As rumours swirl about upcoming Budget changes, experts are warning of unintended consequences that could impact investors, the property market, and various sectors of the UK economy. While the government aims to address a multi-billion-pound shortfall in public finances, previous tax adjustments have often led to unforeseen and damaging outcomes. Property investors, landlords, and those holding diverse portfolios are being urged to take note of the potential risks.
Lessons from previous tax reforms
Tax tweaks can have far-reaching impacts, and history shows that even well-intentioned changes can lead to unexpected results. Sarah Coles, head of personal finance at Hargreaves Lansdown, noted, “History is littered with tax tweaks that had significant unintended consequences, that no government can afford to overlook.” She pointed to several examples of how tax policies have backfired in the past.
“When Gordon Brown abolished the dividend tax credit on pension investments, it was understood this would mean pensioners lose 20p in every pound of dividend income. But what was less understood was the lost incentive to invest in British companies producing dividends,” Coles explained. This change contributed to a significant drop in the proportion of institutional investors in UK-quoted shares, which fell from around half to just 4%.
Another example is George Osborne’s Help-to-Buy equity loan scheme. While it was designed to support first-time buyers, a House of Lords report later found that the scheme inflated the price of new-build homes, particularly in more expensive areas, negating the benefits for many buyers.
More recently, Kwasi Kwarteng’s mini-Budget, which included £45 billion in unfunded tax cuts, led to immediate financial turmoil. The pound dropped to record lows, gilt yields spiked, mortgage rates soared, and government borrowing costs increased, threatening the stability of UK pension funds. While many of the measures were eventually reversed, the damage was already done.
Potential unintended consequences of upcoming tax changes
As the next Budget approaches, several rumoured tax moves could have significant consequences for investors and the property market. One major concern is the potential for higher capital gains tax on stocks, shares, and property. This could lead to a range of outcomes that the government may not have anticipated.
- Investor behaviour could shift: If capital gains tax on stocks and shares increases, investors may hoard assets to avoid selling and incurring higher tax liabilities. This could lead to people holding onto investments that no longer meet their financial needs, ultimately resulting in worse outcomes.
- A potential drop in investment: Raising capital gains tax could discourage people from investing altogether, making it more difficult for businesses to attract vital funding, which could impact financial resilience in the long term.
- Impact on landlords: Increasing capital gains tax on property could prompt landlords to sell before the new rules take effect, reducing the number of rental properties available. This could drive down standards in the private rental sector and push rents up, worsening the current housing crisis.
- Property market freeze: On the flip side, some property investors may choose to hold onto their assets after the changes, waiting for the tax to reset to zero upon death. This could clog up the property market, making it more difficult for people to move and slowing down transactions.
- Inheritance tax adjustments: A reduction in the inheritance tax nil rate band might encourage people to give away money too early, potentially leaving them unable to cover future care costs, which could become a burden on their families.
- Gifting concerns: Cutting gifting allowances for inheritance tax could dissuade individuals from giving much-needed lifetime gifts to family members, reducing financial support for loved ones when they need it most.
- Impact on alternative investments: Changes to inheritance tax relief for business assets could make it less attractive for investors to consider qualifying stocks on the Alternative Investment Market (AIM), which currently offers tax advantages. This could reduce funding for smaller and newer businesses, hindering economic growth.
- Pensions at risk: Reducing tax relief on pension contributions could lead to people saving less for their retirement, potentially increasing their reliance on family or state support in later life.
- Discouraging higher earnings: A cut to pension tax relief for higher earners may make it less rewarding to earn more, especially for individuals earning over £100,000. This could discourage key professionals, such as senior doctors, from remaining in the workforce, exacerbating staff shortages in critical sectors.
- Threat to tax-free pension withdrawals: Even the mere suggestion of cutting tax-free cash on pensions could prompt people to take out more cash than they need, negatively impacting their retirement income prospects.
What investors can do ahead of the Budget
With so many potential changes on the horizon, there are steps investors can take now to protect their finances. Sarah Coles recommends making pension or Self-Invested Personal Pension (SIPP) contributions, paying into an ISA, or taking out a Junior ISA for children. She also advises using the capital gains tax allowance on share gains and utilising share exchange options like Bed and ISA for existing investments.
“Tax tweaks are designed to have an impact,” Coles said. “But as we’ve seen, changing tax rules will often persuade people to change their behaviour in ways the Chancellor didn’t foresee. Investors should take action now to prepare for any unexpected outcomes.”
As the UK government seeks to close its financial gaps, landlords, property investors, and those with diverse portfolios must remain vigilant. The lessons of previous Budgets show that tax changes can have wide-ranging and unintended effects, potentially reshaping the property market and investment landscape for years to come.
