Accessing cash you don't need, putting property into a trust and 8 more things NOT to do before the Budget


Updated on 19 September 2024 | 0 Comments

While next month's Budget will have many worried about a tax raid, it's important to avoid any rash decisions that could end up costing you.

Looming tax hikes could tempt some people into taking drastic action with their finances in a desperate bid to shield their wealth ahead of the Autumn Budget.

Chancellor Rachel Reeves is expected to increase taxes to counter what the Government claims is a £22 billion black hole in the public finances.

But there are fears that individuals taking drastic measures could end up paying a heavy price, according to Sarah Coles, head of personal finance at Hargreaves Lansdown.

“Capital Gains Tax threats, tax on pensions and Inheritance Tax concerns have all thrown people into a state of panic, and there’s a risk they’ll rush into things that come back to bite them,” she said.

Coles highlighted some sensible steps that should be taken, such as:

*Selling your investments held outside of an ISA and buying them back within your ISA

Read more about the things you should do before the Budget.

However, she pointed out that others could end up hitting people financially.

“There are 10 steps that could seriously backfire, with some of them leaving you far worse off than if you’d left things as they were,” she added.

1: Taking tax-free cash out of your pension

It may be tempting to take tax-free cash out now, just in case pensions are in the Chancellor’s plans, but at the very least you need a plan.

For example, it’s pointless putting it in a bank account paying a meagre rate of interest. 

In addition, money in a pension is usually free of Inheritance Tax but keeping it elsewhere could result in a nasty future tax bill.

2: Taking income you don’t need out of the pension 

Fears about how the tax treatment of pensions may change could be enough to persuade you to take an income earlier than originally planned.

However, flexibly accessing your pension will trigger the money purchase annual allowance, and this could slash the amount you can pay in from as much as £60,000 per year to just £10,000. 

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “It’s a move that could seriously hamper your attempts to rebuild your pension at a later date because too much has been taken too early.”

3: Realising capital gains now

Investors may be considering whether to realise capital gains far beyond their annual allowance before the rate can rise.

However, the risk is that you end up paying more tax than is needed, especially as the Budget is likely to keep an annual Capital Gains Tax allowance of some level.

The rate may not even rise anyway.

4: Choosing assets to sell based on tax alone

You also need to be careful about selling assets to make the most use of your CGT allowance and hanging on to those that have currently made a loss.

The fundamentals of the one you’re selling could be better so your decision needs to be made based on the individual investments held and their prospects.

5: Not calculating CGT on Bed & ISA

Bed & ISA is a great way to invest in an ISA and protect it from future Capital Gains and Dividend Tax. 

However, you must calculate the gains on the money you’re moving, to ensure you don’t exceed the £3,000 annual limit on gains or there will be tax to pay.

6: Selling and buying the same assets within 30 days 

It’s worth understanding the Bed and Breakfast rules, according to Sarah Coles at Hargreaves Lansdown. 

“If you sell assets and buy them back within 30 days, for tax purposes they’re treated as if you never sold them at all,” she explained.

“As a result, you won’t have reset the CGT, and the gain will be considered from the first day you bought those assets.”

The exception to the rule is if you use Bed and ISA to sell assets and then buy the same ones back within an ISA. 

7: Trying to give your property away but still using it

There are concerns that the Inheritance Tax will see changes, which could prompt people to sign their properties over to their children.

However, if they don’t move out, for example, they will still benefit from it. In that case, it’s known as a gift with reservation of benefits and doesn’t count as being given away.

This means tax implications further down the line.

8: Putting property into trust for Inheritance Tax purposes

You may also be tempted to put your home into a trust, on the basis that the property is considered to be given away on the date of the transfer, so the seven-year period starts ticking away.

However, this approach could be seen as tax avoidance and trigger an immediate tax bill – alongside the costs of setting everything up.

9: Giving money away you can’t afford 

Be careful about giving money away that you might need later in life. For some, it can be tempting to dip into pensions but this may end up damaging their income prospects.

For example, you may end up needing these savings in later life to pay for additional care.

10: Taking equity release out on a property

Releasing equity from their home – and giving it away – is a way that some people may consider in a bid to avoid Inheritance Tax.

However, equity release schemes can be expensive when you consider the upfront charges and ongoing interest that need to be repaid on death, pointed out Coles.

“If you live much longer than you expected, the costs will mount and can end up costing you far more than simply paying the Inheritance Tax would have done,” she said

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