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!

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.

Residential Nil Rate Band – Planning actions for estates worth more than £2,000,000

Those with estates worth over £2,000,000 will begin to lose out on the new Residential Nil Rate Band. The new allowance is ‘tapered’ away at a rate of £1 for every £2 that your estate is over £2,000,000.

For example, if your estate was worth £2.1m, you would lose £50,000 of the new Residential Nil Rate Band.

While this is clearly unwelcome news for those with larger estates, it does present some significant planning opportunities.

For example, if a couple had an estate worth £2.2m, they would lose £100,000 of their Residential Nil Rate Band, increasing their inheritance tax bill by £40,000.

If considered planning via trusts or qualifying investments was used to bring the estate back under £2m, not only would the £200,000 excess be outside of the estate for tax purposes, but the full Residential Nil Rate bade could be re-claimed.

Estates of this size should also consider other estate planning and succession actions to ensure that the maximum value can be passed down to future generations.

Our estate planning seminars cover all of the topics outlined above, as well as some other innovative methods by which you can preserve and protect your estate. The events are free to attend and you can book your place here.

Residential Nil Rate Band – Planning actions for estates worth more than £500,000 (unmarried) or £1,000,000 (Married), but less than £2,000,000

People in this category stand to gain significantly from the new legislation, however careful planning is required to ensure that you gain the maximum benefit.

Estates of this size are likely to be facing an inheritance tax liability, despite the introduction of the Residential Nil Rate Band, however this should be significantly reduced.

Some wills created historically contained what is known as a ‘nil rate band’ trust. The use of this type of trust has the potential to cause the Residential Nil Rate Band to be lost, as the transfer of the assets would be to the trust and not to direct descendants. It would be good practice to review you will for the presence of a nil rate band trust.

Your direct descendants (i.e children or grandchildren) will need to be the ones who inherit the residential home to qualify for the new relief. Does your current will meet these criteria?

Consideration should be given to other inheritance tax planning actions that could reduce the inheritance tax liability further or eliminate it altogether. This could include the use of lifetime trusts or qualifying investments.

Our estate planning seminars cover all of the above topics in detail and are free to attend. You can book your place here.

Residential Nil Rate Band – Planning actions for estates worth more than £325,000 but less than £500,000 (unmarried) or more than £650,000 but less than £1,000,000 (married couple)

People in this bracket are well placed to make full use of the new Residential Nil Rate Band, so long as the correct planning is put in place.

In effect, people in this category who own a residential home worth at least £175,000 (unmarried) or £350,000 (married couple) and who have children, should be in a position to pass their estate down to their direct descendants with no inheritance tax to pay.

There are however, a number of potential pitfalls to look out for as follows:

Some wills created historically contained what is known as a ‘nil rate band’ trust. The use of this type of trust has the potential to cause the Residential Nil Rate Band to be lost, as the transfer of the assets would be to the trust and not to direct descendants. It would be good practice to review you will for the presence of a nil rate band trust.

Your direct descendants (i.e children or grandchildren) will need to be the ones who inherit the residential home to qualify for the new relief. Does your current will meet these criteria?

We are running a series of free estate planning seminars where you can learn more about the new Residential Nil Rate Band and how to avoid some common mistakes.