The Wind is Blowing – but in What Direction?
The Chancellor of the Exchequer began setting out how he will look to manage the UK out of the Covid crisis during his Spending Review speech last week, with one of the main questions being – What does this mean to investors?
Despite positive news regarding the progress of a vaccination for COVID, there has inevitably been increased debate on how we will begin to repay the wake of financial debris left behind. Although the message delivered by Chancellor Rishi Sunak seemed measured as he discussed the nation’s spending plans, we ask how do investors and savers begin to navigate the next steps as inevitably the stealth screw will begin to turn?
Income Tax, National Insurance and VAT make up the biggest proportion of HMRC’s receipts. Whilst it appears unlikely at the moment Income Tax will face an early raise, it will be likely as we begin to see a light at the end of the tunnel next spring and a new budget arrives, there will inevitably be changes around how Income Tax will affect pensions, Capital Gains Tax and Inheritance Tax. The predictions are as follows:
Pensions
Higher Rate Income Tax relief on pension contributions will be reduced most probably to Basic Rate – this in most cases will mean a 20% loss of Income Tax relief on pension contribution. Whilst we think this is a possibility, it is probably even less likely that the Government will tamper with the tax-free element of your pension. However, nothing is guaranteed.
If you are looking to invest personal contributions as a Higher Rate taxpayer into your pension, then think about getting that contribution in by early March.
Capital Gains Tax (CGT)
It has been rumoured that Capital Gains Tax will increase to fall into line with Income Tax. For a Higher Rate taxpayer that could be 40%, as opposed to the current 20% (28% on residential gains). For business owners looking to sell their business, this could have a massive effect. For others, it could make a significant difference on the value of an asset you are looking to sell.
For anyone looking to make disposals of assets be it rental property, shares or a business then it is important that you are aware of the likely changes that may affect you. The use of your personal exemption is a great way of planning out the effect of CGT. This exemption means that you pay 0% tax on the first £12,500 of gains in one year. In a family of four, this in total could amount to £50,000. Advice about who within a family holds what assets is a key discussion in order to put in place effective mainstream capital gains tax planning.
Inheritance Tax (IHT)
There has been little whispering around any changes to IHT. However, when you are reviewing your personal tax planning, ensure that your ducks are all in a row. Pensions fall outside of IHT in your lifetime, but without careful planning, they can come back into your estate on death. Ensure that your expression of wishes are up to date and that these include no automatic payment to a beneficiary. This means they can elect to keep the benefits outside of their estate, growing tax-free, and with full access at any time – so if by that stage the Government has increased IHT yet again, you are not breeding a problem for the next generation.
As we see the restrictions become more relaxed and life begins to get back to some form of normality, the Government will be likely to start feeling increasingly braver to tackle the financial mess that 2020 has created. Ensure that you review your financial planning early so that you have the most time to plan a strategy that works for you, before any changes to tax are implemented. Whilst there is never any guarantee that tax changes will not be retrospective, as this policy is often seen as a vote loser, you are usually better to have taken relevant action in your planning before and not after any retrograde changes are effected.
Tony Smith
Elevation Wealth Management
Group Managing Director