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The twenty-year IHT freeze

The freeze on the inheritance tax (IHT) nil rate band will mean more tax from more estates.

The Big Freeze

In March 2006 the then Chancellor, Gordon Brown, announced that the IHT nil rate band for 2009/10 would be £325,000. Announcing the change over three years before it would happen was seen by some as a political tactic, kicking a contentious topic down the road. Little did anyone anticipate at the time that the figure of £325,000 would still apply two decades later. However, the announcement in the Spring 2021 Budget of a further freeze on the nil rate band means that it is now not due to change until at least 6 April 2026.

As the current Chancellor explained in his speech, albeit in the context of frozen income tax thresholds, “…this policy does remove the incremental benefit created had thresholds continued to increase with inflation”. In the case of the nil rate band, that ‘incremental benefit’ is now no small number. If the figure Gordon Brown chose for 2009/10 had been increased in line with CPI inflation from 2010/11 onwards, as the graph shows, it would now be £417,000 – over 28% above its actual level.

The difference theoretically means up to an extra £36,800 in IHT at the standard rate of 40% in 2021/22. By 2025/26, the nil rate band would have been £450,000, based on the inflation assumptions made by the Office for Budget Responsibility.

The residence nil rate band (£175,000) has also been frozen until April 2026. Before the Chancellor’s announcement that he would be freezing the nil rate bands, there had been suggestions that Mr Sunak would introduce some reforms to IHT, drawing on two reports which were written by the Office of Tax Simplification at the request of an earlier Chancellor. However, there was nothing in the Budget, although subsequently a relaxation in the requirements for IHT returns from 2022 was announced.

The unspoken message from the Chancellor is that he will continue to look to IHT to raise some much-needed revenue, making estate planning more important than ever.

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

 

Were you born after 5 April 1971?

A new consultation paper has set out more details of an increase in the normal minimum retirement age. 

In February the Treasury and HMRC published a consultation paper on implementing an increase in the normal minimum pension age (NMPA) from 55 to 57. The NMPA sets the earliest age at which retirement benefits (lump sum and/or income) can normally be drawn from a pension. The rise to 57 was originally announced back in 2014, but all then went very quiet. Eventually, in September last year, the Treasury replied to a question from the chair of the Work and Pensions Select Committee by confirming the 2014 announcement remained in force: the minimum pension age would indeed rise to 57 in 2028.

Unfortunately, the Treasury minister’s response was light on detail – there was no mention of the precise timing in 2028, whether there would be any phasing in or if transitional protection would be available. Given the deep water in which the government has found itself with the increase in women’s State Pension ages (SPA), the lack of information was surprising. 

Changing pension ages

The consultation paper addresses the gaps in last autumn’s brief answer with the following proposals:

  • The NMPA will rise to 57 on 6 April 2028, coinciding with the date on which the state pension age rises to 67 (after two years of phasing in).
  • There will be no legislative phasing in for the higher NMPA, although pension scheme providers can choose to bring it in earlier than April 2028. One odd effect of this is that between 7 April 2026 and 5 April 2028 there will be people who reach age 55 and can draw pension benefits but, if they do not do so within that time frame, will have to wait until age 57 is reached.
  • You will still be able to draw benefits before age 57 on or after 6 April 2028 if you had the right to do so on 11 February 2021 or are a member of the firefighters, police and armed forces public service pension schemes.

If this change affects your retirement planning, make sure you take advice as soon as possible.

Inflation: at a turning point?

We could see a jump in inflation soon.

The pandemic has posed problems for the Office for National Statistics (ONS) when it comes to calculating the rate of inflation. For example:

  • How do you measure the price of an item or service when a lockdown means it is not for sale? Two good examples are the ‘Restaurants and hotels’ category, which in 2020 took up almost 12% of the Consumer Prices Index (CPI) and the ‘Package holidays’ subgroup of the ‘Recreation and culture’ category which had a 4.2% weighting in the Index. In February 2021, the ONS said that in the previous month it had managed to collect only 88% of the prices it had collected before the first lockdown.
  • Are the right items and services being measured? All inflation indices measure the prices of a ‘basket’ of goods and services. The ONS reviews and amends that basket each year to reflect changing spending patterns. This is often a source of humorous headlines, such as the replacement of crumpets by individual fruit pies last year.

The new ‘basket’ for 2021 would normally have been based on expenditure in 2019. However, that was in the pre-pandemic era and spending patterns changed in 2020, as we all know. The ONS has therefore created a special 2021 ‘basket’ that uses data from both 2019 and, where there have been significant changes, 2020. As a result, the weighting for ‘Restaurants and hotels’ and ‘Recreation and culture’ have both fallen while those for ‘Food and non-alcoholic beverages’ and ‘Alcoholic beverages and tobacco’ have risen. Eating and drinking in is the new dining out…

Annual inflation over the last ten years to January 2021 has averaged 1.8%, as measured by the CPI, which means overall prices have increased by almost a fifth since 2011 – bad news for anyone with a fixed income.

Although 2021 started with annual inflation of 0.7%, by May the figure is likely to be nearer to 2% as a result of price rises already built in. These include the 9.2% rise in capped gas and electricity bills and council tax increases of up to 5%.

For all the problems of pandemic measurement, inflation is still out there and needs to be built into your financial plans.

Pensions lifetime allowance devaluation continues

The Budget announced a five-year freeze to the standard lifetime allowance.

  

The standard lifetime allowance (SLA) is an important pensions number. It effectively sets the maximum tax efficient value of all your retirement benefits, in the absence of any legislative protections (of which there are many). To the extent that the SLA is exceeded there is a special flat rate tax charge which is 25% if the excess is drawn as taxable income and 55% if it is received as a lump sum.

When the SLA was first introduced in 2006, it was set at £1.5 million, a level which equated to an annual pension income of £75,000, based on a standard legislative assumption of an annuity rate of 5%. The initial legislation set out increases for the SLA to £1.8 million in 2010/11. That proved to be the SLA’s highwater mark. It was frozen in the following year and then the first of three cuts were introduced. By 2016/17 the SLA was down to £1 million.

For three tax years from 2018/19 the SLA has been index-linked, but from April 2021 it will be frozen for half a decade at £1,073,100. Had the original £1,500,000 level been index linked, the SLA would now be £2,082,100 – not far short of double the actual level.

The devaluation of the SLA has three consequences:

  • The pension protected from the SLA tax charge has fallen. On the legislative basis which applies to defined benefit (final salary) schemes, it will now be £53,945. For defined contribution pension arrangements, such as personal pensions, the erosion is greater. Low annuity rates mean that £1,073,100 will buy an inflation proofed income of just over £31,000 a year (before tax) for a 65-year-old. 
  • More people are being caught by the special tax charge. HMRC’s latest (sic) figures show over 4,500 SLA charge payers in 2017/18 against 1,240 five years earlier. 
  • The legislative protections, some of which date back to 2006, are all the more valuable.

If you think you might be affected by the SLA tax charge, either based on current benefits or when you reach retirement, take advice as soon as possible. You could find that from now on it is best to exclude pension contributions from your retirement planning.

The value of your investment and income from it 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.  

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

The spring 2021 Budget

A quiet turning of the tax screw.

Just before the Budget arrived on 3 March, it seemed as if the Chancellor would have nothing to say that was not already public knowledge. However, while some of the many leaks were confirmed, none of the pre-Budget pundits correctly predicted the Chancellor’s strategy. Instead of cutting borrowing, Mr Sunak increased it sharply in 2021/22 over the estimates produced just four months earlier in his Spending Review.

The Chancellor’s approach was:

  • To stimulate investment in the next two years with extremely generous allowances. In effect, for every £1,000 a company invests in new plant and machinery, the government will reduce their corporate tax bill by £247.
  • To pay for this largesse and start to repair public finances:
    • From April 2023, when the enhanced investment allowances end, the rate of corporation tax for companies with profits of at least £250,000 will jump by 6%, from 19% to 25%.
    • Many personal tax thresholds, bands and allowances will be frozen until the end of 2025/26.

The big freeze of everything from the pensions lifetime allowance to the inheritance tax nil rate band counts as a stealth tax. Look at the raw numbers and there is no increase in tax – everything stays the same. In practice, the effect of inflation will take its toll. As incomes and wealth rise, thresholds are crossed and tax bands filled more quickly. More people become taxpayers and all taxpayers pay more tax.

A good (or possibly bad) example is the inheritance tax nil rate band, which was set at its current £325,000 level (now running through to 2026) way back in April 2009. Had the band been linked to the CPI inflation index, it would be about £90,000 higher in 2021/22. That difference equates to an extra £36,000 in inheritance tax at the standard 40% rate.

In other words, you may think you were spared higher tax bills by the Chancellor, but that is not necessarily the case. Tax planning is still important and will become more so as the freeze drags on to 2026.

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

Tilney Smith & Williamson expands in Surrey with the acquisition of HFS Milbourne

We are pleased to announce that HFS Milbourne has become part of Tilney Smith & Williamson, the national financial planning & investment management group. This is an exciting time for us as we move forward into the next chapter! Please find full details here.

Prepare for the new tax year

Taking some time to start planning for 2021/22 now can be worthwhile. 

While there is often a focus on planning for the end of the tax year, much less attention is paid to the start of the tax year. The lack of an obvious deadline is probably one reason – deadlines tend to concentrate the mind. Nevertheless, some planning at the beginning of the year can be a rewarding exercise.

  • Estimate your total income for 2021/22 – If you have a rough estimate of what your income will be, it will give you an idea of what to watch out for and what each extra £1 of gross income will be worth. For example, if your estimate is around £50,000, that means you are on the borders of higher rate tax (or well into the 41% band if you are resident in Scotland). £50,000 is also the threshold at which the child benefit tax charge comes into play.

  • Check whether you will cover your allowances – The allowances to which you are entitled often depend upon your income, although the £2,000 dividend allowance applies universally. Couples have the opportunity to cover two sets of allowances, possibly by transferring investments between each other or changing from single ownership to joint ownership.

  • Check your PAYE code – If you have received a 2021/22 PAYE coding, check that it is correct. The wrong code could mean you pay too much tax during the year.

  • Top up your ISA – If it makes tax sense for you to invest in an ISA because of the potential income and capital gains tax savings, then the time to do so is as soon as possible, not just as the tax year end approaches.

  • Consider making pension contributions – The sooner your contribution is invested, the longer it benefits from a tax-favoured environment and the less likely it is to be ‘lost’ in other expenditure.

For more 2021/22 tax planning, talk to us now… not March 2022.

 

 

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

The value of investments can fall as well as rise. You may get back less than you invested.

Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers.

Four financial lessons from the Covid-19 pandemic

As the pandemic enters its second year, what have we learned?

The World Health Organization declared Covid-19 a pandemic on 11 March 2020, coincidentally the day that Chancellor Rishi Sunak presented his first Budget. At the time, the Chancellor announced a £12bn stimulus to counter the impact of the pandemic. By November, the Office of Budget Responsibility was estimating the cost had reached £280bn.

The last year has been a traumatic one in which much has changed, perhaps never to revert to the old ‘normal’. It has also provided some useful financial lessons:

  • Make sure you have an up-to-date will – Early on in Lockdown 1.0 the importance of having an up-to-date will (or, in some cases, any will) was highlighted to many people just as it became difficult to arrange one.  
  • Relying on a state safety net is dangerous – The pandemic saw the number of Universal Credit (UC) claimants more than double to 5.8 million in the year to November 2020. The lowly level of benefits – even after a £1,000 temporary uplift – was a shock for many of those new claimants, including people who fell between the gaps in the job support schemes.
  • Keep an adequate cash reserve – In a world of near zero interest rates, you may be reluctant to leave cash on deposit, earning next to nothing. However, cash gives you valuable flexibility and time to react to changed circumstances.  
  • Don’t panic – The UK’s FTSE 100 hit its low for 2020 on 23 March, the day that the Prime Minister launched Lockdown 1.0. It was a dark time, but any investor who panicked and sold up at that point, when the FTSE 100 was below 5,000, would have chosen the worst time to pull out. By the end of 2020, the index was 29.4% above its March nadir. That performance was also a reminder of another lesson: market timing is almost impossible.

If any of that quartet resonate with you, will you be ready for next time?

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.

UK dividends: A bad 2020, but a better 2021?

New data show how far UK dividends fell last year, but projections for 2021 suggest the declines are nearly over.  

In January 2021, Link Asset Services published its latest UK Dividend Monitor covering the final quarter of 2020 and the year as a whole. The headline figure was that total dividends fell by 44% over the year, equating to £48.7bn less dividend income received by investors in 2020 than in 2019. In fact, the level of dividend payments in 2020 was just £0.1bn higher than in 2011.

The decline in payments was spread across sectors with around two thirds of companies either cancelling or cutting their dividends between the second and fourth quarter of the year. Within that broad decline, three factors accounted for almost 75% of the lost income:

  • The financial sector cut or cancelled £16.6bn of dividends. Early in the pandemic, the Bank of England told all the major banks to suspend dividend payments. HSBC, which in 2019 was the second largest dividend payer, did not pay a cent in 2020 (it declares dividends in the US currency, not sterling).
  • The oil sector cut its dividend payments by £8bn in 2020, with two household names, BP and Shell, leading the charge. The oil price fall was a contributing factor, but there was probably also some opportunism. The pandemic gave BP and Shell, along with many other companies, cover for reducing dividend levels that had become increasingly unsustainable.
  • Special dividends – one-off payments usually associated with corporate restructurings – crashed from £12bn in 2019 to just £0.8bn in 2020.

2021 started with another lockdown in force, but in Link Asset Services’ comments on the outlook for the year, it does not envisage any further dramatic falls in dividends. For a start, the Bank of England has said the banks can resume dividend payments, albeit subject to tight constraints. Any company that wanted to ‘rebase’ its dividend has probably done so by now. Add those two factors together and Link’s best case is that dividends could rise by 10.0% this year, while its worst case is a decline of 0.6%.

Last year’s dividend performance may have been grim, but the dividend yield on the UK stock market is still around 3.25%, which in the current environment is not easy to beat.

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.

New rules on pension drawdown and investment

From February new rules apply if you choose pension drawdown but do so without taking advice. 

The Covid-19 pandemic has deferred many events of all sizes, from the Tokyo Olympics to millions of foreign holidays. One of the less prominent delays has been a change to the Financial Conduct Authority (FCA) rules on pension drawdown.

Back in June 2018, the FCA issued a consultation paper following a two-year review of the impact of the Pension flexibility reforms introduced in 2015. One aspect which particularly concerned the FCA was those pension owners who, having received various prompts to seek advice, decided to access their pensions through drawdown without taking advice. The FCA found:

  • Many of these individuals were solely focused on taking their tax-free cash and paid little or no attention to the investment of the remaining funds to be used for drawdown.
  • Around one in three were unaware of where their drawdown money was invested. Many others only had a broad idea.
  • Some pension providers were “defaulting” non-advised clients into cash or quasi-cash investments at drawdown. As a result, one third of the non-advised users of pension drawdown held their entire drawdown fund in cash.

 The FCA concluded that its findings “strongly suggest that a significant number of non-advised consumers are likely to hold their funds in investments that will not meet their objectives for how they want to use that money in retirement”. The FCA’s proposed solution to this was to mandate pension providers to provide a range of “investment pathways” for drawdown funds, based on the client’s objectives for their pension pot. The regulator also proposed that there would be specific warnings issued to those who held more than 50% of their drawdown fund in cash or cash-like investments.

The proposals were due to be put into force in August 2020, but the implementation date was put back to February 2021. With cash returns virtually zero, the delay has potentially been costly for some non-advised pension owners.

If you are unclear where your drawdown funds are invested, take note of the FCA’s concerns and then take advice – the investment pathways will be a help, but they are not an advised solution, tailored to your circumstances.

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