The Final 5%

A few client conversations have highlighted the importance to me this week of what I call ‘the final 5%’.

What I mean by this is that the majority of clients that we work with are very financially knowledgeable. They often have a good understanding of things like the Pensions Lifetime Allowance or Inheritance Tax Gifting Rules. They know 95%.

Where our professional expertise really adds value is in the ‘final 5%’. These are the quirks in the rules that are not often reported in the media or in ‘guides’ that you find online. These are the little pitfalls and stumbling blocks that people often get caught out by.

I have had 3 conversations with clients this week, where, were it not for that ‘final 5%’ that we bring to the table, the client might have made a serious mistake, in some cases causing significant additional tax liabilities or inviting an investigation from HMRC.

In all 3 cases, the clients existing understanding of the issue at hand was very good (certainly better than the vast majority of the population I would wager), but they were just missing that ‘final 5%’. The subtle little details that make all of the difference.

In one other case, that ‘final 5%’ turned what was already a very good idea, into a spectacular one, in this example, our expertise more than doubled the potential Inheritance Tax saving for a client, just by making a slight change to the planning that they were proposing.

We are here to serve our clients and to optimise your financial position. So, if you are thinking of implementing some new planning in the next few months, why not run it past us first. It’s all part of the service, and, you never know, that final 5% might actually create ideas that are 100% more effective!

If you have any questions, please get in touch.

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!

Top Rated Adviser’s 2020

This month two Buckingham Gate Chartered Financial Planners have made it into VouchedFor’s Top Rated Adviser Guide for 2020.

The guide is distributed nationally in The Times and digitally through the Telegraph’s website and so this is a great achievement that Buckingham Gate are tremendously proud of.

Congratulations Matthew Smith and Peter Ditchburn for receiving such well-deserved recognition for the fantastic advice you provide to your clients.

What makes their inclusion in the guide so much more special, is knowing that it was thanks to their lovely clients for leaving such powerful reviews on VouchedFor.

VouchedFor is a leading review site for Financial Advisers and helps those looking for advice, find the right adviser for them.

Our unique combination of expertise, makes us a one stop shop for your retirement, investment and estate planning needs.

Matthew and Peter would like to say a huge thank you to their clients for taking the time to leave a review, it really means a lot to them.

If you’re looking for financial advice, you would definitely be in good hands with these two!

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!

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.