CGT is the favourite tip for those predicting where Budget increases will fall.

Its pundit popularity comes despite the fact HM Revenue & Custom’s (HMRC) own ready reckoner suggests a substantial increase in the tax rates would lead to a fall in receipts.

If a sale is going to take place anyway, ensure it is executed sooner rather than later

There were only around 350,000 individuals who realised enough gain in 2022/23 to face a CGT bill, with less than 2% of that select population accounting for 57% of the £13.6bn paid.

HMRC’s stance is that higher CGT rates would mean more wealthy individuals choosing to keep their gains unrealised – although that is not a view shared by some think tanks.

For example, the Resolution Foundation reckons raising CGT rates to match the marginal rates faced by employees (16% for basic-rate taxpayers, 32% for higher-rate taxpayers and 37% for additional-rate taxpayers) and reintroducing indexation relief would raise £7.5bn a year – about a 50% increase on projected 2024/25 CGT receipts.

The speculation has raised the question: can CGT be changed mid-year?

The precedent of a new chancellor making a mid-year change to CGT rates in their post-election premiere already exists.

The one question mark over a mid-year change is – ironically – whether more tax might be raised by deferring it to 6 April 2025

In his 22 June 2010 Budget, then-chancellor George Osborne raised the CGT rate for those paying more than the basic rate of income tax from 18% to 28% for disposals from 23 June 2010.

By 2010, Budget changes usually took effect from the day of their announcement, so it is unclear why there was a one-day delay – although many took advantage of the brief window. At the time, CGT was not expected to rise.

For individuals and trusts, CGT is generally accounted for on a tax-year basis, so a mid-year change causes none of the disruption that would be associated with income tax or NIC tweaks of the same nature. Even residential property sales have a 60-day period for reporting/payment (although this special treatment did not exist in 2010).

The one question mark over a mid-year change is – ironically – whether more tax might be raised by deferring it to 6 April 2025.

If the chancellor wants money as soon as possible, a deferral could well deliver more in the short term

The heightened CGT receipts following Office of Tax Simplification (OTS) reports on CGT reform are a lesson here. CGT liabilities in 2022/23 were less than in the two previous tax years, when the spectre of OTS-inspired reform existed.

If the chancellor wants money as soon as possible, a deferral could well deliver more in the short term. Indeed, this may already be happening, with a recent Financial Times article reporting a selling ‘frenzy’.

 With this in mind – and only where clients are already planning to make a disposal in 2024/25 – you may wish to tell them to consider bringing that forward.

‘Don’t let the tax tail wag the investment dog’ is advice often applied when considering tax-incentivised investments. It is equally so for tax-incentivised dis-investments.

HMRC’s stance is that higher CGT rates would mean more wealthy individuals choosing to keep their gains unrealised

One way of considering any pre-emptive transaction is to think of it as an option contract, with the premium being the cost of the transaction and the associated pre-Budget CGT:

• If the Budget hikes tax and the option pays out, the profit is the saving in CGT between new and old rates.
• If there is no change, the premium represents either:
  • An acceleration of tax and transaction costs that would have been paid at some future date, or
  • A total loss, if the shares are held until death and if CGT uplift on death is then still in being.

If dividends and/or capital gains are also more harshly treated, then, as well as considering the obvious tax wrappers of pensions and Isas, there could be a stronger case for considering the tax management benefits of investment bonds going forward.

In closing, it would be remiss to not comment specifically on one of the major sources of CGT – the sale of business assets.

Currently, up to £1m of gains from the disposal of an interest in a qualifying business would be taxed at the lower rate of 10%. While this could be in the firing line, this is not thought to be a major target given the generally accepted importance of encouraging small business.

Having said that, as for investments generally, if a sale is going to take place anyway, ensure it is executed sooner rather than later.

Tony Wickenden is managing director of Technical Connection

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For 2025/26, the offsetting measures are forecast to deliver savings of £8.1bn, but the spending figures will have to await the first part of the Spending Review, due alongside the Autumn Budget on 30 October.

In her speech, Reeves said: “I have to tell the House that Budget will involve taking difficult decisions to meet our fiscal rules across spending, welfare and tax.”

Nevertheless, she went on to confirm the Labour “manifesto commitment that we will not increase National Insurance, the basic, higher or additional rates of income tax, or VAT.”

In a subsequent interview with The News Agents podcast, Reeves said, “I think we will have to increase taxes in the Budget.”

So, what could we see announced?

I want to look at what the chancellor’s options are in relation to the two main capital taxes – capital gains tax (CGT) and inheritance tax (IHT). Along with pensions and other possible tax changes that could be borne by ‘non-working individuals’ – aka pensioners – it is these that have attracted most media speculation.

CGT

Increases in CGT have been on most hitlists since Labour refused to rule them out in pre-election interviews.

CGT is due to raise £15.2bn in 2024/25 and £16.2bn in 2025/26. The HM Revenue & Customs (HMRC) ready reckoner is pessimistic about the benefits of a significant increase in rates. For example, it says a 10 percentage point increase in all rates would reduce revenue by about £1.35bn, as greater income (£710m) from the disposal of assets qualifying for business assets disposal relief (BADR) would be more than offset by a reduction of tax (£2,055m) on unrelieved gains as investors waited for a more tax-friendly climate (or death).

A 5 percentage point increase would yield £420m, according to HMRC. These numbers are at odds with some think tank calculations. For example, a recent Resolution Foundation report suggested raising CGT rates to 16% (basic), 32% (higher) and 37% (additional) and reintroducing indexation relief would produce £7.5bn a year.

The quick and dirty option would be to simply scrap BADR, which HMRC estimates cost £1.5bn in 2023/24. However, this wouldn’t align well with the encouragement of business and accompanying economic growth.

The general rebasing of values on death for the purpose of calculating future gains is also something that has gained attention as an area for tax-raising reform, particularly when agricultural or business relief also applies.

Applying CGT at death was an idea floated in the Office of Tax (OTS) IHT Simplification Review. The OTS estimated that, for 2015/16, CGT levied at death would raise £1.3bn and affect 55,000 estates (against 24,500 paying IHT). Those numbers, particularly in terms of taxpayer numbers, would skew higher for CGT now, given the reduction in the annual exemption.

Two halfway houses are possible – removing the “on death” uplift if business or agricultural relief is claimed or simply not resetting the base cost for the recipient of an inheritance.

That would mean the deceased’s base cost would pass across to the new owner in the same way as holdover relief currently operates. The drawback of this would be a much smaller immediate tax boost.

IHT

IHT is the second manifesto-unmentioned tax to attract media speculation as a Budget target, especially as it arguably does not impact on ‘working people’. IHT is projected to yield £7.5bn in 2024/25 and £7.7bn in 2025/26, meaning, in total, it raises about as much as 1p on the basic rate of income tax.

A recent Institute of Fiscal Studies (IFS) paper provides a good summary of the areas that could provide extra revenue:

• Business and agricultural reliefs: The IFS put the cost of these reliefs at £1.4bn and £0.4bn respectively. HMRC data shows business relief claimants typically number fewer than 5,000. The IFS proposals were to:

1) Scrap business relief entirely for Aim shares, saving £1.1bn in 2024/25, rising to £1.6bn by 2029/30.

2)Cap the two reliefs to a transferable £500,000 per person. As much of these reliefs is currently claimed by the largest estates, the IFS estimates the change could generate £1.4bn in the current tax year, rising to £1.8bn by 2029/30. The IFS does not distinguish between ‘working’ and passive asset owners. This would be an option for the government, but would add complexity while reducing tax receipts.

• Defined contribution pensions: The IFS, along with many others, favours bringing pension death benefits within the ambit of IHT. It also thinks income tax should be levied at a minimum of basic rate on any funds withdrawn by a successor/dependant, regardless of the age at death of the pension owner. To take account of this additional tax the IFS proposal would apply IHT to 80% of gross funds. The IHT raised would initially be small beer – £0.2bn in 2024/25, rising to £0.4bn by 2029/30.

More radical reform, such as a switch to taxing recipients rather than donors, could raise more money, but would involve a major legislative overhaul.

Tony Wickenden is managing director of Technical Connection

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Questions around what clients should be doing are set to continue up to and beyond Labour’s first Budget.

In thinking about any tax planning, it helps to know what to expect by way of a timeline.

The dates below are part speculative and part certain. However, it is worth casting your mind back to the last time Labour gained power after a long run of Conservative rule.

In May 1997, within days of victory, the new government’s first major act was to give independence to the Bank of England, something nobody (including the Old Lady of Threadneedle Street herself) was expecting. There might be a grand surprise this time…

By the time you’re reading this, new chancellor Rachel Reeves will likely have asked the Office for Budget Responsibility (OBR) to start the preparation of the next economic and fiscal outlook. She has said she will give the OBR 10 weeks’ notice before any fiscal event.

The new ministerial team will have been appointed and parliament reassembled with its first task to elect a commons speaker, too.

17 July: This is the date of the State Opening of Parliament and the King’s Speech. That speech will be an important indicator of the new government’s legislative priorities. Debate on the King’s Speech will likely occupy the next six sitting days for the House of Commons.

1 August (estimate): Parliament typically goes into recess around 22 July (last year the summer recess started on 20 July and, pre-election, it was scheduled for 23 July this year).

Labour will want to be seen taking some action before the holidays begin and, in any case, it will need time beyond the previously planned recess date to debate the King’s Speech.

However, there is a balance to be struck between House of Commons sitting time and the length of the recess, given MPs and their staff need some recovery time after six weeks of campaigning.

2 September (estimate): Parliament resumes after the recess.

13 September (estimate): If Reeves gave the OBR notice on 5 July as predicted, then Friday 13 September would be the earliest day on which she could present a Budget. Ignoring the superstitious date, Budgets are traditionally Wednesday events, so a more realistic earliest date is 18 September. That said, it is looking increasingly unlikely the Budget will be in September, for the timing reasons set out below.

22-25 September: The Labour Party Conference will take place in Liverpool. Parliament usually takes about three weeks off for conference season, allowing the three main parties to hold their annual meetings without MPs having to worry about being in Westminster.

This year, the first party conference is the Liberal Democrats’, running between 14-17 September, with the Conservatives providing the other bookend between 29 September and 2 October.

The decision on recess dates is at the government’s discretion, so it is possible at least one of the main opposition parties will find it is disadvantaged in 2024. Again, the driver will be Labour wanting to make a mark – and exploit its fresh political capital –  in its first 100 days. That becomes more difficult the greater proportion of those 100 days is spent in recess.

October (estimate): With this in mind, October is now looking the more probable month for the Budget. By then, the government will need to have decided whether it is going for a full three-year Spending Review (2025-28), as scheduled by former chancellor Jeremy Hunt, or opting for a one-year interim review.

It is possible Reeves will combine the Spending Review and Budget in one statement, given their interdependencies.

It’s at times of change like these that proactive informed advice can be so valuable. The reassurance and removal of anxiety that can be delivered through trusted behavioural coaching can be a major contributor to the delivery of advice alpha .

Tony Wickenden is managing director of Technical Connection

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Where appropriate, the tax efficiencies offered by enterprise investment schemes (EIS), seed EIS and venture capital trusts will have also been considered.

Using the rapidly diminishing annual capital gains tax (CGT) exemption and, where necessary, in a way that ensured the investor was not too long out of the market but also did not trigger the dreaded bed and breakfast anti-avoidance provisions will have been considered too.

For those who have control over income flow through business ownership, payment of salaries, profits or dividends to spouses/partners could also have been declared last minute to ensure personal allowances, the dividend allowance and lower tax rates be used.

Those interested in estate planning and inheritance tax (IHT) reduction will also have considered using the annual IHT exemption (of £3,000) that can only be carried forward one year.

Quite the list.

But as tax effective as all those strategies are, how much more could one be if planning was not left to the last minute?

I would like to remind advisers the focus should be more on tax-year start planning than tax-year end.

Adopting a tax-year start strategy, supported by tax-year through planning, offers so many more benefits.

Most obviously, like anything worthwhile, taking a measured, consistent approach will yield optimum results. If you get this right, there shouldn’t really be any tax-year end emergencies to deal with.

Let me give you some examples in relation to income.

Aside from income a business owner can control, the only way to tax efficiently plan income flow is to do it earlier in the year – before it “flows”, so to speak.

When it comes to dividends and interest, that means making sure investments are structured in terms of wrappers and ownership.

So, wrappers first. Obviously ensure clients maximise their Isa and pension capabilities. After that, it’s about being aware of the dividend allowance (reduced to £500 this year from £1,000 last year) and the personal savings allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Sadly, zero for additional rate taxpayers.

There’s also the nil-rate starting band of £500, but because of the rules around its “pound for pound” reduction when income from any source exceeds the personal allowance, it’s unlikely to be of any great use to many clients of advisers.

It makes tax sense to ensure clients have enough in appropriate investments to generate income of up to those allowable amounts. At, say, a 3.5% per annum equity yield, an investment of just over £14,000 would deliver tax-free income within the allowance for an investor with no other dividends.

At an interest rate of 4% pa, a deposit of about £12,500 would deliver a tax-free return to a higher rate taxpayer. The deposit could be doubled to produce a tax-free return to a basic rate taxpayer.

For couples, the respective amounts invested and deposited can be doubled (dependent on individual tax rates) and, between a married couple or civil partners, transfers from one to another to facilitate this outcome can be made tax neutrally – i.e. without IHT or CGT consequence.

For other couples, for a transfer of cash, while CGT won’t be an issue in relation to sterling, the transfer would be a gift for IHT. The usual exemptions and the nil rate band should be available and, of course, an outright transfer would be a PET.

For a transfer of chargeable assets – for example, equities or collective investments – then, as well as the IHT consideration, the disposal would also be a disposal for CGT at market value, meaning a gain might arise.

When you get beyond these tax-free amounts, there may also be the personal allowance and, for couples, a possible lower tax rate for one may make the asset transfer still worthwhile.

Beyond these strategies, it may also be worth considering the tax efficiency, deferment and administration qualities of an investment bond. Dividends arising inside a UK or offshore bond will be tax free – without limit – and interest taxed at 20% inside a UK life policyholder fund and 0% inside an offshore bond.

You also have the ability to manage tax on encashment, with a basic rate credit available on gains made under a UK bond.

With the dramatic reduction of the CGT exemption and dividend allowance, the investment threshold above which investment bonds are worth considering has dropped dramatically.

None of these strategies can save tax in a tax year if you only implement them at the end of that year.

That’s also true for actively managed portfolios, where the investor is looking to avoid personal taxation of capital gains in light of the reduced CGT exemption but not go into a bond.

Here, collectives (unit trusts and Oeics) as opposed to “tax transparent” managed portfolios are attracting greater interest.

Another big benefit of tax-year start planning is removing the anxiety many feel making last-minute investment decisions for relatively large amounts, which is what happens leaving Isa or pension investments to tax-year end.

The solution to this is to commit to regular investment throughout the year. Clients might also gain the benefit of age-old pound cost averaging. Remember that?

Tony Wickenden is managing director of Technical Connection

The post Tony Wickenden: Why tax-year start planning is the way forward appeared first on Money Marketing.

At this point, the Child Benefit starts to be tapered away and, at £60,000, is completely removed.

The HICBC has been heavily criticised for the way two-income families, where both earn less than £50,000, are treated compared to a single parent earning more than £50,000. Two earners on £49,000 a year, so a combined income of £98,000, lose no Child Benefit.

There is hope the Chancellor will address the single-parent family position in the March Budget. The income limits could also do with being increased. The IFS paper may serve to increase that hope, though I suspect nobody is holding their breath.

In the meantime, it is important to be aware of the details when having tax-year-end conversations with clients who may be caught out.

Child Benefit is money paid by the government to anyone responsible for bringing up a child – typically, a parent or carer. A “child” for this purpose is one up to the age of 16, or 20 if in approved education or training.

Only one parent (or carer) can claim on behalf of a child, but you can claim for each child in your care. For the current 2023/24 tax year, you get £24 per week for the eldest or only child and £15.90 per week for any other children.

Child Benefit is paid every four weeks, straight into the claimant’s bank account.

The aim of the HICBC is to make any recipient repay some or all of their Child Benefit back as tax if they or their spouse, civil partner or partner (who is not married but living with them) has an individual adjusted net income exceeding £50,000 per year – even though the basic rate threshold (including the personal allowance) stands at £50,270.

Where a claimant has adjusted net income of between £50,000 and £60,000, the HICBC will be a 1% deduction of the amount of Child Benefit for every £100 of income that exceeds £50,000.

If either the taxpayer or the taxpayer’s partner has adjusted net income that exceeds £60,000, the person with the higher income will be liable to the charge on the full amount of Child Benefit – i.e. 10,000/100 = 100%.

Individuals who have adjusted net income above £50,000 but are not entitled to Child Benefit themselves will only be liable to the charge for any part of the tax year during which they are living with someone who claims Child Benefit and whose own income is below £50,000.

The charge is assessed through self-assessment in the normal way, either through payments on account and balancing payments or through the tax code via PAYE. If payment is made through the tax code, the taxpayer (i.e. the person with the highest adjusted net income) will still be required to complete a self-assessment return

So, what planning could be considered?

If either partner’s adjusted net income is above £50,000 but below £60,000, the claimant may still wish to receive Child Benefit payments because the tax charge will be less than the amount of the benefit.

If either partner’s adjusted net income exceeds £60,000, the person with the highest income will be liable to the charge on the full amount of Child Benefit. In this event, it is possible for the claimant to elect not to receive the benefit by contacting HM Revenue & Customs (HMRC), thereby negating any tax charge. If circumstances change and income falls below £60,000, it is possible to revoke the election (for up to two years).

If a claimant decides to stop receiving Child Benefit payments, this won’t affect entitlement. So, as long as the claimant or their partner are entitled to receive the benefit, a claim form should be completed for any new children.

This is because entitlement to Child Benefit can help you qualify for National Insurance (NI) credits, which can protect entitlement to state pension and ensures the child is automatically issued with a NI number prior to their 16th birthday.

Note, annual NI credits for state pension entitlement are only granted up to a child’s 12th birthday. HMRC’s fact sheet on adult childcare credits explains this.

Where the working parent of a couple has registered to receive Child Benefit rather than their non-working partner, the non-working parent does not receive any NI credits and may therefore lose entitlement to future state pension. NI credits can be transferred between parents of children under the age of 12 using HMRC form CF411A (however, backdating is currently effectively limited to a single tax year.)

Meanwhile, it is possible to reduce an individual’s income with gross pension contributions or gross gift-aid payments. Here, not only would a taxpayer be increasing their pension pot on retirement but they could also prevent being caught by the HICBC.

Further, they can continue to receive Child Benefit payments in the normal way, resulting in a beneficial outcome for all parties concerned.

Where income includes a chargeable event gain on a life policy, the full gain, not the top-sliced gain, is included to calculate adjusted net income for the purposes of Child Benefit and the HICBC.

Note that a top-sliced gain can only be used in the calculation of adjusted net income for the purposes of determining the personal allowance when calculating the tax on the top-sliced gain in the second part of the top-slicing relief calculation – it cannot be used to reduce adjusted net income to reduce or avoid the HICBC, or in any other situation.

Tony Wickenden is managing director of Technical Connection

The post Tony Wickenden: Could Budget bring change to High Income Child Benefit Charge? appeared first on Money Marketing.

IHT has also been conspicuously absent from any recent commentary on Labour’s taxation plans.

The tax was only relevant for around 4% of estates in 2020/21 – a proportion the Institute for Fiscal Studies (IFS) projects will rise to 7% by 2032/22.

Giving up £7.5bn of revenue to benefit such a small – and comparatively wealthy – part of the population would attract negative press

Given that limited impact, it seems unlikely abolition or even reform would be anywhere near the top of Labour’s to-do list.

For both parties, there is also the inescapable fact that, while IHT currently generates only around £7.5bn per annum, it is still £7.5bn that would have to be found somewhere else were the tax to be abolished. The state of the public finances and growing demands on public services leave no real alternative.

Superficially, scrapping IHT could look like a vote winner for the Conservatives at the upcoming general election, with the tax regularly polling as the most hated.

However, giving up £7.5bn of revenue to benefit such a small – and comparatively wealthy – part of the overall population would undoubtedly attract some negative press.

Given the current list of more urgent issues to address, it is difficult to imagine this being anywhere near the top of the agenda

The chancellor has also been vocal about the need to act responsibly with public finances, meaning now might not be the best time to consider cuts for such a small proportion of the voting public.

So, IHT abolition looks unlikely – though, of course, not impossible. We may get more clarity in the upcoming Budget on 6 March.

What could future reform look like?

Plenty has been said about potential reform over the past few years. In 2019 and 2020 alone, there were three lots of suggestions.

The first was from the Office of Tax Simplification. Proposals included the reduction of the seven-year cumulation period to five years, abolition of taper relief, moving to a single “consolidated” annual gift exemption and scrapping tax-free capital gains tax revaluation on death.

Superficially, scrapping IHT could look like a vote winner for the Conservatives at the upcoming general election

None of these ideas were adopted or progressed by the chancellor at the time, Rishi Sunak.

The second came from the All-Party Parliamentary Group for Inheritance and Intergenerational Fairness, which suggested introducing a single annual gift exemption of £30,000, abolishing normal expenditure out of income relief, retaining the nil rate band, abolishing business and agricultural relief and dropping the rate to 10%/20%.

None of these suggestions were adopted either.

The Institute for Public Policy Research also put forward some ideas, proposing a single lifetime cumulative gift allowance of £125,000 and all capital receipts from transfers made during lifetime or one death taxed on the donee as income. The Resolution Foundation has also recently made similar proposals.

None of these suggestions have been adopted.

Most recently, in September, the IFS published a report proposing the following:

• Business relief to be capped or abolished
• Agricultural property relief to be capped or abolished
• Defined contribution pension funds to no longer be IHT-free
• Residence nil-rate band to be abolished

With these changes, the IFS projected that, to remain revenue neutral (i.e. no drop in the IHT yield), the government could afford to:

• Increase the nil-rate band to £525,000 or
• Reduce the IHT rate to 25%

There has been no official comment on these suggestions.

Clearly, there are no shortage of suggestions and options that could be considered, and no one could rule out a future fundamental review of capital taxation reform.

However, given the current list of more urgent issues to address, it is difficult to imagine this being anywhere near the top of the agenda for any political party.

I will be a keeping a close eye out, though.

Tony Wickenden is managing director of Technical Connection

The post Tony Wickenden: What are the chances of big IHT news? appeared first on Money Marketing.

Indeed, it is frequently branded as the UK’s most disliked tax, with the latest YouGov survey showing 50% of respondents think it ‘unfair’ or ‘very unfair’, against 20% who call it ‘fair’ or ‘very fair’.

But as the Office of Tax Simplification (OTS) demonstrated in its first report reviewing IHT, there is a perception the tax has a much greater impact than is actually the case.

Even 26% of those who responded to an OTS public call for evidence (a self-selecting group who ought to have had some knowledge of the tax) believed 20% or more people paid IHT. The latest HMRC figures (for 2020/21) show just 3.7%.

The current cost of IHT abolition would be £7bn. Almost half that benefit would go to those with estates of £2.1m or more at death

A new report on IHT from the Institute for Fiscal Studies (IFS) does not answer the impossible question its director Paul Johnson recently posed in an article for the Times: what is the question to which abolishing IHT is any sort of plausible answer?

However, the report does make a range of points about the operation of the tax and its potential reform:

1. Inherited wealth is growing compared with earned incomes and will have a growing impact on inequalities by parental background.

Those with the wealthiest fifth of parents are set to benefit from a rise in averages of 17% of lifetime income for those born in the 1960s to 30% of lifetime income for those born in the 1980s.

2. The share of deaths resulting in IHT is small but a growing proportion are potentially affected by the tax.

The proportion of deaths resulting in IHT is projected to grow to over 7% by 2032/33. However, inter-spouse/civil partner exemptions means the number of people affected by IHT is larger. By 2032/33, one in eight people are projected to face IHT either on their death or their spouse/civil partner’s death.

3. IHT revenues are small, at £7bn (or 0.3% of GDP) a year.

The 2032/33 projection is just over £15bn in today’s prices (0.5% of GDP), driven by increasing levels of wealth held by subsequent generations of retirees.

4. The current cost of IHT abolition would be £7bn.

Almost half (47%) of that benefit would go to those with estates of £2.1m or more at death. That group, which represents the top 1% of estates, would benefit from an average tax cut of around £1.1m. The circa 90% of estates outside the IHT net would not be directly affected by such a reform. Those figures underline the political risk for prime minister Rishi Sunak in IHT abolition.

5. IHT reliefs for agricultural and business assets, and defined contribution (DC) pension pots, create opportunities to avoid the tax and distort economic decisions.

The residence nil-rate band, which gives special treatment to property passed to direct descendants, raises similar types of problems and is of greater benefit to those in London and the South. IHT would be a cleaner, more coherent, tax if there was no special treatment for certain types of asset.

Abolishing reliefs for agriculture, businesses and DC pension pots could raise up to around £1.5bn a year – 20% more IHT revenue. Combining these changes would reduce the scope for substituting one avoidance channel for another.

Other changes to taxation at death could improve efficiency and fairness, as well as raise revenue

80% of the tax revenue from business relief reform could be captured just by capping the relief at £500,000 per person instead of outright abolition. Most business wealth is concentrated among those with high wealth, so the fiscal cost of such a threshold would be low.

Around 90% of business wealth bequeathed is given as part of an estate worth over £2m.

The IFS makes no comment on defined benefit pensions. Its stance presumably reflects the general absence of meaningful death benefits beyond survivor’s pensions once retirement has been reached.

6. Scrapping the residence nil-rate band (NRB) and extending the NRB would make the system fairer.

A single £0.5m NRB would cost around £0.7bn a year and hold the proportion of deaths resulting in IHT down at around 4%.

7. Combining simple reforms could lead to a better IHT structure.

A package that capped agricultural and business reliefs, brought DC pension pots within the scope of IHT and abolished the residence NRB could fund an increase in the NRB to around £525,000 on a revenue neutral basis. Alternatively, the IHT rate could be cut from 40% to around 25%.

8. Maintaining the share of deaths resulting in IHT at its long run 4% level requires the current NRB to be £380,000.

It would cost about £0.9bn a year for such a 17% increase in the NRB – well below the 53% CPI increase from April 2009, when the NRB reached its current £325,000. The cost of limiting the scope of the IHT system to a 4% share would grow over time, reaching £2.7bn by 2032/33.

9. Other changes to taxation at death could improve efficiency and fairness, as well as raise revenue.

Levying capital gains tax at the point of death would produce around £1.6bn a year. Levying income tax on all withdrawals from inherited pension pots would also raise further revenue.

10. IHT has only a small impact on the distribution of inheritances received and intergenerational wealth mobility.

The wealthiest fifth of donors will bequeath an average of around £380,000 per child and pay IHT of around 10% of this amount. The least wealthy fifth of parents will leave less than £2,000 per child.

By the time inheritances are received, wealth inequality is already substantial. Inheritances are most often received when people are in their late 50s or early 60s. Around the ages of 50–54, children of the wealthiest fifth of parents have an average of £830,000 in wealth, while children of the least wealthy fifth have on average £180,000.

The main political parties, particularly the Conservatives, cannot afford to ignore this report

The IFS report is a useful exercise in showing how IHT can be reshaped by removing the reliefs which have accumulated over time. However, the proposals outlined above are a long way from some of the more radical ideas that have appeared in recent years, such as applying income tax to beneficiaries’ (not donors’) receipts above a cumulative lifetime threshold.

The main political parties, particularly the Conservatives, cannot afford to ignore this report. The IFS is the media’s go-to think tank for tax matters. The parties’ strategists and spin doctors would all be aware of the need to have responses ready when a journalist raises questions based on IFS material.

That is particularly pertinent for Sunak et al considering nearly half of the benefits of IHT abolition would go to those with estates over £2.1m.

Tony Wickenden is managing director of Technical Connection

The post Tony Wickenden: IHT abolition is not the answer appeared first on Money Marketing.

We will get more detail once we have the manifestos to consider – some time later into 2024 in all probability. We may also, of course, get some hints at the upcoming party conferences.

With the Conservatives, we have both the Autumn Statement and the 2024 Spring Budget to give further indications of its direction of travel in relation to taxation.

But the big question is what the Labour party could have in store, especially given the current standing in various opinion polls.

Reeves was categorical she was not adopting the politician’s trick of non-denial

People still remember the somewhat radical policies proposed by former Labour leader Jeremy Corbyn and shadow chancellor John McDonnell with more than little fear. Current leader Kier Starmer and shadow chancellor Rachel Reeves have been at pains to stress they are very different, though.

So, what do we know?

Until recently, Reeves has only mentioned a small number of targeted tax increases, none of which are significant revenue raisers. These are:

• Ending (or reducing) the tax benefits of the non-domicile rules
• Treating carried interest as earned income rather than capital gain
• Removing the charitable status for private schools
• Reinstating the lifetime allowance rules

In a recent interview with the Financial Times, Reeves said she had “no plans” to align capital gains tax (CGT) rates with income tax rates or to restrict relief for high earners’ pension contributions. This appeared to contradict her earlier statements about increasing taxes on wealth .

Labour is vulnerable to Conservative accusations it is a tax-and-spend party

Last weekend saw another interview with Reeves, this time in the Telegraph. This was, to a large degree, a replay of the “don’t-frighten-the-electorate” FT interview. I summarise the key points here:

• A previous plan from Starmer to raise the top rate of tax is “off the table”.
• So too is “any form of wealth tax”, despite the recent re-emergence of proposals on this front.
• The party does not have “any plans to increase taxes outside of what we’ve said”.

Reeves was categorical she was not adopting the politician’s trick of non-denial – saying there are no current plans, thereby leaving scope for future changes of plan. In her words: “We won’t be doing that. It’s not a non-denial, it’s just a denial.”

While Reeves’ interview gained plenty of attention from the media, it did not alter the picture of Labour tax policy painted by the previous Financial Times interview.

Labour is vulnerable to Conservative accusations it is a tax-and-spend party. The row over the expansion of the Ulez charging zone, which arguably cost Labour a by-election victory in Uxbridge, is a variation on this theme.

The shadow chancellor’s latest statement will be well received by those who could be affected by a wealth tax

Reeves and Starmer are therefore doing all they can to soothe these concerns. Some pundits have labelled their approach as the Ming Vase strategy: tip-toing forward to avoid dropping an extremely precious item (an election win). The spectre of Neil Kinnock’s 1992 election defeat still looms large in the party’s memory.

Reeves’ comments ruffled some feathers on the left wing of the Labour party, some parts of which favour a wealth tax. It will be interesting to see how much their complaints are supressed when Labour holds what is almost certainly its pre-election conference in Liverpool on 8 October.

On the whole, though, financial planners and clients should be cautiously reassured by what they have heard so far. CGT stability will be particularly welcome – especially given the concern that resulted from the Office of Tax Simplification proposal to tax capital gains in the same way as income.

Since the Wealth Tax Commission report in 2020, there had been little talk of a wealth tax – despite the recently introduced solidarity tax in Spain. But there has been a recent flurry from three groups – Tax Justice UK, the Economic Change Unit and the New Economics Foundation – to resurrect the idea of it. The shadow chancellor’s latest statement will be well received by those who could be affected.

There’s no doubt that questions on tax and what, if any, action to take, will increase as we head towards the election.

Tony Wickenden is managing director of Technical Connection

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The first is that it will usually help your clients achieve an objective important to them – to protect the wealth that will pass down to the next generation.

The second is that it will enhance the longevity and value of your business through greater certainty of business flow and fund retention. Potential buyers love predictable, stable revenue flows.

Of course, not every client will want to engage other family members in a discussion of their finances. And it’s not only the older clients (those mostly with the wealth) who might have this resistance to cross generational communication.

It is supercharged by the accumulation and decumulation phases of a financial journey

Younger clients can feel awkward discussing the likes of inheritance tax (IHT) with their parents. I mean, it seems a little “self-serving”, right?

But with suitable coaching and an explanation of the benefits, this barrier can often be overcome.

Much intergenerational planning, understandably, focuses on estate planning but outcomes will be optimised if an intergenerational approach is deployed throughout all three phases of the financial planning lifecycle:

• Accumulation
• Decumulation
• Preservation and transfer

Throughout all of this, paying attention to embedding as much tax efficiency as possible will contribute to the best outcomes. It’s obvious really.

In the accumulation phase, look to maximise front-end tax relief when it’s available and minimise tax on income and capital gains on invested funds.

In the decumulation phase, look to minimise tax on what you draw (by using exemptions, allowances and tax freedoms) and ensure undrawn funds remain in the most tax efficient environment.

If there is scope and desire to invest specifically for the next generation, then it’s definitely worth considering

When funds are transferred, ensure they can be done so free of IHT (or with as little as possible). And let’s not forget how effective life assurance plans in trust can be in creating or enhancing an inheritance.

Let’s look at each of those phases in a little more detail.

Accumulation first. Thinking intergenerationally aligns with tax best practice for the main client in relation to their own investments.

Taking full advantage of the tax no-brainers such as Isas, pensions and VCTs/EISs will all help maximise returns. And the greater the accumulated (un-tax diminished) funds, the better it is for the next generation too.

As well as investing in a “tax smart” way, if there is scope and desire to invest specifically for the next generation, then it’s definitely worth considering.

The £9,000 per annum that can fund a Junior Isa set up by parents but contributed to by anyone is a great option.

The alternative of collectives held in trust has the baggage of the Trust Registration Service and the reducing dividend allowance and capital gains tax annual exemption to weigh against it, despite the extra level of control over access it can deliver.

Of course, giving thought to up to £2,880 per annum being contributed into a child’s pension, topped up to £3,600 by HM Revenue & Customs, is a very worthwhile consideration for those taking the long view. The power of compounding remains as compelling as it always did.

A tax smart decumulation will then retain more of the tax smart accumulated funds, so that makes great sense, right?

When it comes to the transfer of funds to the next generation (often via a surviving spouse or partner), then minimising IHT is an obvious thing to strive for.

Up to £2,880 per annum being contributed into a child’s pension, topped up to £3,600 by HMRC, is very worthwhile

Lifetime transfers are always worth considering so as to reduce the taxable estate on death and it’s helpful that where cash or investments are available to plan with, access for the donor can be facilitated through trust/financial products combinations.

There’s also the IHT freedoms given by the protection of pension funds and investments that qualify for business relief.

Added to this should be the use of appropriate protection in trust to tax efficiently create or boost the inheritance and/or to provide for the payment of IHT.

So, my point is successful intergenerational planning is contributed to by appropriate IHT planning, but it is supercharged by what precedes that through the accumulation and decumulation phases of a person’s financial journey.

Tony Wickenden is managing director of Technical Connection

The post Tony Wickenden: Intergenerational strategies should start long before estate planning appeared first on Money Marketing.

The control bit can be relatively easily overcome with appropriate trusts. The access bit is a bit trickier. Legislation in the shape of the gift with reservation and pre-owned asset tax provisions sees to that.

Of course, IHT doesn’t represent a huge challenge in relation to a pension fund or an interest in a trading business owned for two years. Control and access both delivered.

Any planning with a main residence is always going to be difficult from an IHT standpoint and potentially challenging on emotional grounds too.

From 1 May, the rate of interest used when valuing the retained rights under DGTs increased from 4.5% per annum to 6.75% per annum

That said, the industry has been pretty successful in designing plans founded on financial products and trusts to overcome the stated challenges and not be caught by the anti-avoidance legislation.

Most notable well-used solutions are the loan trust and the discounted gift trust (DGT).

Both are tried and tested, avoid the Disclosure of Tax Avoidance Schemes (DOTAS) provisions (in the case of the DGT, provided the scheme used was established practice before 1 April 2018) and need to be registered under the Trust Registration Scheme – a relatively simple process.

I am not going to go over how these innovative and relatively long-standing solutions work in granular detail. I fully expect anyone who’s got this far into the article to know that. Suffice to say the loan trust delivers a way to give away the future growth on the investment (a UK or offshore investment bond). Effectively a kind of “freezer trust”. The lender retains access to the original capital.

The change was a long time coming and suggests HMRC had just forgotten about DGT

With a DGT, the donor retains the right to a flow of regular payments throughout their life – but no access to capital. The “discount” comes from the fact the value of what is given into trust is diminished by the value of the retained right to the “income” payments from the trust.

Of course, this discount is only relevant if the settlor dies within seven years of making the gift. But it is relevant and a really big selling point for the DGT.

So, for those for whom this kind of planning might be appropriate, there is a degree of importance attached to any change that affects the level of the discount.

From 1 May, the rate of interest used when valuing the retained rights under DGTs increased from 4.5% per annum to 6.75% per annum, in accordance with a policy paper from HM Revenue & Customs.

As stated, broadly, when someone sets up a DGT, there is a transfer of value for IHT purposes. This transfer is quantified as the difference between the amount invested and the open market value of the retained rights. The retained rights are effectively payable to the settlor(s) for the remainder of their lifetime.

So, what affect does an increase in the interest rate have on the discount applied to the value of the amount transferred by way of gift when a DGT is established?

The HMRC interest rate basis is unclear

The answer is that the rise in interest rate from 4.5% to 6.75% will reduce the value of the retained benefit (think of it as a higher interest rate making an annuity cheaper per £1 of income). The corollary is that the discount used to calculate the value of the gift also falls.

We do not have a copy of the mortality tables used for the valuation basis, but it’s possible to work backwards from existing discounts to get an idea of what the new rate would be.

For example, if, for a 65-year-old with 5% withdrawals, the current discount was 66.88%, that would go down to about 56%. For a couple aged 65, the difference would be between about 77% and 61%. The discount reduction shrinks as age increases.

The change in interest rate was a long time coming and suggests HMRC had just forgotten about DGT.

The HMRC interest rate basis is unclear. Its latest paper says, “Yields on medium to long-term gilts have increased over the last year” but also adds, “In addition, the Bank of England has increased interest rates to 4.25% now”.

To muddy the waters more, the only other reference to a basis we can find goes back to the original technical note in 2007, which refers to “a 1% differential over short-term gilts”.

Tony Wickenden is managing director of Technical Connection

The post Tony Wickenden: What the DGT rate rise means for IHT planning appeared first on Money Marketing.

I will make no comment on the fundamental question of whether the changes will deliver the required result of both driving people back to work or keeping them working… Aside from that, the details are eagerly awaited.

Among all the pensions-related excitement (I still find “pensions” and “excitement” an interesting juxtaposition), it would be easy to forget the tax context in which we are all living and its impact on the numbers of people likely to need financial advice.

The many frozen thresholds, allowances and exemptions remain as such and will continue to have a big impact.

The greater the “tax pain” the greater the desire to seek some relief from it

It is unlikely a Labour government (should we get one) would see “thawing” these as a major priority, at least in relation to higher and additional rate thresholds, the dividend allowance, the capital gains tax exemption and the inheritance tax thresholds.

Advisers should take heart from this, as the market for those requiring advice is likely to materially increase.

It has almost become a tradition for the Office for Budget Responsibility (OBR) to rework its calculations on the impact of the freezes to the personal allowance and higher rate threshold in its economic and fiscal outlook (EFO).

In the March 2021 EFO, which accompanied then-chancellor Rishi Sunak’s original announcement of a freeze on the personal allowance and higher rate threshold through to 2025/26, the OBR estimated that, by 2025/26, the net effect would be:

• Extra revenue of £8bn a year
• 3 million more taxpayers than if the personal allowance had been indexed
• 1 million more higher rate taxpayers than if the higher rate threshold had been indexed.

A year later, inflation prompted the OBR to revise its 2025/26 figures to:

• Extra revenue of £17.5bn a year
• 8 million more taxpayers than if the personal allowance had been indexed
• 2 million more higher rate taxpayers than if the higher rate threshold had been indexed.

In the latest EFO, which emerged with the Budget earlier this month, the OBR has once again revisited its spreadsheets, this time also taking account of the reduction of additional rate threshold to £125,140 for 2023/24 and last November’s announcement of a further two years’ freeze. It now reckons that by 2025/26:

• Extra revenue of £24.2bn a year
• 2 million more taxpayers than if the personal allowance had been indexed
• 2 million more higher rate taxpayers than if the higher rate threshold had been indexed.
• 300,000 more additional rate taxpayers than if the £150,000 threshold had remained.

Taking the view out to 2027/28 gives the following:

• Extra revenue of £26.4bn a year
• 2 million more taxpayers than if the personal allowance had been indexed
• 1 million more higher rate taxpayers than if the higher rate threshold had been indexed
• 400,000 more additional rate taxpayers than if the £150,000 threshold had remained.

The EFO projections also show that, by 2027/28, 20.4% of taxpayers will be paying more than basic rate compared to 14.5% in 2021/22 (and 10.4% in 2010/11 when additional rate tax was introduced).

The latest EFO figures naturally use the OBR March 2023 assumptions for inflation, which are that CPI increases will average less than 1% a year in three years starting in 2024. The OBR notes its 2024 Q4 CPI forecast of 0.5% is 1.9% below the current independent consensus.

If the OBR proves to be too optimistic on inflation, that will bump up the taxpayer numbers yet again.

The greater the “tax pain” the greater the desire to seek some relief from it, and therein lies the adviser opportunity.

Tony Wickenden is managing director of Technical Connection

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