Keeping pace with HMRC
Why seeking expert advice is the best way of staying abreast of the latest tax changes introduced by the government.
While many of us are likely to be aware of the latest model of car or mobile phone, tax updates attract rather less interest – but ignorance of them can be expensive. Take nil-rate band trusts, which were widely used for Inheritance Tax (IHT) planning between husbands and wives. Many felt, for tax purposes, they effectively became redundant eight years ago when the transferable nil-rate band was introduced.
While for some this may be the case, it is certainly not true for all and there are many non-tax reasons for their existence, even though they should have been reviewed. Families in this position may also find that their parents or grandparents failed to keep pace with other tax changes. ‘We are seeing a lot of Wills that haven’t been updated,’ says Kirstie Williamson, Tax Manager at law firm Irwin Mitchell. ‘People are starting to miss out.’
The pace of change in tax law looks likely to accelerate because the government has placed many key areas under review. In his summer Budget, Chancellor George Osborne announced that estates worth as much as £1 million can be sheltered from IHT – a relief to be staggered over three years from April 2017 – a 54% increase on present IHT relief. He has also begun a review of the existing powers to vary the terms of a Will after a person has died - something that could have a significant impact on many families. Other recent tax changes could affect the tax status of partners in professional firms and the Capital Gains Tax liabilities of entrepreneurs.
Few of us are expert enough to be able to identify and understand these changes on our own. That means it is vital to include tax changes as part of regular financial reviews. Tony Müdd, Divisional Director of Tax and Technical Support at St. James’s Place, says advisers have a professional responsibility to keep a watching brief. ‘Advisers will be analysing their clients’ affairs, identifying what changes mean for them and communicating that to clients,’ he says.
Tax changes since 2010
The average UK household saw an annual gain of £321 a year between 2010 and early 2015 due to direct tax cuts, according to the Institute for Fiscal Studies.
Pensions: The new pension freedoms have culminated in freeing ‘defined contribution’ investors from having to convert funds into annuities and allowing over-55s to take out part or all of their private pension savings. But tax relief on pension contributions for higher earners has been cut, with more to come in April 2016.
Tax rates: The top income tax rate rose from 40% to 50% in 2010 but was reduced to 45% in 2013. The standard personal allowance has gone up from £6,475 in 2010 to £10,600 now and will be set at £12,500 by 2020. Other changes have had a negative effect on higher earners.
Venture Capital Trusts: Chancellors have made regular changes to VCTs and the July Budget aimed to encourage younger, growth and innovative businesses. That may make VCTs less popular, despite the 30% upfront tax relief as tax relief for more established businesses is restricted.
Inheritance: The IHT threshold, set at £325,000 per person since 2009, is being extended between 2017 and 2020 to include another £175,000 per person for the family home. Since married couples and civil partners can share their allowances, a family home of £1 million will be exempt by 2020. In recent years, many families have agreed to vary the terms of a parent’s Will. These deeds of variation could be used to change a Will so that the bequest bypasses a generation and could reduce IHT.
David Brookes, Tax Adviser at accountancy firm BDO, adds that the key is to be aware of any changes: ‘An annual review may not be sufficient for investors with complex investments and tax affairs. Usually, the client’s advisers will alert them to changes that have a direct impact on them, but it is important that investors look at Budget summaries provided by their advisers, and if they think they may be affected by a change to the tax law, they should ask the question as soon as possible.’
Even apparently straightforward areas of finance can be affected by changes. Pensions regulation has undergone significant change in recent years, including the scaling back of tax relief for higher earners and caps on the amount that can be saved over a lifetime. The tax treatment of dividends and bank interest has also recently been altered.
George Osborne’s actions to date suggest that the pace of change and its scope will not slacken. ‘Generally, governments use tax policy to change behaviours,’ says Brookes. Müdd warns that pension tax changes could culminate in a regime similar to that of ISAs, which would have the attraction for the government of postponing the upfront claiming of tax relief by pension savers down the timeline, thus helping its cash flow. The government will report on the result of its consultation on pension reforms in the Autumn Statement on 25 November, when the direction of change should be clearer.
For clues to where the government may consider reforms, look at the areas already being prioritised for other reasons. For example, the drive to boost small business formation and growth prompted the development of the Venture Capital Trust system, while concern about the impact of rising property prices on liability for IHT encouraged an increase in the annual allowance. But no area is guaranteed to be exempt from changes; the key is to keep abreast of changes to tax legislation.
Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place.
The value of an investment with St. James's Place may fall as well as rise. You may get back less than the amount invested.
Please note that VCTs are suitable only for sophisticated investors, who are willing to take a high level of risk with their capital.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.