Rachel Reeves sent Budget raid warning over pensions, inheritance and capital gains tax

The Chancellor has been warned that any piecemeal tax raid on pensions, inheritance and capital gains could threaten UK investment and growth.

Experts at Hargreaves Lansdown, who handle investments totalling more than £1.55 billion on behalf of some 1.88 million clients, have sounded the alarm over widely predicted wealth tax rises.

In the firing line are the tax relief offered on private pension contributions from salaries and the size of the tax free cash lump sum people are allowed to take from their pension pots.

Changes to inheritance tax are also an option. These include limiting the amount of money people can give to loved ones during their lifetime free of tax and ending a loophole that allows people to pass on their pension pots free of tax if they die before they reach 75.

Separately, a number of think-tanks and economists have suggested Labour should raise the rates of Capital Gains Tax payable on profits made on property, shares and other investments to bring them into line with income tax.

Sarah Coles, head of personal finance, at Hargreaves Lansdown, warned: “Tax policy tends to be made in a piecemeal way, tweak by tweak, in subsequent Budgets. However, Rachel Reeves needs to fight the temptation to tinker round the edges. Instead, she needs to take a step back and consider the overall picture.

“Putting together a Budget is like assembling a Jenga tower. You might think you pull bits out here and there to build the tower taller, but if you don’t consider the overall impact of removing pieces, the whole edifice will come crashing down. There are five piecemeal changes that have been rumoured, and they need to be considered in the round.”

Pensions tax relief

Currently, basic rate taxpayers get tax relief at 20 percent on their contributions to private pensions. By contrast well-paid higher rate taxpayers get a more generous 40 percent or 45 percent on their contributions.

Helen Morrissey, head of retirement analysis, said: “Pensions tax relief offers an enormous incentive to save, and any tinkering around the edges risks putting people off.

“A move to a 30 percent flat rate would spell good news for basic rate taxpayers, who would see a £100 contribution cost £70, rather than £80, but it would be a blow to higher and additional rate taxpayers who currently enjoy relief at 40 percent and 45 percent.

“Meanwhile, a shift to 20% across the board would mean no change for basic rate taxpayers, but a massive decrease for higher earners.

“Bringing in such a change could also have unforeseen consequences for defined benefit pensions. Lower tax relief would mean that in order to guarantee the same benefit for members of public sector schemes, more money would need to be paid in. For senior members of staff, including doctors, this could mean contributing more than the annual allowance, which could result in an immediate tax bill.

“This could raise the risks of these staff members retiring rather than paying the tax – taking the government back into the same problems the previous one suffered around the lifetime allowance. It means this is unlikely to be an issue anyone wants to reopen.”

Pension Tax free cash

Currently people can take 25 percent of their pension pot tax free with an upper limit of £268,275.

Helen Morrisey said: “Any attempts to reduce the amount of tax-free cash people can take from their pension would prove hugely unpopular.

“People have plans for this money, whether that’s paying off their mortgage or making home renovations. Any changes risk throwing long-standing plans into chaos. The danger is that this results in people pulling their tax-free cash out early, in an attempt to avoid any such raid, which could lead to poor outcomes.”

Capital gains tax

CGT is charged on profits made on property and investments at a lower rate than income tax.

Currently, the rate is either 10 percent or 18 percent for basic rate taxpayers. For higher or additional rate taxpayers, the rate is either 20 percent or 24 percent. However, there are suggestions it should be brought into line with income tax – 20 percent for basic rate taxpayers and 40-45 percent for the high paid.

Sarah Coles said any change could “put people off investing, damaging their financial resilience and making it more difficult for businesses to attract vital investment”.

She added: “Increasing the rate could encourage them to sit on assets for life once the changes have been introduced, which could mean they hold the wrong assets for the wrong reasons, leading to poorer outcomes.”

Inheritance tax rules on gifts

There have been suggestions the government might consider cutting gifting allowances for inheritance tax. At the moment, this tax break encourages people to give lifetime gifts to their family.

Sarah Coles said: “A change might stop people from passing wealth down the generations in the way that can do the most good.”

Business property relief for inheritance tax

Currently, investments in qualifying AIM companies are inheritance tax-free after they’ve been held for two years. The Budget might remove this exemption from AIM stocks, increase the minimum holding period (possibly from two years to five years), cap the maximum or reduce the level of relief.

Sarah Coles said: “Investors need an incentive to invest in smaller companies, where they are exposed to more risk. The government would need to seriously consider the implications for these companies if they were to cut the tax benefits of holding AIM stocks.

“Some of these changes would mean bitter blows for savers and investors, and anyone who has worked hard to build their assets over the years. Anything which puts people off saving and investing risks damaging financial resilience at a time when people are expected to take ever-more responsibility for their own financial security. At the same time, it could mean less funding for British businesses, which flies in the face of the government’s stated desire to attract more investment for UK companies.”