JEFF PRESTRIDGE: Savvy investors are taking these steps ahead of the Budget… I urge you to do the same: Tax mitigation is the order of the day – here’s how to do it

I’m afraid the risk of a tax raid on our investments has just shot up.

Last week, Conservative leader Kemi Badenoch revealed her intention to abolish inheritance tax as soon as she could. 

And she pledged that in the meantime a Conservative government would scrap inheritance tax when passing down family homes and that couples would get a £1million tax-free allowance on top of that.

Her announcement backs Prime Minister Andy Burnham into a bit of a corner. He can hardly use his first Budget later this month to raise inheritance tax further when his opponent has pledged to scrap it. Even if he was planning an attack on inheritance tax, I think it unlikely he’d go ahead with it now.

He’ll have to look for other targets to boost the Government coffers… so, I think investors had better watch out.

’Do not let the tax tail wag the investment dog’ is a saying that has been around since before I wore shorts to school. It means you should make investment decisions on the growth potential of the funds or shares you have your eye on – not to save on tax.

Yet while tax considerations alone should never drive major investment decisions, I’m not sure the saying holds true any longer. Indeed, it should be sidelined until such time we are no longer governed by a rabid socialist party eager to tax wealth to the hilt while bingeing on welfare spending.

Former Chancellor of the Exchequer Rachel Reeves set this in train with hikes in capital gains tax (CGT) on profits from share sales and second homes. Yet current Chancellor John Healey is likely to ratchet up this wealth attack in his Budget.

As a result, I believe that defending long-term wealth from Labour’s tax-grabbing mitts is now a priority. Investing, dear readers, can no longer be looked at in splendid isolation. Forget tax tails wagging investment dogs. Tax mitigation is the order of the day.

It means that tax-friendly investment vehicles such as Isas and pensions should be prioritised. Along with your home, they should be the foundation stones of your long-term wealth.

So utilise as much of your £20,000 annual Isa allowance as you can between now and April – and, if you’re still working, try to increase your pension contributions. 

You’ll thank me for such advice when you come to retirement and are pleasantly surprised by the size of your pension pot.

Also, don’t forget the tax-friendly wrappers available to your children in the form of Junior Isas (Jisas) and pensions. Other tax-friendly options include Premium Bonds, investments such as Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) for the wealthy and brave.

What tricks Healey has up his sleeve have yet to be revealed, yet I wouldn’t be surprised if he aligns CGT rates with income tax rates.

When Reeves pushed up CGT in 2024, it jumped from 10 to 18 per cent for basic rate taxpayers – and 20 to 24 per cent for higher and additional rate taxpayers. 

Come the Budget, these rates could (not will) suddenly rise to 20, 40 and 45 per cent respectively.

According to numbers crunched by wealth manager Rathbones, the increase in tax for investors selling shares would be significant.

For example, a higher rate taxpayer earning £60,000, who makes a profit of £10,000 from a share sale, currently faces a CGT tax bill of £1,680, but if CGT rose to 40 per cent, the bill would jump 66.7 per cent to £2,800. If this same person was taking a capital gain of £50,000, the tax bill would leap from £11,280 to £18,800.

Rathbones’ Kirsty Cartwright says there are some smart financial moves you can make to defend against future CGT rate hikes. 

Among them are limiting gains you take so they fall within your annual CGT exemption allowance of £3,000. Or, even better, selling shares up to the value of £3,000 and then buying them back within your stocks and shares Isa.

By doing this, you future-proof them from tax on both dividends and capital gains. Yes, there are costs involved, but it’s a savvy bit of investment manoeuvring. It’s called ‘bed and Isa’ and if your investments are held on an investing platform, they offer the service.

Another shrewd move is to split investment assets not held in an Isa or pension between you and your spouse. It’s called an inter-spousal transfer – it’s tax-free and you double up on the CGT allowance as well as on the equivalent annual dividend allowance.

Protect your wealth from the march of socialism.