I have been asked this question a lot over the past couple of months. It doesn’t help that the Chancellor and the Prime Minister are constantly going on about how tough the budget is going to have to be. I must have read 100 reports that state the author knows what will be announced, only to have another author say the exact opposite.
Will they change pension tax relief? Change inheritance tax (IHT)? Reduce or even get rid of the tax free cash element of pensions? Make pensions liable to IHT? Increase capital gains tax? We simply don’t know.
I know of a client (not one of mine) who recently sold an entire £29 million general investment account and will have to pay millions of pounds in capital gains tax (CGT) as she thought the rate of tax might go up. Some of her holdings may have been a terrible time to sell, but more importantly, you shouldn’t ever let tax dictate your investment strategy. Remember, you only ever pay CGT on the profit, so if you do end up paying some CGT it means your investment strategy is working! The above client will have a definite tax bill and there is no way of knowing if it was the right thing to do until after the budget. On top of that we could have managed things using allowances over the coming years to potentially reduce that CGT bill.
I also had another client in February 2023 that crystallised his entire pension which was well over the Lifetime Allowance of £1,073,100 as he thought that they were going to reduce the allowance again. This cost him approximately £55,000 in tax. About a month later Jeremy Hunt announced that they were abolishing the Lifetime Allowance, so this client paid £55,000 simply because he was impatient.
There is an old saying in finance; “Don’t let the tax tail wag the investment dog.” Which basically means that we shouldn’t allow tax to be the most important part of the investment strategy. It’s our job to minimise the amount of tax you pay and make sure your money is invested as tax efficiently, however, we do that within the current tax environment. We don’t try and guess what might happen, simply because guessing wrong could be very costly.
So, the answer is almost always – no. If you were going to take an action anyway, like sell some shares or make a pension contribution, then do so and if you can manage to do it before the budget then it means you are definitely going to be taxed by the rules as they are now. However, you should never take action just in case things might change in the future, it rarely pays off and we should always be trying to take as much guesswork out of our finances as we can.