also provide a spouse or civil partner exemption. This means that if one partner dies, the survivor can claim any of their unused nil-rate band. 

    On top, there is a £175,000 residence nil-rate band, available when a home is passed on to a child or grandchild – including stepchildren, adopted children and foster children. 

    Both these allowances have now been frozen by Sunak until 2026. The Private Office’s Shields says the Chancellor’s move makes inheritance tax planning ‘more important than ever’. 

    Various gifts can be made by parents and grandparents to reduce their inheritance tax bills. ]

    AND A FINAL BEWARE 

    Later this month, the Government could well use ‘Tax Day’ (March 23) to unveil further tax changes to savings and investments. 

    These could include the higher capital gains tax rates outlined in the OTS report – and simplification of the inheritance tax regime, especially around gifting. 

    If so, using the words of my friendly expert at the start, Sunak’s pick-pocketing could turn out to be a mugging after all.

    USE THAT ISA ALLOWANCE NOW 

    Tax-friendly Isas weren’t given a mention in Sunak’s Budget – and thankfully there were no sneaky changes hidden away in the swathe of supporting documents. 

    It means anyone aged 18 or over can continue to invest or save a maximum of £20,000 per tax year inside an Isa. Money within the plan grows tax-free and it can be withdrawn at any time without any tax charge. The Isa can be cash based or invested in shares and funds. 

    For under-18s, there is a Junior Isa for which the maximum annual contribution is £9,000. For those aged 16 and 17, they can contribute to both a cash-based Isa and a Junior Isa – a potential maximum annual contribution of £29,000. Ben Yearsley, a director of Shore Financial Planning, says investors should try to use their Isa allowance. ‘It’s a generous annual allowance,’ he adds, ‘and it wouldn’t surprise me if it got cut further down the line. Use it if you can. It shelters your investments from income tax and capital gains tax.’ Over the next five weeks, he says investors could squirrel away £40,000 in Isas if they had sufficient funds – £20,000 in the current tax year and £20,000 in the tax year starting April 6. 

    Becky O’Connor, head of pensions and savings at Interactive Investor, says those close to their pension lifetime allowance may prefer to contribute to an Isa rather than continue paying into a pension and face a possible future tax hit. She adds: ‘You don’t get tax relief on the way in, but you can take tax-free income from the Isa.’ 

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