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New prime minister, new tax policies

July ended with a new prime minister in Boris Johnson and a new chancellor in Sajid Javid, both with different ideas from their immediate predecessors.

There is already speculation about what Mr Javid might produce in his first Budget and more importantly, what some much publicised tax proposals could cost.

At the start of his campaign, Boris Johnson’s main tax proposal emerged as raising the higher rate threshold to £80,000 from its current £50,000 level and applying the same increase to the ceiling for full rate National Insurance Contributions (NICs). The combination was potentially unwelcome news for high earners north of the border, as Scotland currently sets their own higher rate threshold (£43,430 in 2019/20), but not the NICs limit.

In the rest of the UK, the proposed reform would boost income for about 3.6 million people, according to calculations made by the Institute for Fiscal Studies (IFS). The biggest winners would be pensioners with income of over £80,000, who would save up to £6,000 of income tax, but not suffer the extra NICs of up to £3,000.

The IFS calculated that three quarters of the fall in tax liabilities would go to those in the top tenth of the income distribution. It also assessed the cost of the changes at a net £9 billion, the financing of which Mr Johnson did not address.

Later in his campaign, the prime minister appeared to backtrack on his tax proposals which became ‘an ambition’ and up for ‘debate’. He then switched to focus on reform of stamp duty land tax, including cuts to the higher rates and considering the switch of the tax liability from the property purchaser to the seller. A range of other spending priorities has emerged since Mr Johnson took office, not least of which is increased spending against a no deal Brexit.

We may have a clearer idea of Mr Johnson’s actual tax and spending plans in September – there are already suggestions of an emergency pre-Brexit Budget as ‘insurance’ against the consequences of a no-deal exit. In the meantime, the situation is as it was under Mrs May and Mr Hammond: if you wish to save tax, rely first on having the right personal planning in place.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Implications from the over-75 TV licence row

The BBC’s decision to scrap universal free TV licences for the over-75s is part of the larger debate about our growing ageing population.

Free TV licences for the over-75s were introduced by Gordon Brown in his 2000 Budget. It was a classic rabbit-out-the-hat Budget measure, designed to please at a relatively modest initial cost.

Wind forward to 2015 and a government looking to ease spending cuts discovered a neat way to deal with the rising cost of free TV licences: it passed the problem onto the BBC. In exchange for government agreement on a financing deal that provided an index-linked licence fee and closed loopholes on catch-up TV, Auntie accepted the poisoned chalice of responsibility for the free licence scheme from 2020.

While the BBC’s recent announcement has been met with predictable political outcries, it always looked as if the broadcaster would be forced to drop the universality of the over 75 free licences. As the corporation has pointed out, maintaining the status quo would cost £745m – a fifth of its total budget.

A look at population numbers casts an interesting light on the problem. National Statistics data and projections show:

  • In 2000 the UK had 4.37m people aged 75 and over.
  • By 2020 the corresponding figure is projected to be 5.84m – an increase of 1.47m or about one third.
  • The overall population is projected to have grown by about a seventh over the same period – less than half the pace of the growth in over-75s.

Simply on the basis of the growth in the over-75 population and the increase in licence fee, the cost in 2020 would be double that of 2000. So the argument around free TV licences is a microcosm of the much larger issue of an ageing population and intergenerational fairness. It is also a reminder of the dangers of relying on the government to fund a comfortable retirement. Private pension provision is a must…if only to fund later life TV viewing.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  

Student fees may be coming down

A government-commissioned report has proposed significant changes to the funding of university students in England.

Students resident in England (different rules apply in other parts of the UK) pay a maximum university tuition fee of £9,250 per year, financed by a student loan. Further loans to cover maintenance plus interest at RPI+3% mean that at the end of a three-year course graduates can start working life with £50,000 of debt. That debt is currently written off after 30 years, but until then repayments must be made at the rate of 9% of income above a threshold presently set at £25,725.

At the time of the last General Election, the Labour Party’s manifesto proposed scrapping future tuition fees at an estimated cost of £11.2bn a year – the party’s most expensive single measure. The idea was predictably popular in many university towns and may have been enough to swing the vote in some of them. After the election the government responded by setting up an independent review of 18+ education in England.

That review, headed by Philip Augar, published its report in June. There was a long list of recommendations, including:

  • Reducing the maximum tuition fee to £7,250;
  • Cutting the earnings threshold for repayments by £2,000;
  • Introducing means-tested maintenance grants of up to £3,000;
  • Reducing the interest rate to match inflation during the period of study;
  • Capping total loan repayments at 120% of the loans drawn, revalued in line with inflation; and
  • Extending the loan repayment period to 40 years.

The proposals have one consequence which has raised a few eyebrows: they would reduce the total outlay for the highest earning graduates while increasing it significantly for middle earners.

Whether or not these ideas are adopted, they are a reminder of the eye-watering expense of higher education, both for students and the government. If you have children or grandchildren heading to university, the sooner you start planning for that cost, the better.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

 

Could we see the back of inheritance tax?

A paper presented to the Labour Party has suggested the abolition of inheritance tax (IHT).

Labour Party proposals to kill off inheritance tax (IHT) and replace it with a gifts tax were reported across several newspapers last month. The coverage was somewhat creative, as the idea was plucked from a paper prepared for the Labour Party primarily focused on reforming the taxation of land. The gifts tax section covered just half a page and did little more than regurgitate a structure proposed over a year ago by the Institute for Public Policy Research (IPPR).

These proposals are not yet Labour Party policy –they will only be considered when the party prepares its manifesto for the next election, which could be as far away as 2022. However, it’s worth considering how IHT might be transformed into a gifts tax.

The major change proposed is that liability would shift to the recipient of a gift or legacy, not the person making the gift or bequest. This approach is common in other countries which levy estate taxes. The IPPR framework would make gifts and bequests totalling £125,000 (indexed to inflation) over a lifetime free of tax. Beyond that threshold, any amount received would be treated as income and taxed accordingly. The new tax would apparently raise almost three times as much as IHT. The paper on land tax reform added one tweak to the IPPR proposals: a new tax on equity release which it described as a “key means of avoiding inheritance tax”.

IHT is generally regarded as the UK’s most hated tax, despite the relatively few estates that end up paying it. However, IHT is much easier to sidestep than a lifetime gifts tax would be. Under IHT, the general principle is that outright gifts only enter the IHT calculation if they are made within seven years of death.

If the impact of IHT on what your family or other beneficiaries will receive concerns you, now could be a good time to discuss with us the ways in which you can take advantage of the generous treatment of lifetime gifts…while it lasts.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

When it comes to funds, the best advice is personal

The recent problems with the suspension of dealings in a heavily promoted UK equity income fund have exposed the blurred line between advice and guidance.

According to the Investment Association (IA), there are around 3,500 funds on sale in the UK. The IA sorts these into over 30 individual investment sectors, although about 10% are listed as being in the unclassified sector. Faced with such a large choice, understandably many private investors want some help in making their fund selections. The assistance they receive has come under the spotlight following the recent suspension of trading in the Woodford Equity Income Fund (WEIF).

WEIF’s manager, Neil Woodford, established a strong track record with Invesco Perpetual before leaving the group in 2014 to set up his own fund management business. Unsurprisingly, a large amount of money followed him to his new company. He was helped by a common feature of today’s fund marketplace: favoured fund lists. These typically consist of 50 –100 funds, spread across those 30+ IA sectors, chosen by firms whose main business is marketing funds to the public. The criteria for selection are not always specified, but there is often a heavy reliance on past performance. However, there is one aspect that is clear: if you pick a fund from the list, then it is you who are making the choice.

Favoured fund lists do not constitute personal financial advice, even if may investors think that is what they are receiving. At best they are a form of general guidance, attempting to sort some of the wheat from a large volume of chaff. A select list only supplies the selector’s opinion at the time. It does not offer you a recommendation based on your personal circumstances, including consideration of the other investments you hold, whether held directly or indirectly, e.g. via pensions. Nor does the provider of the list offer any ongoing support, an important factor in current market conditions.

There is a role for recommended fund lists, but there is no substitute for personal, regularly reviewed advice on your investments.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.  

2019 defies analysts’ predictions

The world’s share markets had a buoyant first six months.

Index 2019 H1 Change
FTSE 100 +10.4%
FTSE All-Share +10.4%
Dow Jones Industrial +14.0%
Standard & Poor’s 500 +17.3%
Nikkei 225 +6.3%
Euro Stoxx 50 (€) +15.7%
Shanghai Composite +19.4%
MSCI Emerging Markets (£)  +9.3%

The final few months of 2018 were a dark time for the world’s stock markets, with concerns about US trade policies and the backwash from the Brexit uncertainty leaving many markets posting an overall loss for the year. The prospects for 2019 did not look bright, with the spectre of the US Federal Reserve continuing to raise interest rates after its fourth rate increase in December.

Six months on, and the doomsayers appear to have been on the wrong track. Reuters, not known for its investment hyperbole, ran a story suggesting that it was “The best first half for financial markets ever”.  As the table above shows, major markets all produced solid returns, despite the continued headwinds from the same sources that produced negative results in 2018.

It helps that the interest rate picture has now altered significantly around the globe. Current expectations are now that the Federal Reserve could cut interest rates as early as July and keep cutting thereafter. Yields on US government bonds dropped over the first half – and hence their prices rose – in anticipation of the reversal. The benchmark 10-year US Treasury bond, which began the year yielding nearly 2.75% accompanied by predictions that 3% would soon be breached, ended the first half at 1.99%. On this side of the Atlantic the yield on 10-year UK gilts dropped from 1.26% to just 0.79%.

These last six months have once again reinforced a lesson about investing in shares: timing investment is all too often a fool’s game. There were few people shouting ‘invest now’ at the end of last year, even though it would have been a rewarding call.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

Another take on long-term care costs

A new set of proposals for funding long-term care has emerged from a significant source.  

The funding of long-term care is an issue that beats even Brexit in terms of protracted political procrastination. A Royal Commission on the subject was established in 1997 and reported in 1999. Its proposals were rejected by the then Labour government as too costly.

Since then there has been a steady flow of reports, reviews and even another Commission report (although not royal this time around). Over the last 20 years the system become fragmented, with Scotland providing free personal and nursing care which the rest of the UK does not. The last attempt to introduce a new system in England did manage to reach the statute book, but its start date was deferred. The scheme was then abandoned entirely, shortly after the 2017 general election.

That election featured a rapidly withdrawn proposal from the Prime Minister – dubbed a ‘dementia tax’ by opposition parties – that would have allowed everyone to retain £100,000 of assets, regardless of their total care costs. After the election a green paper on care funding was promised, but it too has suffered frequent deferrals and, after several missed deadlines, is now only due to be published “at the earliest opportunity”.

Total spend by type of care
Care type Average weekly cost
Domiciliary £252
Residential £617
Nursing £856

Source: Fixing the Care Crisis CPS April 2019

Into this limbo land another paper has now emerged. This one came from a think tank, the Centre for Policy Studies, which is closely linked to the Conservative Party. The paper’s author, Damian Green, is a former Secretary of State for Work and Pensions and Chair of the All Party Parliamentary Group on Longevity. His ideas include scrapping the current means test and, in its place, providing a Universal Care Entitlement (UCE) paid by the state, which individuals could top up from their own resources and private insurance.

The main way of funding would be by an extra 1% on National Insurance Contributions for those aged over 50. However, some experts have questioned whether this would produce enough revenue, given the existing funding shortfalls.

For the foreseeable future – although surely not another 20 years – the key remains to continue making sure your retirement provisions are sufficient to cover the quality of care you require.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Pension flexibility: too taxing for many

Recent HMRC statistics highlight the over-taxation of some pension benefits.

More than one million people have received flexible pension payments thanks to the rules introduced just over four years ago. HMRC’s most recent statistics, to the end of March 2019, show that 1,113,000 people have withdrawn over £25,600m from their pensions, across 6,136,000 payments. The amounts withdrawn and the number of payments have both increased each tax year – in 2018/19 there were over 2,400,000 payments totalling £8,180m.

However, the system is causing some problems for HMRC. In the first quarter of 2019 HMRC refunded £31.1m of overpaid tax to over 12,500 people who had used pension flexibility. The over-collection is a result of HMRC’s insistence on using emergency tax codes where a pension provider does not have a current tax code for the individual, which is usually the case on a first withdrawal. More often than not, emergency tax codes create too high a tax deduction, as the example shows.

Emergency, Emergency!

Graham, who lives in England, expects to have an income of about £28,000 in 2019/20. He decided to draw £24,000 from his pension plan as an uncrystallised funds pension lump sum (UFPLS). He knew that a quarter of this would be tax free, with the £18,000 balance taxable. As that would still leave him comfortably below the £50,000 higher rate threshold, he expected to receive £20,400 as a net lump sum (£24,000 – £18,000 @20%).

In fact, he received £17,619 because an emergency tax code was applied to the taxable element of his UFPLS.

The excess tax can be reclaimed and HMRC has created dedicated forms to speed up the repayment process. In theory if no reclaim is made, the tax should eventually be refunded once HMRC undertakes its end of year reconciliation – but that could mean waiting over 12 months if the payment is taken early in the tax year.

If you are thinking about using pension flexibility, it pays to take advice before asking for the payment. In some circumstances the emergency code issue can be sidestepped, but if it cannot, then you need to be aware of what you will receive initially and the process of tax reclaim.

The value of your investment can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Brave new world of UBI?

If those three letters mean nothing to you now, they may do soon.

Universal Basic Income (UBI) has become a topic attracting attention among some think-tanks and political parties, both in the UK and overseas. The idea behind UBI is simple and has an obvious electoral appeal.

In its most basic form, UBI would give every citizen a government paid regular cash income, subject to the most minimal of qualifications, e.g 18 or over and not imprisoned. Millionaires and paupers, students, full time employees and pensioners would all receive the same amount. In theory, UBI offers the opportunity to revise radically – or even abandon completely– the existing support systems of means-tested social security benefits and tax credits. In practice many UBI proposals recognise that that there would probably need to be some additional benefits for people with disabilities.

Unsurprisingly, the question of whether UBI is affordable is a contentious one. The corollary is whether what is affordable could be classed as a meaningful UBI. A good example of the affordability question emerged in a structure recently put forward by the New Economic Foundation (NEF). This think tank suggested for the UK excluding Scotland:

  • Scrapping the income tax personal allowance;
  • Replacing it with a UBI of £48 a week for everyone aged 18 or over with a National Insurance Number and income of up to £100,000 a year;
  • Adjusting means-testing to allow for UBI; and
  • Restoring the real value of Child Benefit to its 2010/11 value, before benefit freezes started to erode its purchasing power.

The NEF calculates that such reform would generate a net saving of £2.9bn for the Exchequer. If that seems surprising, it is because of the subtle impact of replacing the personal allowance (worth £2,500 a year to a basic rate taxpayer) with a UBI of about the same amount. The reform would mean that the higher rate tax threshold dropping to £37,500 (from the current £50,000), leaving most people with income above that level worse off. As the NEF said, the effect is their proposals would be “highly redistributive”.

John McDonnell, the Shadow Chancellor, has said that he would trial UBI if Labour were elected. It is not inconceivable that a future Conservative chancellor might ‘borrow’ some UBI ideas, given the long running problems surrounding Universal Credit. Pre-election tax planning may have already begun.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

How well do you understand inheritance tax?

A survey by HMRC published in May concluded that the public have a relatively poor knowledge of inheritance tax (IHT) rules and lack of confidence in what they do know.

HMRC recently commissioned a survey of 947 people who had made gifts in the last two years. To assess knowledge of the IHT system among these donors, they were asked eight questions, which are shown below. Now it is your turn to try:

 

58% answered five or more questions correctly, while just 37% gave themselves a confidence rating of over 6 out of 10 on answering the questions. After adjusting for confidence levels,the survey concluded that the proportion with a “high knowledge” – as opposed to simply lucky with their answers – was just one in four.

The correct answers are shown below. Whatever your score, it is worth considering why HMRC should have undertaken such a survey at this time. It may be no coincidence that the Office of Tax Simplification is due to publish its second report on IHT simplification soon. Rationalising the rules on lifetime gifts is an obvious target, but as ever with simplification, there would be some losers. We can help you consider where you might stand on the wining and losing scale.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Answers: True: 1, 2, 3, 4, 5, 8 False: 6, 7