Topic: Taxation

Cost of Living Rises as Prices Surge – 22nd November 2021

Article written by Andrew, Charles, Chris, Mark and Will, Portfolio Management Team at Square Mile.

Last week saw UK inflation surging to its highest level for a decade, hitting 4.2% in October. This was both higher than the markets expected and more than twice the Bank of England’s (the Bank) target of 2%.

It looks as if soaring energy and fuel prices are pushing up the cost of living, and families were warned of a “painful’ rise in the cost of living this winter. The figures also showed sharp rises in inflation across food, hospitality, and household goods as supply chain disruption took its toll.

The figures have surprised some market commentators after the Bank of England’s decision earlier this month to maintain interest rates at record levels of 0.1%. The Bank, however, needs to be seen to be doing something, as there is a danger that inflation is rising so rapidly that it risks becoming embedded. There is also the issue of the Bank’s credibility after the decision to leave interest rates untouched, which wrongfooted the market and led to some questioning their credibility. Although their reasoning for not raising interest rates to date has been due to the labour markets, it is evident after the employment figures, that this is no longer in question.

With the sharp fall in unemployment and record levels of vacancies, it is now believed that an interest rate rise next month to curb prices is almost inevitable. The Bank has also recently warned that the Consumer Prices Index (CPI) will reach 4.5% towards the end of this year, and around 5% in April 2022. The headlines reflect the fact that these price increases are happening at a time when pay growth is slowing to 3.4% in September, and families are facing the prospect of falling real incomes over the coming months. The city now expects a hike in interest rates and is assuming they will rise by 0.15%, to a headline of 0.25%. This increase, however, will not make much of a difference as inflation is being driven by rising petrol, gas, and electricity bills, and these prices are not affected by UK interest rates.

Whilst raising interest rates may not stop soaring inflation, it could at least begin to slow it. It takes about six months for any interest rate rise to start to take effect, so we should not expect much evidence of change for some time to come. Future interest rates are not expected to rise much above 1%, and the impact of higher rates will be felt by household borrowers, but also by a heavily indebted government that has borrowed record levels of money to keep the UK economy afloat through the COVID crisis.

The Bank must grasp whether this inflation is short-term, driven by short-term supply chain squeezes, or longer-term and therefore more aggressive hikes in interest rates will be needed. We should get a clearer picture in the next few months. In the meantime, we will ensure we retain a flexible approach in your portfolios to ensure we can deliver irrespective of what the markets might throw at us.

 

This document shall not constitute or be deemed to constitute an invitation or inducement to any person to engage in investment activity and is not a recommendation to buy or sell any funds of individual stocks that are mentioned in this document. Past performance is not a guide to future returns and the value of capital invested and any income generated from it may fluctuate in value.

 

Monthly Vlog – October 2021

In this month’s Vlog, Matthew provides updates on the market and the performance of the Buckingham Gate Portfolios. Matthew speaks more about so-called ‘transitory’ inflation and explains how we are going to approach registering our clients’ trusts. Matthew tells of the outcomes (or lack of) from the 2021 Budget announcement and lastly explains that we will be bringing you some more advanced financial planning ideas in future vlogs.

Care Fees Update, National Insurance & Dividend Tax & Budget Date

Care Fees Update

We have this week finally seen the much-hyped changes to care fees announced.

This is an issue that has been ignored and deferred by successive governments. There have been countless consultations and suggestions over the years, but none of them have really moved far off the starting line. But now we have a new care fees system.

I think most people will now be aware of the key points which are as follows:
The ‘full fees capital means test’ limit will be increased to £100,000. This means that if you have over £100,000 of capital assets (including the family home, unless it continues to be occupied by a partner, relative or dependent aged over 60), you will be responsible for your care fees in full.

There will also continue to be a lower limit of £20,000 below which assets will not be taken to fund care fees.

For those with assets between £20,000 and £100,000, there will be a partial contribution required towards care fees, with this increasing the closer you are to the £100,000 asset limit.

In addition to the above, there will remain a (very significant, but far less publicised) income based means test that says that if you have sufficient income to pay your own care fees (regardless of capital), then a contribution could still be required.

All of the above will be subject to a cap on what an individual will be expected to contribute to their care fees. The cap will initially be set at £86,000. Beyond this point, no individual will have to pay towards their care costs.

So far so good, however, as usual, we have been looking beyond the headlines to try and find some of the devil in the detail.

The most significant point not really being covered in the mainstream media is that the whole set of rules above only apply to your personal care costs, not your ‘hotel’ costs (‘hotel’ costs being the cost of staying in accommodation, food, utilities etc).

As such, the amount an individual could pay in their lifetime for how they would view their ‘care fees’ could well be much greater than the £86,000 cap when you factor in the ‘hotel costs’.

Now, to be clear, this has always been the case. Hotel costs have always been assessed separately from actual personal care fees, but people often don’t appreciate that there is this distinction.

As such, the new proposals are a welcome addition to the care fees system and at least provide some degree of certainty.

What is perhaps more interesting is that these proposals could well pave the way for insurers to re-enter the long-term care market and produce the first real insurance products for long-term care in several decades.

We will continue to monitor developments and will of course report on anything significant that becomes apparent in the months ahead.

National Insurance & Dividend Tax

In order to pay for the above, the government has introduced an additional 1.25% levy to be added to national insurance as an interim measure and then split out as essentially a third kind of tax on employment income.

Moving forward, you should see your income tax, national insurance and a ‘health and care premium’ on your payslips.

In addition, the dividend tax rates have also had 1.25% added, meaning the basic rate of dividend tax will rise from 7.5% to 8.75%. Dividends will still represent a tax efficient income source for most people, although of course these changes make them slightly less attractive.

What they also do is increase the relative attractiveness of capital gains as a form of ‘income’, especially when levied on shares and bonds, as this is charged at a basic rate of 10% and a maximum rate of 20%, even for higher rate taxpayers.

Budget Date

Finally, we do now also have a confirmed budget date of 27th October 2021. This budget will be particularly telling as the UK continues to recover from the Covid pandemic.

We will of course continue to monitor any proposed tax changes and will report to clients anything that might be relevant to their financial planning.

Budget Update – 3rd March 2021

The Chancellor has just finished presenting his budget speech to the house. The Buckingham Gate team is now busy analysing the budget document in detail and searching for any devil in the details. We will report back on any significant findings that become clear in the coming days, however, as expected, today’s budget was rather benign from a personal financial planning point of view.

Lies, Damn Lies and Speculation

As budget day approaches, the volume of rumour, speculation and mistruth is stepping up in traditional fashion.

Of course, there are the old favourites (you know, the things that the media report ‘might’ happen in the budget every single year, but never seem to actually occur) such as the removal of the 25% tax-free cash on pensions and restrictions to pension tax relief (for what it’s worth, I don’t believe we are likely to see either at this coming budget).

Office Of Tax Simplification IHT Review – Some Interesting Insights

There were a few interesting insights to be gleaned from the OTS Inheritance Tax Review, in addition to the much-covered suggestions for changes to the IHT regime.

First is the seemingly profound under-use of the ‘gifts from regular income exemption’. We have often made the point that this is the most underutilised and misunderstood IHT exemption and figures from the OTS seem to confirm this point.

In the 15/16 tax year, there were only 579 claims in total for the gifts from income exemption with well over half of these claims being for less than £25,000.

As such, it could be argued that there is a huge missed opportunity out there for additional IHT savings, without the hassle of the 7-year rule. Of course, the OTS has made some suggestions to abolish the gifts from income exemption, but for now it lives on and it might be wise to make hay while the sun shines.

Another notable point raised in the review is the fact that of the estates that paid IHT in the 15/16 year, only 20% had any form of lifetime gifting within the 7-year cycle.

Now of course in some cases, this would simply have been unaffordable, however surely there are a host of missed opportunities for IHT savings in the 80% of estates which had engaged in no gifting at all.

Trust Tax Consultation – Nothing To See Here (Yet)

Please forgive the unusually technical nature of my blog today, but this is an issue that impacts on many of our clients and potential clients – trust taxation.

Many people would have seen the media reports about the consultation that HMRC has launched on the taxation of trusts (among other issues I might add).

The consultation is focusing on the taxation of trusts, their operation and administration and also checking that the treatment of trusts is fair and equitable when taken together with the other possible methods of estate planning.

In principle, none of this is a bad thing.

My Good Friends – The Media

Now as you might expect, the media have vastly over-done the potential impact of this consultation. Some headlines have declared that ‘IHT trusts will be stripped of their tax advantages’.

This makes for a good headline (and no doubt draws readers and traffic to websites to drive ad revenue), but is it actually true?

Well, as with any consultation, the strict answer is – we don’t know.

A consultation is just that, a consultation.

HMRC are seeking input and ideas on some of the questions posed by the consultation.

What we can glean from the questions though is the direction of travel and nothing in the consultation document itself (unlike some of the media commentators, I actually saw fit to read the whole document before making prophecies of doom) has given me major cause for concern at this time.

First of all, many consultations result in no change at all. Either the consultation does not deliver a viable alternative to the status quo, or the whole things just loses steam and falls off the radar. This has happened countless times before.

But, even if we do see action, I think much of it could be positive.

The consultation document first talks about simplifying the taxation of trusts (nothing about the rates here, just the operation). This would be incredibly welcome given the current complexities of accounting for income tax, capital gains tax and inheritance tax across the settlors, the trustees and the beneficiaries of a trust.

Three different taxes accounted for across three different groups of people can and does get messy sometimes and any simplification to this system will do nothing to harm the appeal of trusts.

The document also talks about the fact that the 20% entry charge on gifts into trusts could be perceived as unfair when compared to the unlimited potential gifts we can make to other people.

Although nothing is certain, the language here hints to me that HMRC could be playing with the idea of removing this charge which would again be most welcome.

The only potential downside is that there is hints of an increase to the 6% periodic charge. While this would be unwelcome, it would also be relatively un-important for the majority of our clients on the basis that we usually manage trusts to be below the nil rate band allowance, meaning that no tax is due in any case, regardless of the rate.

The consultation document recognises the benefits of trusts in financial planning and in society and so I don’t see any prospects of trusts being ‘outlawed’ (again, contrary to some headlines you may stumble across).

As with many things, ‘wait and see’ will be the best approach here.

Firstly, the consultation may come to nothing, in which case, no action will be required.

Second, the consultation could provide benefits to trust planning, in which case we will look at how we can take advantage.

And, if we do see any negative changes, we will analyse them and plan around them, just like we have planned around numerous negative tax changes before and no doubt will again in the future.

Despite the headlines, I don’t believe that the consultation (in its current form) is particularly dangerous.

Taking action based on sensationalist headlines on the other hand – well that could prove very dangerous indeed.

Can’t We Just Leave Things Alone?

The continual tinkering with various tax allowances, reliefs and rates is getting a little tiresome. While I am all for positive change and simplification in this area, the opposite has been true over past years.

The biggest example of these changes is perhaps the £5,000 dividend allowance, which was only introduced last tax year and is now proposed to be reduced to £2,000 from April 2018. To further muddy the water, these proposed changes have been omitted from the finance act to ‘slim it down’ so that it could be passed before parliament dissolves before the election.

As such, we are left in a strange ‘limbo’, where we don’t know what the dividend allowance will be next year. Given that investment planning is a long-term game, it seems a little unfair to me to introduce an allowance one minute, reduce it the second and then back away from that reduction minutes later still.

These types of allowances do drive changes in people’s investment behaviour. For example, many people have been holding assets in ‘general investment accounts’ rather than investment bonds in the hope of making use of these new allowances. Given the changes, this strategy may not now be appropriate and investment holdings may need to be restructured yet again.

While I appreciate the need for the government to increase tax revenue, it would surely be better to set a lower allowance in the first instance, which could be retained for the longer term, rather than continually tinkering.