Are concerns about inflation inflated?

As we write this letter, speculation is rife about what the new chancellor of the exchequer (Rachael Reeves) will include in the Autumn budget.

Currently, the hot topics are in perceived 'wealth'. Inheritance Tax (IHT), Capital Gains Tax (CGT) and Pensions. No surprises though as these have been in the rumour spotlight for years.

The new Government might want to tread carefully though as they could inadvertently shoot themselves in the foot by drawing too much attention to these areas by increasing the tax rates.

The simple truth is that they probably don’t need to increase the tax rates. The tax revenues generated in these areas have been steadily rising for years through a method known as 'fiscal drag'.*

* Freezing tax thresholds increases people's taxable income without tax rates increasing. This results in additional revenue to the government. This phenomenon is called 'fiscal drag', as more taxpayers are 'dragged' into paying tax, or into paying tax at a higher rate.

For example, the amount of IHT collected has risen steadily from about £2.3 billion in 2010 to about £7.5 billion last year. There hasn't been a surge in deaths among the rich and famous, rather more and more ordinary people are being snared by the tax because various allowances and thresholds have remained frozen for years.

It’s even worse in the case of CGT because allowances have been systematically diminished in recent years.

Unlike income tax (where the effect is immediate), fiscal drag acts like a pick-pocket; most people don't even realise that they're affected until it's too late.

Indeed, many clients have recently mentioned to us that they instinctively know they're paying more tax but don’t quite know how or why.

Budget Prediction

Our best guess is that the chancellor will continue to chip away at CGT allowances and probably extend many of the frozen thresholds and allowances for longer (beyond 2027).

For the more cynical, this might be viewed as a classic example of 'bait and switch' i.e. Prime the public for tax hikes and people breathe a collective sigh of relief when they announce the lesser evil of extended freezes!

All of that said, we strongly advise against taking most forms of pre-emptive action when it comes to speculating about the future, as it may do more harm than good. Our philosophy is simply to optimise the use of all available allowances today. We can always take stock again if (when) the rules change.

We cover some of the other topical matters in our newsletter, which we hope you will find useful. In the meantime, we hope that you enjoy the rest of the summer.

As always, please do not hesitate to contact us if there's anything you would like to discuss further.