The case for and against inheritance taxbb

Jean-Baptiste Colbert, France’s celebrated 17th century finance minister under King Louis XIV, famously said the following: “The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing.” Or, to put it more bluntly, a successful tax should earn the government plenty of money whilst causing as little aggravation as possible to the people paying it.

Those who argue against the levying of inheritance tax (IHT) may or may not be aware of Colbert’s quote, but it’s very likely that they’ll agree with it. Opponents of IHT often say that it actually brings in a very small amount of money, an argument the statistics appear to back up: whilst annual receipts exceeded £5 billion for the first time earlier this year thanks to the boom in house prices, this only amounted to 0.25% of GDP. For the amount of ‘hissing’ the tax causes, is it really worth it for such a small percentage of the government’s revenue? Those against IHT would say not.

In contrast, those who support IHT come at the issue from a different angle. Whilst the revenue percentage may be small, IHT still earns the government a sizeable amount of money which would need to come from elsewhere if it were abolished. Getting rid of IHT could therefore lead to greater taxation elsewhere, preventing people from being able to enjoy their hard-earned money during their lifetime. The existence of IHT can also be seen as a potential stimulant for the economy: if people know that tax will be paid at 40% on any money they leave behind, they’ll be more likely to spend it whilst they’re still alive.

Looking at IHT’s impact on business, again there are those who argue for the tax as both a positive and a negative. Those against IHT say that it takes money away from beneficiaries who may well have used it to set up a business, removing potential investable capital from the economy. Supporters of the tax counter this argument by suggesting that those looking to protect their money from IHT may well be encouraged to invest it before they die in small businesses owned by their children or other family members.

So, what’s the answer? Whether you’re a supporter of Inheritance Tax or you think it should be scrapped, it’s unlikely that such a contentious tax is going to become less of an economic hot potato any time soon, leading to plenty more hissing as the IHT feathers continue to be plucked.

More tax transparency with offshore lettersbb

HM Revenue & Customs (HMRC) wants to remind you of its interest in your offshore investments.

Globalisation is not just about trade and investment flows. One of the significant changes to tax in recent years has been a move towards globalisation of tax. A prime example is the development of Common Report Standards (CRS) by the Organisation for Economic Cooperation and Development (OECD).

If you hold investments abroad, then this welter of abbreviations could explain some recent correspondence you have received. Under CRS, over 100 jurisdictions have agreed to automatic exchange of tax information. More than 50 early adopters, including HMRC, will start to exchange information by the end of this September. HMRC’s view is that CRS “dramatically increases international tax transparency.”

In advance of the first round of CRS information exchange, the government introduced legislation requiring certain financial institutions, financial advisers, solicitors and tax advisers to send a standard HMRC “notification letter” to any UK clients for whom they have provided overseas financial advice, services or referral. The deadline for issuing these letters is 31 August 2017.

Full declaration

The notification letter is designed to encourage errant taxpayers to bring their UK tax affairs up to date by using an online worldwide disclosure facility. Although the headline in large green letters at the top of the letter sounds daunting – “If you have money or other assets abroad, you could owe tax in the UK” – the key message (in much smaller black print) is that “If you are confident that your tax affairs are up-to-date, and you have declared all of your UK tax liabilities, then you don’t need to do anything further.”

The days of hiding money from the taxman offshore have long passed, a point the CRS reinforces. If you want to limit the tax you pay on your investments, there are plenty of legal, onshore opportunities we would be happy to explain.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

No summer Budget, but…bb

The general election left the future of many spring Budget announcements up in the air, but that situation may soon change.

When Theresa May announced her snap election in April, it threw a major spanner in the previous month’s Budget. There was no time to pass the 776 pages of Finance Bill before parliament shut down. The result was that about 80% of the Bill was removed and its uncontroversial residue passed through parliament in a few days. At the time it was anticipated that following the election the Chancellor – not necessarily Mr Hammond – would reveal a Summer Budget, just as his predecessor did in 2015. The second Budget of the year was expected to reinstate the lost measures and add a few more that were best left until after the polls closed.

It did not quite work out that way, as we all know. Mr Hammond has remained in place at 11 Downing Street and in June told Andrew Marr “…there’s not going to be a sort of summer Budget or anything like that, there will be a regular Budget in November as we had always planned…”. Shortly after that appearance, the background notes to the Queen’s Speech revealed that there would indeed be a Summer Finance Bill, even if there was no Budget.

A tight timetable

The new Bill will incorporate “a range of tax measures including those to tackle avoidance”, but precisely what those measures will be or when the Bill will emerge is unclear. The Treasury has a record of stretching seasonal limits when it comes to publications and will not be helped by the parliamentary timetable, which arrives at the summer recess on 20 July. Parliament resumes on 5 September, but only for nine days before the conference recess, which runs until 8 October.

One planned-and-abandoned/deferred measure which could be relevant to you is the reduction in the money purchase annual allowance. This generally operates when pension contributions are being made at the same time as benefits are (or have been) being drawn. If you think this might affect you, it is vital you check the current situation with us before taking any action.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

HMRC, the ultra-rich and the not-so-richbb

Parliament’s Public Accounts Committee thinks that the “government must take a tougher stance on taxing the very wealthy.”

In 2009, HM Revenue & Customs (HMRC) set a specialist team to focus on the tax affairs of high net worth individuals (HNWIs is the jargon). At the time, HNWIs were defined as people with net assets exceeding £20m, although in 2016 the threshold was cut to £10m. The latest figures (for 2014/15) shows that this select group of around 6,500 individuals paid £3.5bn in income and capital gains tax – over £535,000 a head.

That might sound like a healthy contribution to government finances, but a report from the House of Commons Public Accounts Committee (PAC) issued in January was highly critical of HMRC’s efforts in handling their richest clients, each of which is allocated a dedicated “customer relationship manager”. The PAC felt that HMRC was not tough enough in dealing with tax evasion and avoidance by HNWIs, even though at any one time a third of the group were subject to open enquiries into their tax affairs. There was a call for more prosecutions: in the five years to 31 March 2016, HMRC completed investigations into 72 HNWIs for potential tax fraud, but only two of these were criminal cases, of which one was successfully prosecuted.

One worrying suggestion from the PAC was that HNWIs should be required to provide details of their assets on their tax returns, a feature of some other countries’ tax systems. The PAC notes that “HMRC has been looking at what further information HNWIs could be required to report to help improve its understanding of their wealth. The Department told us the issue is currently being considered by ministers.”

If you are thinking that you don’t count as a HNWI, do not imagine that HMRC is neglecting you. Two years after the HNWI Unit was set up, the Affluent Unit was established, which now covers people with income of over £150,000 and/or net assets of £1m or more. The latter criterion is significant: rising house prices and strong investment markets have swollen the potential members of this second tier.

As we near the tax year end, make sure that you talk to us about any tax planning before taking action – or hearing from a unit of HMRC…

The value of your tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Article Posted: Feb 2017

The end of the tax year: 5 April remindersbb

As the end of the tax year nears, remember the 5 April is a multi-faceted deadline.   

In 2017, the tax year ends on Wednesday 5 April, over a week before Easter. The Budget is almost a month earlier (8 March), but that should not affect most tax year end actions. As a reminder, here are some of this year’s points to consider – and act on, if necessary – by
5 April:

  • If your pension benefits were worth over £1.25m in total on 5 April 2014, you have until 5 April 2017 to claim individual protection.

 

  • If you reached state pension age before 6 April 2016, 5 April is the deadline for making Class 3A voluntary contributions to top up your state pension.

 

  • 5 April is the last day for making pension contributions to exploit up to £50,000 of unused annual allowance from 2013/14.

 

  • If your employer offers salary sacrifice arrangements, the new, harsher, tax rules will apply immediately for any starting after 5 April. Arrangements which begin before
    6 April 2017 will enjoy the old tax rules for another year (another four years for sacrifice involving cars, accommodation and school fees).

 

  • Any of the £3,000 annual exemption for inheritance tax that was unused in 2015/16 will be lost unless you make gifts covering both this tax year’s exemption in full and the unused balance from the previous year.

 

  • If you have started to draw a flexible income from your pension arrangements, the maximum further tax-efficient pension contribution you can make will fall from £10,000 to £4,000 on 6 April.

 

  • Your annual capital gains tax exemption of £11,100 will disappear on 5 April.

 

  • 5 April is the final day to make ISA contributions of up to £15,240 for the current tax year.

 

If any of these strike a chord, do please talk to us: just because there is a deadline, does not mean you have to act.

 

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Article Posted: Feb 2017

The residence nil rate band – not so simplebb

From April, the residence nil rate band comes into being.  

It was nearly two years ago that the Conservatives’ manifesto for the 2015 election promised to “take the family home out of tax by increasing the effective Inheritance Tax threshold for married couples and civil partners to £1 million.” The legislation which starts the first stage of this process comes into effect on 6 April 2017. It will not be quite as simple as the manifesto sounded:

  • Initially the £1 million – actually £500,000 per spouse/civil partner – will be £850,000 consisting of the existing nil rate band of £325,000 plus the new residence nil rate band (RNRB) of £100,000 for each spouse/partner.

 

  • The RNRB will then increase by £25,000 in each of the following two tax years, so that it reaches £175,000 by 2020/21. During that time, the nil rate band will remain frozen (it is not due to increase until at least April 2021).

 

  • The RNRB is subject to a tapering reduction of £1 for each £2 by which your estate exceeds £2 million, so large estates will often see no benefit.

 

  • The RNRB only applies to gifts of residential property made on death (not during lifetime) to the deceased’s direct descendants. It is therefore of no use if you do not have any children/grandchildren or you wish to leave your home to someone who is not a direct descendant.

 

  • There are rules to cover downsizing or moving into residential care, but these are highly complex.

 

With the introduction of the RNRB imminent, it makes sense to review your estate planning now to see what impact, if any, it may have. For example, it may require you to revise your will or consider lifetime gifts to limit the impact of tapering. As the tax year end is approaching, why not add estate planning to your year-end review list?

 

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Tight turnaround for year end tax planning before Spring Budgetbb

The Treasury has announced the date of the next Budget.

On 15 December, the US Federal Reserve (Fed) raised its key short term interest rate by 0.25%, to a range between 0.5% and 0.75%. It had made the same increase 12 months previously. When the Christmas 2015 rate rise occurred, the central bank was implicitly expecting to raise rates four times during 2016. However, a collection of events from wobbles in China to the uncertainties caused by the Brexit vote put paid the rate rise every quarter that had been pencilled in.

Last month when the Fed repeated its end-of-year increase, it suggested that there would be three further increases in 2017, taking the target rate to 1.25%-1.50% by the end of the year – the same range it had originally struck for the end of 2016. A trio of rate rises would represent a dramatic acceleration in activity by the Fed – December’s rate rise was only the second in the last ten years, as the graph shows.

Whether the Fed’s predictions prove any more accurate this year is a matter of some debate. One problem the bank faces in looking at 2017 is the economic impact of President Trump’s actions, as opposed to candidate Trump’s campaign rhetoric. If he succeeds in giving the US economy a boost through tax-cutting measures, the Fed is likely to raise rates steadily, as unemployment is already at low levels.

On this side of the Atlantic the Bank of England will probably not raise rates in 2017. The uncertainties surrounding Brexit will stay the Bank’s hands, even though inflation is on the rise – the November 2016 the CPI annual rate of 1.2% was 1.1% higher than 12 months’ previous.

As the year turns, the US interest rate outlook means that a review of your investments could be a wise move.

The value of your investment can go down as well as up and you may not get back the full amount you invested.

Attention staff: the cafeteria is closingbb

The Autumn Statement confirmed plans to limit the scope for salary sacrifice arrangements.

In recent years, the number of employers offering ‘cafeteria’ remuneration has steadily increased. Under the system, employees can swap pay for benefits, which can range from anything from mobile phones through to company cars or gym membership.

The advantage of visiting the cafeteria depends on what is chosen from the menu. In some instances – mobile phones for example – pay that is subject to income tax and employees’ and employer’s national insurance contributions (NICs) becomes a benefit free of both tax and NICs.

The party on the other side of this disappearing trick, HM Treasury, has now decided enough is enough. Over the summer, HM Revenue & Customs issued a consultation paper on countering the effects of salary sacrifice and the Autumn Statement confirmed that most of the proposals in the document will take effect from 6 April 2017. Broadly speaking, if you give up salary for a benefit, then from 2017/18 you will be taxed on the greater of:

  • the salary foregone; and
  • the statutory value of the benefits

Your employer will also be subject to NICs on the same basis, so the only saving remaining will be employee NICs, which for higher rate taxpayers is generally 2% of the earnings sacrificed.

There will be a range of transitional protection for arrangements in place before April 2017 and a limited number of total exemptions. The most important of these is for pensions, where the gain from using salary sacrifice can be as much as 33.9%. If you would like to learn more about the continuing advantages of this type of salary sacrifice arrangement, please talk to us.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

 Article Posted: Jan 2017

Breaking the PAYE codebb

Article Posted: March 2016

Your latest PAYE code may look a little strange.

It’s the time of year when HM Revenue & Customs (HMRC) sends out PAYE codes for the new tax year. Usually that means adjustments for:

  • An increase in the personal allowance, which in 2016/17 will rise by £400 to £11,000;
  • Changes in any benefit values, notably car benefit which could increase quite sharply if you have a low emission car; and
  • Collecting tax due from earlier years and, unless you have requested otherwise, tax due for the current year on certain investment income.

Reports suggest that HMRC has started to allow for the dividend tax changes and the personal savings allowance in setting 2016/17 codes. However, the results can be confusing, not least because HMRC’s starting point will be the dividend and interest on the last tax return which they received from you (hopefully 2014/15).

For example, if you are a higher rate taxpayer who had £7,000 of dividend income in 2014/15, HMRC will make the following calculation:

Dividends £7,000
Dividend Allowance £5,000
Taxable dividend £2,000
Tax due £2,000 @ 32.5% £   650

 

To collect this tax, HMRC will reduce your total allowances by £1,625 on the basis that 40% of £1,625 is £650, the amount of tax due.

Anecdotal evidence suggests that the HMRC process is not running too smoothly. There have been wrong calculations and instructions not to collect tax in-year have been ignored. Although in the end the full self-assessment calculation will sort out any errors, it is better to start off with the right numbers rather than wait for a surprise bill or delayed tax repayment. If you want a quick check on what your tax bill should be for 2016/17 – and ways you might reduce it – do talk to us.

  

Year Start planning: time to get ahead?bb

Article Posted: March 2016

As we near the end of the tax year, now is the time to consider not only year end planning, but also planning for the new tax year.

It is one of the features of the political cycle that the more difficult and less palatable legislation tends to come at the start of a parliamentary term rather than as an election nears. Tax changes are very much a case in point: the rises come soon after an election, the cuts shortly before the election. When 2016/17 starts there will be a number of important tax changes scheduled to take effect which need to be built into your financial planning:

  • Lifetime allowance The lifetime allowance effectively sets the maximum tax-efficient value of all your pension benefits. It started life in 2006 at £1.5m, reached a maximum of £1.8m and will be cut from £1.25m to £1m on 6 April 2016. It will be possible to claim some transitional protection, although final details are still awaited.
  • Annual allowance The annual allowance effectively sets the maximum tax-efficient annual input to all your pension benefits, regardless of source. It started life in 2006 at £215,000, reached a maximum of £255,000 and is now £40,000. From 6 April 2016 a new tapered annual allowance will be introduced, which may affect you if your total income (not just earnings) exceeds £110,000. The taper will mean that your annual allowance could be as low as £10,000.

 

    •  
  • Dividend taxation The new tax rules for dividends begin on 6 April. If your dividend income is less than £5,000 you will have no tax to pay, but if you have substantial dividend income – perhaps from a shareholding in a private company – then your dividend tax bill could increase.

 

    •  
  • Personal Savings Allowance This new allowance will mean that if you are a basic rate taxpayer you have no tax to pay on the first £1,000 of interest, while if you are a higher rate taxpayer, then £500 will suffer no tax. In line with these new allowances, interest from banks and building societies will be paid without deduction of tax (but it will still be taxable).

 

If any of the changes gives you pause for thought, do contact us. Each one offers planning opportunities, not all of which are obvious.

The value of your investment can go down as well as up and you may not get back the full amount you invested. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

  

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