- The Budget is expected to target the ‘wealthy’, but how much do you have to have to be considered wealthy?
- If you were to quantify wealthy by income, the top 20% of households have median net household income of £78,394 a year (HL Savings & Resilience Barometer, July 2024).
- If you were to quantify it as being the age group with the most assets, it would be those aged 60-64, who have nine times as much as those aged 30-34 (ONS 2020).
- If you were to quantify it as the individuals holding the most assets, those with the top 10% of assets hold £90,000 in the bank, £310,000 of property, and £627,000 in pensions (ONS 2022/23).
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“If this Budget targets the wealthy with its efforts to top up the government finances, you might think you’re off the hook. However, before you breathe a sigh of relief on the grounds you don’t have enough money for the government to be interested in you, it’s worth considering what counts as wealthy, and whether you could end up bearing the brunt of tax blows in the Budget.
Who is wealthy?
If it’s all about the top 20% of earners, the HL Savings & Resilience Barometer shows they have median net household income of £78,394 a year, £843 left over at the end of the month, and save 13% of their household income. The government may think these higher earners have wiggle room in their budgets to pay more tax.
However, they tend to be younger than the asset-rich older groups, and still building wealth. The Barometer shows they have an average of £35,804 in cash – including almost £10,000 in their current accounts. The household collectively has £293,994 in pensions. And they have an average of £39,445 in stocks and shares ISAs. It means this group may be comfortable, but hitting them with higher wealth taxes won’t be as fruitful as those who have already built wealth.
If you were to qualify wealthy as having lots of assets, this tends to peak at 60-64, when we have an average of £380,100 in wealth. It tends to start low, build slowly, then pick up the pace when we hit 55. We then spend gradually as we go through retirement, so the next wealthiest group is aged 65-74. If you’re in this position, and have been carefully building assets to fund your retirement, the idea of losing it to tax at an age where you have fewer options to rebuild wealth could be particularly worrying, especially given rising social care costs.
However, the government will be aware of this, so while it may seem like a target for tax, they would need to consider the risk that damaging the wealth of those who have recently retired could mean they fall short as they get older, and need to fall back on the state.
Who will be targeted?
It means that rather than homing in on wealthy groups of people, the government might simply take a bigger slice from everyone as they grow their wealth. This could mean hiking the rate of capital gains tax.
The risk is that some people might then hang onto capital gains until they die, because under the current rules CGT resets to zero on death. So they might accompany this with rules that mean capital gains tax doesn’t reset to zero after you die, and your estate may need to pay it on top of any inheritance tax.
They may also decide that inheritance is a useful target, because it’s not money that individuals will be relying on later in life. However, while it’s not going to affect those who have spent their lives building assets, it will affect their family, who may be relying on an inheritance for key life milestones like buying a house or retiring. It could throw people’s plans into disarray.
What can you do
If you are worried about capital gains tax
It’s worth taking advantage of your capital gains tax annual allowance as you go along. You can either sell, wait for 30 days, and buy the same assets, sell and buy different assets immediately, or use the share exchange (Bed & ISA) process to sell and buy the same assets immediately in an ISA – which protects them from capital gains tax in future too.
You should also look at losses. You can offset losses from the same year against your gains when working out how much tax you owe. You can also carry them forward for one year. However, it’s worth knowing that you need to report losses when you make them in order to carry them forward.
If you’re earlier in the process of building your assets, it makes sense to consider a stocks and shares ISA for your investments, because any growth is free of both capital gains tax and dividend tax.
If you are worried about inheritance tax
Gifts are a sensible way to bring down the size of your estate if you’re worried you could end up with an inheritance tax bill.
You can give up to £3,000 away before the change, which will fall within your annual gift allowance. You can give away larger sums and they will be outside of your estate after seven years. 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 have children in your life who are under the age of 18, you could consider paying into a Junior ISA for them each year. This is counted as being given away immediately for inheritance tax purposes but is tied up until they reach the age of 18.
If you are relying on an inheritance
An inheritance can play a role in retirement planning, but you need to consider it carefully. Your essential expenses should be covered regardless of whether or not you get an inheritance. This can come from a combination of state pension, workplace and personal pensions as well as any other investments.
Then any inheritance should help pay for the extras to make life more comfortable – or give you the lifestyle you want in retirement. If your pension savings will fall short without an inheritance, you need a robust plan B you’re prepared to use. This could include downsizing your home, working longer, or working part time in retirement.
If an inheritance is likely to play some part in your retirement income, you need to be as sure as you can be that you’ll actually get one. It may feel like a tricky conversation to have with your loved ones, but you can’t base your planning on a vague assumption and crossed fingers. You may even find they’re happy to make lifetime gifts, which could be more tax-efficient.
