Five things you can still do TODAY to beat Rachel Reeves’ Budget tax raid

Rachel Reeves will deliver her first Budget this week, in which she is widely expected to announce sweeping tax rises.

The Government has said that the tax burden will fall on those with the broadest shoulders, and many people are understandably worried about what it might mean for their money.

It’s not advised to make any rash decisions based on speculation, and finance experts are urging people not to panic and do something they might later regret. 

However, there are a few simple things you could still consider to protect some of your cash from a tax grab.

We look at what potential changes might be in store and some of the tweaks that you can make ahead of the Autumn Budget.

Use your tax-free allowances

It is widely expected that Reeves will stage a capital gains tax raid to boost the Treasury’s coffers, having repeatedly ruled out an increase to rates during the election.

CGT is levied on profits made when you sell investments, second properties, business assets and personal possessions worth more than £6,000, with profits above the annual tax-free allowance of £3,000 all falling within the tax net.

The rate someone pays depends on their whether they are a basic, higher or additional rate taxpayer, and the type of assets they are selling. 

However, in most cases CGT rates are lower than income tax rates, making them a prime target for a hike.

Basic rate taxpayers with taxable income below £50,270 generally pay 10 per cent capital gains tax, while higher and additional rate taxpayers pay 20 per cent.

But rates are different on property that isn’t your own home. Profits on second homes and buy-to-lets face capital gains tax rates of 18 per cent for basic rate tax payers, and 24 per cent for higher and additional rate tax payers (the latter rate was reduced from 28 per cent as of April 2024).

It is unclear whether Reeves will chip away at the tax-free allowance, currently £3,000, or raise the overall rates, which is more likely.

This means that you could end up paying more tax on your investments or second properties.

If you think you might be hit by a CGT raid, the first thing to do is to make sure that you are using all tax-free allowances available to you.

If you hold investments, make sure that you have used all of your £3,000 tax-free CGT allowance, as well as your yearly Isa allowance limit.

Isas allow savers to put away up to £20,000 each year tax free, meaning they can avoid being taxed on any gains made.

Gary Smith, financial planning partner at Evelyn Partners said: ‘Higher CGT rates should focus everyone’s mind firstly on the importance of tax wrappers like Isas and pensions, which protect investments from tax on both capital gains and dividends, and secondly on the use of annual tax-exempt allowances. 

‘This is especially important if you are married or in a civil partnership and can take advantage of both sets of allowances, and transfer savings and investments so they do not attract unnecessary tax liabilities.’

Shared allowance between spouses

You can also mitigate some of the impact of higher CGT rates by transferring some of your shares to a spouse or civil partner.

A couple can use their two CGT allowances jointly, giving them a limit of £6,000. If you are in different tax brackets, any gain above the nil-rate band can be realised by the lower-rate taxpayer. This helps to reduce your overall CGT bill.

It is worth remembering that once you have transferred the shares, your spouse or partner becomes the full owner of the investments.

AJ Bell pensions and savings expert, Charlene Young says: ‘Any investments transferred to your spouse or civil partner are exempt from capital gains tax. 

‘This means that if your spouse hasn’t used up their tax-free allowance this year and has some Isa allowance remaining you can make use of those tax breaks.

‘You just need to make sure you keep a note of the original cost of the asset, as that’s what will be used when your partner comes to sell it.

‘If your spouse is in the basic rate income tax bracket but you’re a higher or additional rate taxpayer there’s a double benefit, as current rules mean they will pay capital gains tax at a lower rate.’

Bed and Isa

It is always a good idea to ensure you are putting money into an Isa and not paying more tax than necessary, regardless of the Budget.

You can move your shares into an Isa by doing something called a ‘bed and Isa’ where shares are sold and then bought back from inside the Isa.

However, you should be aware that this may result in a CGT charge if the gain exceeds the £3,000 allowance.

You could also transfer the shares to a spouse if they are a lower-rate taxpayer, and then sell and repurchase the shares.

You should also be aware that the Government could introduce a cap on money saved in Isas, however. While there is an annual Isa allowance of £20,000, there is currently no limit on how much money savers can amass in an Isa over their lifetime. 

But there has been speculation that Labour could introduce a £500,000 lifetime cap, which could pose problems for those sitting on larger pots.

They could also cut the £20,000 annual  Isa allowance by £5,000, meaning less of your money will fall within the tax-free wrapper every year.

Reeves will not make any changes to the tax-free wrapper on Wednesday, and instead any changes are likely to be made next April – giving savers some time to work out a plan of action. 

Gifting

If you are looking to protect your money in other ways, you could always gift some of your savings to a family member.

You can currently gift up to £3,000, which falls under the annual gift allowance, but you can also give larger sums under a system called potentially exempt transfers (PETs). 

These will be outside of your estate after seven years, provided you do not die within that period – a rule put in place to stop people avoiding inheritance tax by giving large sums of money away in old age. 

There is currently no limit to how much you can gift as a PET, but it will only be exempt from inheritance tax if you survive for seven years after it’s made.

Hargreaves Lansdown says that more than one in seven of its customers said they had been spurred on to gift money to family.

However, there is speculation that Labour may change the rules and extend the number of years from seven to ten, making it harder to pass on your cash.

This means that if you are considering gifting some of your savings to reduce inheritance tax, it may be better to do it sooner rather than later.

But you shouldn’t necessarily worry unless inheritance tax might become a problem for your beneficiaries.

You need to be worth £325,000 if you are single, or £650,000 jointly if you are married or in a civil partnership, for your loved ones to have to stump up death duties.

And there is a further chunky allowance – known as the residence nil rate band – which increases the threshold to a joint £1million if you have a partner, own a property, and intend to leave money to your direct descendants.

Don’t panic

Reeves will likely make some broad changes which could see more of your cash fall under tax.

But when it comes to making changes to your finances, the most important thing is to think long-term and not to make hasty decisions.

Fidelity’s Emma Simon says: ‘It is never a good idea to make significant changes to your investments based on Budget speculation. This rarely equates to sound financial planning.

‘However, it is always worth reviewing your finances on a regular basis to ensure you are making the most of all tax allowances.

‘This includes sheltering savings and investments in tax-free wrappers such as Isas and pensions.’

It is important to note that, while speculation has reached fever pitch, we still don’t know what Reeves will announce in the Budget.

We also don’t know when any changes are likely to be enacted. It could be that she makes the changes immediately, to avoid a rush of people selling their assets.

Or she may have to wait until the next tax year, which begins next April, which would give you some more time to consider any changes you’d like to make, if any.

Hargreaves Lansdown says: ‘Not every last-minute move is such a great idea… While smart moves at the 11th hour could leave you substantially better off, you shouldn’t feel rushed into making a mistake that could do more harm than good.’