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.

Some of the key announcements and our commentary can be found below:

Income Tax

Both the personal allowance and higher rate threshold will be increased to £12,570 and £50,270 respectively from April 2021, but then both allowances will be frozen until 2026. While this is better than some had anticipated (it was widely reported that there would be no increase this year for example), the length of the freeze until 2026 is longer than expected.

This is effectively a ‘stealth tax’ and follows a long-standing tradition of governments simply not index linking allowances rather than reducing them in nominal terms. This is a theme that continues below.

Capital Gains Tax

The annual exempt amount will remain frozen at the current level of £12,300 until April 2026.

Pension Lifetime Allowance

The pensions lifetime allowance will remain frozen at the current level of £1,073,100 until April 2026.

Inheritance Tax

The Nil Rate Band and Residence Nil Rate Band will remain frozen at the current level of £325,000 and £175,000 respectively until April 2026. The level of assets at which the taper to the Residence Nil Rate Band kicks in will also remain at £2 million.

Investing

The ISA and Junior ISA allowances will remain at current levels for the time being.

Commentary

All in all, this is a very quiet budget from a personal financial planning perspective (although do bear in mind the very, very significant interventions for individuals and businesses to assist the recovery from Covid-19).

The main headline from a personal finance point of view is no change, for a long time. Most allowances have been frozen at current levels until 2026! As such, this is a fairly extended period of ‘stealth taxation’. If we assume inflation runs at around 2-3% per annum, this could see the real value of these allowances reduced by around 10-15% in the period up to the end of the freeze.

What is very interesting to us however, is the fact that these allowances have been frozen all the way up to 2026, especially in relation to Capital Gains and Inheritance Tax. Despite heavy media speculation of a big shake up in both areas, today’s policy announcements suggest that the Government can see the current regime in both areas still existing in 2026 at the least.

That is not to say that these things won’t change in the future (of course these kinds of long term policy decisions are often tweaked along the way) however, it does seem that any imminent changes are unlikely given that the Government is legislating based on the current system for the next 5 years!

All in all, keep calm and carry on is our message from today’s announcements.

If you have any questions, please get in touch.

Yours sincerely,
Buckingham Gate Chartered Financial Planners

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).

Then we have the two new rumours that seem to be doing the rounds, namely the alignment of Capital Gains Tax rates with Income Tax rates and some kind of root and branch reform of Inheritance Tax.

For what it’s worth, once again, I believe that both are unlikely to materialise in a few weeks’ time. The reason for this is that almost all suggestions in this respect would require pretty much a complete rewrite of that particular part of the tax system and a whole raft of changes to HMRC IT systems – projects that could take years to complete at the best of times.

That’s not to say that we won’t see some changes to the tax system (the freezing of the personal allowance and basic rate tax band are looking likely at this stage) however, the point is that no one (myself included) really knows other than the Chancellor himself, and even he would not have completely made his mind up at this stage because the budget document is often only finalised in the days leading up to the budget announcement itself.

What I am trying to get at is that it’s important not to delay planning because of what ‘might’ be coming in the budget. There will always be some big financial event on the horizon to wait for (after this budget, I suspect there will be another in the autumn and then in the spring again).

If you are planning on taking some action that might be impacted by a forthcoming budget, can it be a good idea to accelerate that action – yes absolutely. After all, if you are planning on doing something anyway, why not get it done and then you know where you stand.

However, I would strongly discourage people from delaying action based on what might be included in this budget or the next one or the one after that. I have seen too many examples of families learning this lesson the hard way.

It is frustrating enough looking back and thinking that you should have done something historically that you have never thought of before. But, when you look back on today a year from now, how would you feel if you knew that you should have taken action, but didn’t for whatever reason.

The old rules of financial planning say that we plan based on current and known future tax changes and then we adjust the plan to take any future unknown changes into account. That rule is just as valid in the run up to a budget as at any other time of the year in my view!

Coronavirus Update – 13th March 2020

It is refreshing to open an update with at least a paragraph or two not on Coronavirus (but more on that in a moment). We are pleased to report that we have completed our analysis of the Spring 2020 Budget document and the impact on personal financial planning is incredibly minimal. Except for some increases to National Insurance thresholds and some tweaks to fringe tax benefits such as Entrepreneurs Relief, there is little in the budget that will have any effect on current planning.

Perhaps if there is one good thing to come from the present situation, it is that we have yet another fairly benign budget from a personal financial planning point of view and this means that the current fairly generous personal tax regime will be maintained.

Back to the virus now and it is fair to say that the market is searching for direction. Headlines from yesterday reported some of the worst stock market falls since 1987. It is interesting to observe that at the time of writing this (which I will quote as 12:28pm on Friday 13th March given the minute-by-minute changes we are seeing) the FTSE 100 is up around 8.7%, effectively re-gaining much of yesterday’s loss.

Assuming it closes at this level (and there is a whole 4 hours for things to change before then!), don’t be surprised if this barely gets a mention in the media, despite the huge reports on falls of a similar magnitude yesterday. This only goes to show just how volatile things are at the moment and how rash decisions can have an impact on your wealth over the long term. The current volatility is almost entirely driven by emotion and not logic. There is almost no conceivable way that the long-term intrinsic value (over the next 30 years) of all of the worlds great companies (think Apple, Unilever, HSBC, General Motors etc) fell by 10% yesterday only to grow by 10% today!

Having consulted with our partners at Square Mile again, the view is now that most markets are starting to offer very good value and there are some real opportunities to purchase the worlds great companies at a significant discount versus where we were just 3 short weeks ago.

The Only Constant Is Change

If you are anything like me, you will have been fascinated by the seemingly never-ending political surprises over the past few days, not least Boris Johnson’s decision to prorogue parliament.
All of this would make for fantastic watching if it were a political TV drama, but unfortunately it is real life.
In some people’s minds, Mr Johnson’s actions have made a general election more likely and by extension the prospect of a labour government more likely as well.
Many will use these potential changes on the horizon as an excuse not to take action on something. Not to invest. Not to get that updated will drawn up. No to [insert any other thing you might want to do here].
Although potential changes are always unsettling, it is important not to use them as an excuse for inaction. Because, the thing is, once one change has happened, there will always be another one on the horizon.
If we have a general election this year, who’s to say that there wont be one next year? (and in the current political climate, I wouldn’t bet against it). Once we have had this years budget, there will be the Spring statement and then next years budget.
There will always be changes on the horizon, but at some point we must act if we want to achieve anything.
I always say to clients that we must plan based on what we know today and then adapt and change the plan in the future when the inevitable changes happen!

The Importance Of Financial Education

A couple of weeks ago, I attended the latest Personal Finance Society (PFS) Regional Conference, and as the Professional Qualifications Officer for Kent, I presented some slides to other financial professionals on the initiative by the PFS for members to provide pro bono financial education sessions within local secondary schools.

The content is in the form of a board game and looks to provide students with tips on understanding investment risk and financial budgeting, but for me the most important objective is helping young people to avoid financial scams. It reminded me of an article that I’d read on the BBC website a couple of days earlier about London Capital & Finance which went into administration after taking £236 million from investors.

Their marketing campaign targeted first-time investors with promises of fixed interest returns of 8% from secure ISA’s and would spread investment risk over hundreds of companies. The reality was that 25% of the investments made were paid as commission to the marketing agent, and then funds were lent to a total of 12 companies – four of which had never filed accounts and nine were less than three years old!

The financial crisis of 2008 showed that even well-known and reputable financial firms are not immune from the perils of administration, but in the current low interest rate environment, a guaranteed investment offering a return of four times the best Cash ISA rate on the market would be treated with scepticism by the majority of experienced investors.

The government have introduced incentives such as Junior ISA’s and automatic enrolment to encourage younger people to start saving earlier in life, but it is important that we educate them on managing money responsibly. For those children fortunate enough to have parents and/or grandparents funding Junior ISA contributions, they will take over sole responsibility for the management of the account on their 18thbirthday. What’s to stop them investing in the scheme they saw on social media promising double digit returns, and looks so much more interesting than their existing investment?

I’ve done a number of surgeries to talk to people about the pension benefits offered by their employer, and some of the people I speak to are just out of school or university. For the majority this is probably the first conversation they have ever had about pension provision, and while there are those who are lucky enough to have parents who they can turn to for help, I’ve met young people who struggle to understand how deductions from payroll such as Income Tax and National Insurance operate.

Matt wrote a blog a couple of months ago about our intention to host workshops to provide the tools the next generation needs to be successful financially, and while the goal of any investment is to make some money, it is probably more important to teach the lesson of how not to lose it all.

The New Property IHT Allowance

One of the more predictable elements of the summer Budget was the introduction of a new ‘Property Nil Rate Band’, which will mean that eventually individuals can pass on a further £175,000 tax free to their direct dependents, in addition to the current £325,000 nil rate band that exists at present.

As with all new legislation however, there are some things to be aware of.

First of all, the new allowance will be introduced in tranches as follows:

  • 2017/18 – £100,000
  • 2018/19 – £125,000
  • 2019/20 – £150,000
  • 2020/21 – £175,000

These amounts are given with reference to the date of death of the deceased.

In addition, the new Nil Rate Band will only apply to a family home (i.e your main residence), passed onto direct descendants, which in the legislation are taken to mean children and grandchildren. There is some further consultation on where the property could be left to certain types of trust.

As with all new legislation, it is important to review you current plans to make sure you get the full benefit. Any older will that include gifts into trust, may not be eligible to claim the new nil rate band, and this could also be true for those who do not own a home, or who choose to leave their home to people not considered to be direct descendants.

We will be covering the new changes in detail during our updated Estate Planning Seminars, running from September onwards. You find out more information here.

Summer Budget Summary

The Summer Budget contained little in the way of surprises (nice ones anyway), however the rate of change seems to be building, creating a more dynamic and fluid financial planning world. There are already hundreds of budget summaries online, so I will cover here some of the key points that might impact on Buckingham Gate Clients:

 

1. Dividend Tax Changes

From 2016, dividends will no longer come with their 10% tax credit, which used to satisfy the basic rate tax liability for those in the 20% tax band. From 6th April 2016 dividend income will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers, once income from dividends exceeds a £5000 tax free allowance. This news will be unwelcome for business owners who receive large amounts of dividends as part of their remuneration and those with large share portfolios outside of a tax wrapper such as an ISA.

Business owners especially, may wish to review how they are remunerated from their companies.

 

2. New IHT Property Nil Rate Band

I have written a more detailed article about this change here.

 

3. Removal of Higher Rate Tax Relief on Buy to Let Investment

I have written before about the potential pitfalls of using pension assets to fund buy to let purchases, however the case has just become even less compelling. The Chancellor has announced that over the coming years, tax relief on buy to let mortgages will be restricted to just 20%. This will have the effect of reducing the net returns from buy to let investments for higher rate taxpayers. While buy to let property is undoubtedly a success story for many, there are risks and pitfalls.

Beware Of Temptation

A majority of pensioners who were asked if they would sell their annuity – a reform the government is currently consulting on – said they would not sell, reported the Financial Times. Almost half said they thought they would get a poor deal. But almost one in five said they would sell either to pass on an inheritance or to fund healthcare costs in old age.

The sale of existing annuities is likely to be tricky and even if the government does go ahead with its proposals, many annuitants can only expect to get back a much smaller sum than they paid originally.

What needs to be remembered here, is that it is likely to be the same insurance companies who offer the annuities that will be offering to buy them back, and the cynic inside me says that they will want to take some profit along the way.