How to shield your wealth from Budget tax increases: Expert advice from Hargreaves Lansdown

Following the Budget's revelation of a £40 billion hike in taxes, finance gurus are guiding households on wealth preservation. Measures like increases in Capital Gains Tax, Inheritance Tax, and National Insurance for employers drive this need for financial savvy.

Hargreaves Lansdown experts have pinpointed certain key steps to better financial well-being. Sarah Coles, the head of personal finance at the firm, advised: "It’s easy to get overwhelmed by the endless post-Budget debate, but we need to cut through the noise, and do the right things for our finances right now."

Currently, there is an encouraging outlook for some workers: those on lower incomes can anticipate a substantial lift from the minimum wage rise, and public sector staff are set to enjoy pay hikes. According to predictions by the Office for Budget Responsibility (OBR), buoyed by the Budget, earnings are expected to surge more optimistically than initially thought in 2024 and 2025, by 4.7 percent and 3.6 percent respectively.

Yet, this favourable scenario isn't poised to last indefinitely. The longer-term economic landscape may be less rosy due to the repercussions of increased National Insurance contributions on employers. This could lead to restrained pay growth down the line.

OBR forecasts signal that real wage growth will be positive at 2.4 percent this year and 1.2 percent in 2025 but will then plateau in subsequent years, with 2026 and 2027 seeing a halt in growth after accounting for inflation. The firm advised: "It means it’s worth setting up a direct debit to go into a savings account on payday each month, so you do the right thing without thinking about it, and build an emergency savings safety net. That way, if your budget gets tighter in the coming months, you’ve prepared some wiggle room."

They also highlighted strategies for managing capital gains tax following the Budget's increase from 10 percent to 18 percent for basic rate taxpayers and from 20 percent to 24 percent for higher rate taxpayers. The firm suggested: "Fortunately, there are still ways to reduce a potential capital gains tax bill. You can use your annual allowance of £3,000 to realise gains gradually over the years."

Additionally, they mentioned: "At the same time, you can use the Share Exchange (Bed & ISA) process to move the assets into a stocks and shares ISA, so you don’t have to worry about either dividend tax or CGT on these investments at any point."

Moreover, they offered further advice: "You can also offset any losses against your gains, give assets to a spouse or civil partner so they can use their annual allowance too, or defer income to next year so any capital gains tax you do pay is at a lower rate. You can hold assets for life, and the tax will reset to zero on death."

Finally, they touched upon the importance of planning for a remortgage. The Office for Budget Responsibility has issued a caution that although the Bank of England interest rate is projected to decrease from 5 percent to around 3.5 percent in the final year of the forecast, this fall isn't as steep as anticipated back in March, when a drop to 3 percent was expected. This doesn't necessarily signal an increase in fixed mortgage rates, as the OBR notes the market had already anticipated this outcome, meaning it's largely accounted for in current pricing.

The firm advised: "If you have a remortgage looming, you’ll already be braced for a hike in your monthly payments. The average interest rates on all outstanding mortgages right now – including rates that have been fixed for years – is 3.7 percent. By 2027, this is expected to rise to 4.5 percent."

"Around two thirds of mortgage holders have already had to remortgage since rates started rising, but it still leaves around a third to come up for a remortgage between now and 2026. If you’re in this position, you’ll need to plan for higher payments."

"Given how rates have fluctuated with expectations in recent months, it’s also worth hedging your bets. You can lock in a rate up to six months before your mortgage expires. If rates drop between now and then you can go elsewhere for a better deal, but if they rise, you will have secured a cheaper mortgage."

As the cost-of-living crisis has eased, those with higher incomes may have found some leeway in their household budgets, allowing for more discretionary spending.

The Budget is not anticipated to cause a sudden spike in inflation, but forecasts suggest it will climb to 2.6 percent by 2025 – influenced partly by rising energy bills and also due to increased wages and employer costs. The firm commented: " It means it’s worth drawing up a budget in advance, so that you’re not caught out by price rises this time. You could even implement it early, and build up a cash cushion before it hits."

They added, "The positive news is that inflation is still expected to drop back to 2 percent by the end of the forecast, so careful budgeting should help you keep on top of your spending in a way that was nigh-on impossible for so many people when inflation was in double digits."

On the topic of inheritance tax, the Budget's implication became apparent, as money left in a defined contribution pension after death is set to count towards estate valuation for inheritance tax. This move is predicted to cost an astonishing £1.46 billion in tax year 2029/30 and is estimated to impact 8 percent of estates, underlining the importance of forward planning.

On this matter, the firm advised: "It might encourage people to consider giving gifts during their lifetime to lower their overall tax liability. Sensible gifts can help support younger family members at a time when you’re still around to see your family enjoy the money. You can give up to £3,000 away each year, which will fall within your annual gift allowance."

"There’s a separate rule that means you can give away surplus income inheritance-tax free too. You need to pay it from your regular monthly income and have to be able to afford the payments after meeting your usual living costs."

"If you give them a lump sum of more than the annual gifting limits, it becomes what’s known as a ‘potentially exempt transfer’, which falls out of your estate after seven years have passed. It also gives you more control over how the money is given. You could, for example, put it into a stocks and shares Junior ISA for a child under 18, so you know the money will be invested carefully, and tied up until they’re an adult."

Consider how you take a pension income. Many more people will be being dragged into paying inheritance tax because their defined contribution pension is now counted as part of their estate. It will mean people who were planning to leave money in their pension to give tax-efficiently to family after their death will need to revisit their finances.

The likelihood is that more people will look to spend down their pensions as retirement income rather than leave them untouched, a move which could keep the rest of someone’s estate below the IHT threshold. People could choose to give some of this money away to their family to help them with life’s milestones. More people might use their pension pot to buy an annuity, which provides a lifetime income, rather than see it plundered by IHT.

There may be a surge in interest towards annuities as individuals aim to secure a guaranteed income while keeping their estate under the inheritance tax threshold. It's crucial to deliberate on the decision to withdraw tax-free cash from pension pots.

Those who accessed their SIPP funds before the Budget might consider reinvesting some of it. Hargreaves Lansdown advises caution, stating: "Those who have only recently opened a drawdown account could be able to reverse their decision, and the money can continue to grow tax free within the pension, as they’d originally planned, without missing a beat."

They added, "However, if it has already left, there’s the potential to breach recycling rules aimed at preventing people exploiting the system for extra tax relief and be clobbered with a fine. If you’re not sure where you stand, this could be one of the times in life when financial advice can be most rewarding."