Beware the unintended consequences of a tax-raising Budget

• Gordon Brown, George Osborne and Kwasi Kwarteng have all fallen foul of the law of unintended consequences.
• Rumoured Budget changes could have unexpected impacts on new investors, AIM investors, and those holding large and diverse portfolios.
• They could also damage the property market.

Sarah Coles, head of personal finance, Hargreaves Lansdown:

“Tax tweaks are designed to have an impact. In the case of the forthcoming Budget, the government will be hoping it can tweak its way to filling a multi-billion black hole in the public finances. However, history is littered with tax tweaks that had significant unintended consequences, that no government can afford to overlook.

Changing tax rules will often persuade people to change their behaviour in a way that the Chancellor didn’t foresee. There are a number of memorable instances of this, perpetrated by Chancellors of every party.

When Gordon Brown abolished the dividend tax credit on pension investments, for example, it was understood this would mean pensioners lose 20p in every pound of dividend income, but what was less well understood was the lost incentive to invest in British companies producing dividends – which helped cut the proportion of institutional investors in UK-quoted shares from around half to 4%.

George Osborne, meanwhile, brought in the Help-to-Buy equity loan scheme, to help support buyers trying to snap up a newbuild. A House of Lords report found it had inflated the cost of newbuilds. It said that in more expensive areas, it had pushed prices up so far that it had undone the benefits of the scheme

And one of the most dramatic Budgets of unintended consequences of recent years was the mini-Budget, which offered £45 billion of unfunded tax cuts, without the scrutiny of the OBR. The end result was the pound falling to record lows against the dollar, gilt yields spiking, the price of mortgages rising through the roof, the cost of government borrowing soaring and a threat to the stability of UK pension funds. Most of the measures were subsequently reversed, but the damage was done.

10 possible unintended consequences of rumoured potential Budget moves

1. Increasing capital gains tax on stocks and shares could mean that when the rules come in, investors hoard assets. They could end up holding investments that don’t suit their needs, leading to worse outcomes.
2. Increasing capital gains tax on stocks and shares could put people off investing, damaging their financial resilience and making it more difficult for businesses to attract vital investment.
3. Increasing capital gains tax on property could persuade more landlords to sell up before the rules change, cutting the number of decent private rental properties available – pushing standards down and rents up.
4. Increasing capital gains tax on property could persuade investors to hang onto property after the changes come in – waiting until this tax resets to zero on death – clogging up the property market and making it more difficult for people to move.
5. Cutting the inheritance tax nil rate band could persuade people to give money away too early in life, so they can’t pay for care, creating a financial headache for their family.
6. Cutting gifting allowances for inheritance tax could persuade people not to give lifetime gifts to their family that they really need.
7. Changing inheritance tax relief for business assets could make it less attractive for investors to consider qualifying stocks on the alternative investment market, which can bring a tax bill down. This could remove essential funding for smaller and newer businesses.
8. Cutting tax relief on pension contributions could mean people put less aside for the future, so they need to fall back on their family or the state later in life.
9. Cutting tax relief on pension contributions for higher earners would make it less rewarding to earn more – particularly once you make £100,000. This could remove key individuals from the workforce – including senior doctors.
10. Even if it never materialises, the threat of cutting tax-free cash on pensions could encourage people to take more cash than they need, severely damaging their later retirement income prospects.”

What can you do ahead of the Budget to protect your finances?

1. Make a pension or SIPP contribution
2. Pay into an ISA
3. Take out a Junior Isa for a child
4. Use share exchange (Bed and ISA) for existing investments
5. Use your CGT allowance on share gains