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Every week, Kyle Caldwell and guests take a look at how the biggest stories and emerging trends could affect your investments, with practical tips and ideas to help you navigate your way through. Join the conversation, tell us what you want us to talk about or send us a question to OTM@ii.co.uk. Visit www.ii.co.uk for more investment insight and ideas.
Hello, and welcome to On The Money, the weekly podcast that covers investments and pension topics in a practical manner. For this episode, the focus is on what may be inside the famous red briefcase when chancellor John Healy steps up to deliver his first budget on the October 28. Joining me to discuss what may be in store and the potential ramifications is Craig Rickman, who is personal finance editor at Interactive Investor. Now please do bear in mind that we're recording this episode on the October 12, and as we get closer and closer to the budget, there'll be more rumors and speculation. Now, Craig, before we get on to the various measures that may crop up in the upcoming autumn budget, there has already been a very notable policy change, which is that from 2030, if labor win the next election, the pension triple lock will be tweaked.
Kyle Caldwell:So at the moment, the state pension rises by the highest of one of three measures. That's either earnings growth, inflation, or a minimum of two and a half percent. So, Craig, what's gonna change from 2030?
Craig Rickman:Yeah. Sure. So, yeah, this was the the the big announcement from Labour's... The the the annual party conference. Yeah.
Craig Rickman:This this tweak to the triple lock, the triple lock, the state pension triple lock. So there's... I think there's quite a few questions that that people may still have around this change. So let's sort of try and unpack some of those. So it's probably the best place to start is, yeah, let's look at the the triple lock in its current form.
Craig Rickman:So what is it? So it's, as you say, it it uprates the the state pension every year. The state pension uprates by the highest of three metrics, which are two and a half percent, average wage growth, and inflation. Whichever of those is highest, the following April, that's what drives the state pension increase. There's been a lot of pressure on on Andy Burnham since he started his premiership to adjust that policy.
Craig Rickman:However, in its election manifesto, Labour promised to keep the triple lock for the rest of this parliament. The reason why there is pressure on Andy Burnham and has been pressure on previous governments as well and previous prime ministers is because critics have said the triple lock has become incredibly expensive, and it's and it's not sustainable. So it's pressure on Andy Burnham to act, and he has. So he's made a suggested alteration, a a tweak to the policy, which will honor the triple lock for the rest of this parliament, but that change will come in from April 2030. So what's changing?
Craig Rickman:So so the the the the state pension rating system will still have three elements. It's important to say that. They are inflation and two and a half percent, so those remain, but it's the earnings element which is being tweaked. So the earnings element will be the amount required to return or maintain the value of the state pension relative to earnings. So, again, there's still three parts of it.
Craig Rickman:So how much does the government expect to save from this policy? Well, forecasts have suggested that by the end of the twenty thirties, it should save around 15,000,000,000, and by the end of the twenty fifties, around 50,000,000,000. And what the government has said or what Andy Burton has said, he said he wants to use those savings to fund social care. So that's the amount... They're the amounts that the government expects to save by tweaking the triple lock over time.
Craig Rickman:But as many experts have pointed out, there's no guarantee that that they will be the amounts that they save, and that's because forecasting savings to the state pension, forecasting the cost of the state pension is really difficult because you don't know what inflation is gonna be in the future, and we don't know what... How how much earnings are gonna rise. And so that's been one of the key questions around this. If this sort of tweak to the triple lock and the savings from that are going to be used to fund social care is whether it it will actually will actually fully fund social care. Most people think it probably won't, and the government may may need to find other sources.
Kyle Caldwell:Could you explain a bit more about what is exactly changing with the earnings element? I've seen various headlines point to the triple lock changing to a double lock. But as you've said, they are still taking into account earnings growth, but just not in the same way as they do at the moment.
Craig Rickman:That's right. Yeah. So what it will essentially do is it will remove this ratcheting effect that you get with the state pension triple lock, which is what critics have said is one of the reasons that has made it so expensive to run since it was it was launched in 2011. So in in terms of how this sort of ratcheting effect works, so let's say you have a period where inflation spikes. So inflation spikes, earnings don't don't tend to rise at the same time.
Craig Rickman:The earnings increases sort of arrive later, play catch up, while then, you know, companies start paying their staff more money to cope with the inflation increases. So what that does, that that sort of ratchets up the the state pension over time. So instead of that happening, it will be sort of the the the value of earnings over a period of time instead of assessed every year.
Kyle Caldwell:So following that change to the earnings elements, suppose the key question people receive in the state pension or those about to will be asking themselves is, will I be worse off under these changes?
Craig Rickman:Yeah. That's a good question. I mean, the... If if we... If the sort of tweaked triple lock or the adjusted triple lock was in place since 2011, the Institute for Fiscal Studies did some calcs on this and worked out that it would have...
Craig Rickman:The state pension would have risen by 75% over that period. Under the current triple lock, it rose by 89%. So in answer to that question, if it had been placed since 2011, then people wouldn't have been as well off as they would have been under the the current triple lock system. However, if if since 2011, if the state pension had increased just with inflation, it would have risen 60%. And if it had risen just in line with average earnings, it would have been 66%.
Craig Rickman:And the IFS calculated that the state pension would have risen, again, under this sort of tweet proposal, would have risen 6% above inflation. So it would have risen 6% in real terms.
Kyle Caldwell:So let's now move on to the Autumn Budget. Reports over the weekend indicate that Healy faces having to find 35,000,000,000 to avoid cuts to public spending while meeting his pledge to raise defense spending to 3% of national income by 2030. That £35,000,000,000 figure is from the Institute for Fiscal Studies, you've already mentioned them, a think tank. And according to the IFS, here, they will have to choose between spending cuts, tax rises, or a mixture of both. One area that they are reportedly taking a very close look at is capital gains tax.
Kyle Caldwell:Okay. Proposed changes to the capital gains tax regime. There've been rumors that have cropped up the last two budgets, and rates indeed got... They actually went up in 2024. It's not that long ago.
Kyle Caldwell:Could you firstly explain why this time around the rumors are being gathering pace?
Craig Rickman:Yeah. So the capital gains tax regime has been a big target for the government in recent years. As you note, in the 2024 budget, the headline rates went up. So the basic rate went up from 18... Sorry, 10% to 18%, and the higher rate went up from 20% to 24%, and that's on the sales of shares, so it brought them in line with the capital gains tax rates for property.
Craig Rickman:But even before that, the annual exemption, so the amount that you can sort of enjoy in profits every year tax free, That was slashed. That used to be £12,300 that was more than halved to £6,000 and then halved again to £3,000 the amount that it stands today. So, you know, all those changes have happened and happened over the past few years, that's been a big target for the government. And so there are now sort of rumors that the government could could target capital gains tax again. The rumors this time as they were last year as well, and in fact, the year before that were this idea to equalize them with income tax rates.
Craig Rickman:So if we look at the income tax system in The UK, so that would mean the basic rate would raise to 20%, the higher rate to 40%, and the additional rate to 45% or even slightly higher in Scotland. So so there the room is doing the round. This was... Part of this has been stoked by the Labor donor called Dale Vince who who suggested that the capital gains tax rate should be equalized with income tax in order to fund an increase to the personal allowance or to help fund an increase to the personal allowance, I think is more accurate. So, yeah, that's...
Craig Rickman:They're they're the rumors doing the rounds, and they're... They are... Yeah. They're they're really starting to gather a bit of pace.
Kyle Caldwell:And, you know, Labour in general, I mean, Healy, in particular, they are... They have been playing their cards very close to their chest. Healy has previously said that he won't give any answers or signals that will fuel budget speculation, but he did point out to The Sunday Times in late September that The UK has the lowest capital gains tax of any g seven nation. So, Craig, you've done some research looking into this. How do The UK capital gains tax rates compare with our g seven neighbors?
Craig Rickman:Yeah. I think... I mean, just just on the hat note, I mean, if you're if you're gonna make a comment to that, you know, the The UK's low capital gains tax rates compared to others, it does signal that you might be inclined to increase them. That's that's the takeaway that people might have. So...
Craig Rickman:Yeah. So let's let's have a look. So he said... Yeah. He said, yeah.
Craig Rickman:Lowest capital gains tax of any European g seven nation. So let's compare. Let's compare how we look with with our neighbors. So if we look at France, so France has a capital gains tax rate of 30%, which could rise to 34% for the top earners. For Germany, capital gains tax is 25%, plus there could be a 5.5% solidarity surcharge on the tax paid, which means the total could go to 26.375.
Craig Rickman:Italy, capital gains tax rate at 26%, and then as we've said, The UK top rate of 24%. So I guess were Healy's comments around it correct? Are we lower compared to the others? Yes. We're lower.
Craig Rickman:We're not talking huge amounts here. In some cases, we're talking one or two percentage points so that it's not huge. And if you looked at capital gains tax on a global scale, it's... You know, we're probably somewhere somewhere in the middle. But I think just in general, you know, just comparing tax, you know, between different jurisdictions is always a bit of a tricky thing to do.
Craig Rickman:You know, if if we take, you know, Germany, for example, they charge... Capital gains tax is charged on dividends and interest as well, so people will pay 25% ish on those. Whereas in The UK, we know that on interest and dividends, the top rates are much higher. So, yeah, if you looked just at the headline rates, yes, capital gains tax. Our capital gains tax rates are lower than than in the country he's mentioned, but you need to sort of dig a bit deeper to to sort of find out more about how tax systems work.
Craig Rickman:But interestingly, if The UK or the government decided to to equalize capital gains tax with income tax rates, then it would make ours one of the sort of... Would shunt us right near the top, to the very top, in terms of in terms of capital gain... Top capital gains tax rates.
Kyle Caldwell:However, if capital gains tax rates were to increase, there's no guarantees that that's gonna increase tax revenue because it's very much based on behavior. Ultimately, you're not gonna pay capital capital gains tax unless you sell investments or if it's not your main residence, you sell a property.
Craig Rickman:Well, that's right. Yeah. And in fact, HMRC did some calculations on this and and found that if capital gains tax rates were increased by 10 percentage points, they would actually net result in a net reduction in treasury revenue. So, yeah, that's... So this is not that simple for the government.
Craig Rickman:If if they did see the capital gains tax regime as somewhere where they could raise some extra revenue, then it's then it's not that simple. They have to be they have to be a bit careful there because as you know, it's... It could trigger a shift in in investor behavior because you only... And again, as you as you noted, you only pay capital gains tax If you sell something, if you transfer it or you gift it to someone else, it's only on a on a on a... What's called a disposal of an asset, and if people think the rates are are unpalatable, then they've just stopped selling stuff with a view that either, you know, rates will come down in the future or, alternatively, they'll hold on to it, the asset, until until they die because there's no capital gains tax on death.
Kyle Caldwell:On that point that you've just mentioned about capital gains tax not being payable on death, so what this means is that any gains that you've made, Jordan, your lifetime, they're wiped out on death. Is there any prospect of that rule changing at all?
Craig Rickman:This... That's a rumor that has surfaced before, and it's it's an option for for the government. But I think we, in The UK, typically don't like double double taxation. I mean, I say that with knowing that from April next year, you know, unspent pension savings could be subject to a double taxation in the form of inheritance tax and income tax. So, you know, it it it can happen, but I think, you know, if if, for example, that if people were leaving pensions to loved ones that were double taxed and also other types of assets, you know, in in accounts that aren't in tax wrappers, then it could get really, really punishing.
Craig Rickman:So really, really punishing tax bills and debtors, obviously, something that we don't... That we hope doesn't happen.
Kyle Caldwell:And for investors, the main way to keep capital gains tax at bay is to make the... Make use of tax wrappers. You can put up to £20,000 a year in an ISA, and, also, you can use your pension allowance. You know, most people can put a 100% of their earnings or sit... All up to £60,000 a year into their pension.
Kyle Caldwell:There are other tactics as well, Craig, that people can utilize. Could you give a quick run through them?
Craig Rickman:Yeah. There are a few things you can do to to mitigate capital gains tax. So, again, this is on, yeah, holdings outside of tax wrappers. So one thing you can do is to use your annual exemption every year if you can. So as I sort of mentioned earlier, anyone can...
Craig Rickman:The first... Or the first £3,000 of any gains that you make during the tax year are tax free. But that that allowance is use it or lose it. So if you don't use it between the April 6, one year, then the April 5, the following year, then you can't carry it forward. So it's worth using.
Craig Rickman:I mean, one tactic that some investors use is something called bed and ISA, where you realize gains outside of tax wrappers up to your £3,000 annual exemption, and then funnel that straight into your ISA to make sure that any future capital gains and any future dividends escape tax. That's one thing to look at. Another is gifting money to gifts to spouses and civil partners, their capital gains tax exempt. Another thing you can do as well is offset losses against gains, so you can offset losses made, I think it's the previous four years, so there are a few things that investors can do to avoid capital gains tax.
Kyle Caldwell:Let's now move on to the next item on the on the list, which is pension tax free cash. Now there were there were a lot of rumors ahead of last year's Autumn Budget about potential changes to tax free cash. The pensions minister, Thorsten Bell, made some recent comments to a financial publisher called City Wire on tax free cash rumors. Craig, could you run through what he says?
Craig Rickman:So I have the quote here. He said, some pension savers have been very badly let down by newspapers writing garbage, and they should stop it because it has caused a lot of problems over the last few years. Some people have lost serious money. Very bold statement there. Let's have a sort of...
Craig Rickman:Let's unpack that a bit. So I guess it should offer some reassurance to to people ahead of the budget. I mean, the rumors about cuts to tax free cash haven't quite been as fierce as in as in previous years, but there have been a there have been a few. And it would be a very strange move by the by the government if the pension minister came out and said this, and then they did make the change sort of in... At at the end of this month.
Craig Rickman:But at the same time, you know, he hasn't come out and said, we're not gonna we're not gonna change x y zed elements of of pension tax. Hasn't come out and said that. I think also in terms of the rumors and what newspapers have been publishing, I think it's important to remember that the the rumors and the speculation before the previous two budgets have been stoked by the the government. We were warned two years ago that there was a there was a black hole, fiscal black hole, and it needed to be plugged with tax rises. And then we were also warned that there was gonna be a painful budget.
Craig Rickman:So then it's natural that the media will then speculate about what might happen. I think we can agree that things did get out of control. However, last year, Rachel Reeves, then chancellor, two weeks before the budget, did did come out and say that we're not we're not gonna touch pension tax free cash. In some cases, that might have been a little bit too late because some people have already reacted to the speculation. But...
Craig Rickman:Yeah. So I think, you know, I think that that talks and bail's comments, know, my personal view is it should offer some reassurance, but, you know, I think it's, you know, that's that's something the government could do. Just come out and say, if you're not gonna change it, come out and say that.
Kyle Caldwell:I completely agree. You know, if they're, you know, upset about speculation, then they can come out and end it by clarifying that we're not gonna make any changes, ASO common or budget to tax free cash. But, you know, I think it's important that, you know, it's important you don't act on speculation. You wait for the sort of hard, cold evidence, because some financial decisions that are made based on rumors are irreversible.
Craig Rickman:Yeah. And taking your tax free cash is is one of those... Was one of them. Particularly, as you can't use... There's there's no cooling off period.
Craig Rickman:So you couldn't take your tax free cash now, for example, wait and see what happens in the budget, and then reverse the decision. We've had direction from HMRC that that you that you can't do that. So, yeah, you know, I totally agree to your point. Whenever making big decisions like this, always make them with your long term future in mind, and go and get advice if if you're unsure.
Kyle Caldwell:So let's now move on from pension tax free cash to Britain's most hated tax, which, of course, inheritance tax. Now we saw at the recent Conservative Party conference a pledge that there will be reform to inheritance tax if the Conservative Party win the next election. So, Craig, could you run through what was said, and could we see some inheritance tax reform at this upcoming autumn budget?
Craig Rickman:I think, yeah. I mean, I I would argue that that that there should be some reform to the inheritance tax system that's long overdue. We'll come on to that in a second. But let's have a look at this this this conservative proposal to inheritance tax, which will... Because it's a a cut, it will inevitably pique the interests of of some voters.
Craig Rickman:So what are they proposing? So they're proposing that the family home or your home you can leave to your children or grandchildren completely tax free. And then while everyone will be allowed to leave 500,000 tax free, so a million pound for couples. So essentially, in addition to you leaving your home tax free and because people would be able to leave their home tax free, this would mean the residents' nil rate band, which is this is an amount that you can, it's a 175,000 that you can pass on tax free if you own a home and you pass it to direct descendants, children or grandchildren. The recommended that part that's policy is scrapped or probably more accurately that 175,000 is added to the nil rate band, which is the 325,000 everyone can pass on tax free.
Craig Rickman:So they've they've sort of proposed to add those together so that everyone gets £500,000. So again, an interesting proposal. One of the one of the key sticking points of this appears to be the cost. Conservatives reckon it will cost 6,000,000,000, but many experts have waded in and said it could cost double that. So it could be an expensive policy, so to introduce something like that may require tax hikes elsewhere.
Craig Rickman:Sort of the other thing is that, I mean, it would create a, you know, create a, you know, an an inheritance tax loophole for for the for the right people that, you know, buy the most expensive house, upsize if you like, and make sure that you have enough money in other assets, pensions or ISAs and other savings and other assets that are below sort of a million pounds if you're a couple, and effectively, you could escape inheritance tax. So that's the first bit. Could we see an inheritance tax cuts at this budget? I think that's incredibly unlikely. I do agree.
Craig Rickman:I I think that, you know, if I had if I had the choice, if I was given a magic wand, I would get rid of the residents Neil Ray banned. I think it's too complicated. I think it's unfair in parts, And so I would remove that 175,000 and and I guess like the conservatives have suggested, I would add it to the residents... No. Sorry.
Craig Rickman:The the standard nil rate band, which has been frozen at 325,000 since 2009. So that's something that I would do if I was chancellor, if I were chancellor. But think IHT giveaways at this budget are incredibly unlikely to happen.
Kyle Caldwell:You just mentioned a policy you'd like to see happen in the autumn budget. One that I would like to see is the removal of stamp duty on UK shares. I sound like a bit of a broken record because I've said it a number of times over the years on, you know, preview episodes ahead of the budget. I just feel like, particularly now when the government is trying to foster a greater investment culture in The UK, it's trying to turn us away from a nation of savers into a greater nation of investors. It's lots of, you know, positive things that they're doing, looking at things like risk warnings.
Kyle Caldwell:But I just feel, you know, having stamp duty on UK shares, it's nonsensical, and it's a barrier, and I think it should be removed.
Craig Rickman:Absolutely. Yep. Yep. That's something that we've campaigned for, Interactive Investor, for some time. And, yeah, I I I completely agree with you.
Kyle Caldwell:So, Craig, we've run through the rumor mill, and you'll be back on the podcast in a couple of weeks to run through the contents of the famous red briefcase.
Craig Rickman:Looking forward to it.
Kyle Caldwell:Thank you for listening to our preview episodes ahead of the budget. As I've just mentioned, we will be doing a dedicated episode following the budget, and that'll be published on Thursday, October 29. It'll be later on in the day rather than first thing, but will, as usual, be published on a Thursday. We always love to hear from listeners, and the best way to get in touch is by emailing us on otm@ii.co.uk. Ahead of the budget, we're gonna have plenty of news analysis articles on the I I website, which is ii.co.uk, And we'll be back as usual next Thursday for our two hundredth episode in which myself and Dave Baxter are gonna run through the golden rules that we keep on coming back to.