A Taxing Agenda
Tony Müdd, St. James’s Place Technical Consultancy Director, reviews the pre-election battleground on taxation.
The party conference season is out of the way and politicians of all persuasions are now gearing up for next year’s general election with a raft of incentives and proposals to appeal to Britain’s long-suffering savers and taxpayers. From new rules for Individual Savings Accounts (ISAs) to increased flexibility for pensions and the traditional pre-election battleground of Inheritance Tax (IHT), the lines are being drawn as the political parties set out on their campaigns for votes next May.
The government and HMRC have another target in sight: the fine line between tax evasion and tax avoidance. The distinction has looked increasingly blurred as the government looks to net additional revenues of £7 billion by the end of this parliament through initiatives to tackle aggressive tax avoidance. The Finance Act 2014 provided HMRC with extensive new powers to target those who avoid payment by “making use of tax law in a way not envisaged by Parliament”. The latest consultation by HMRC also revealed plans to clamp down further on providers of such aggressive tax schemes, but confirmed that it does not want to attack arrangements that rely on statutory exemptions and reliefs.
Of course, most people will have little to be concerned about, but should err on the side of caution on all tax-saving matters, seek expert help and avoid high-powered tax-planning ideas. As a number of celebrity investors have recently discovered, if a tax-saving scheme sounds too good to be true, it probably is.
So, as the government proposes to give with one hand and take with the other, what steps can you take to ensure you pay HMRC no more than you are legally obliged to?
There are still ways in which people can legitimately reduce their tax bills. Individuals can make the most of allowances and reliefs available to their family and spouse. They can make the most of the opportunities available to invest and to save tax-efficiently through ISAs, pensions and other tax-advantaged investments, such as Venture Capital Trusts and Enterprise Investment Schemes.
For savers and investors, the changes to ISAs introduced in July this year were a very welcome and overdue boost, offering greater flexibility and an enticing increase to £15,000 for the annual allowance. Yet just three months on came news that the average ‘no notice’ Cash ISA rate had fallen to a record low and confirmation from HMRC, perhaps unsurprisingly given the derisory rates on offer, that there were 1.2 million fewer subscriptions to Cash ISAs in the last tax year than in 2012/13. More encouragingly for our future wealth prospects, the amount allocated to Stocks & Shares ISAs increased 12% year-on-year in 2013/14, as investors sought to take advantage of the recent recovery in markets. It is a logical decision to make use of this valuable allowance to invest in assets that are more likely to make the most of the long-term tax advantages.
Chancellor George Osborne followed this up with his recently announced changes to the taxation of pension death benefits, which will enable many people who have, in his words, “worked hard and saved all their lives”, to pass on their pensions to loved ones tax-free. There are also plans to give members of defined contribution pension schemes unrestricted access to their retirement savings from the age of 55. Suddenly, pensions look a lot less inflexible and a great deal more appealing. More than ever, those looking to invest tax-efficiently to fulfil their hopes for retirement need to consider the virtues of pensions alongside ISAs and get the right help to ensure the appropriate strategy for their individual circumstances and goals.
The details of the death benefit changes are yet to be firmed up, but the proposals are due to come into effect from next April alongside the other pension reforms in the Budget. The proposals raise a number of financial planning needs, from the review of Wills and pension beneficiaries, to reconsidering pension contributions and opportunities for IHT planning. Households paid IHT bills of £3.4 billion last year, more than at any point since the start of the recession, as property prices continued to rise, and the nil-rate band of £325,000 remained frozen.
Meanwhile, David Cameron has repeated the pledge made by the Conservatives ahead of the last two elections to significantly increase the threshold. Taxpayers and voters will have to wait and see whether he is still willing and able to deliver this time. But, as it stands, figures from the Office for Budget Responsibility forecast that the number of families that will be hit by IHT over the next five years is set to double from one in twenty estates to almost one in ten.
Whether in terms of your estate or your income, there remain plenty of opportunities to plan your tax affairs more effectively. What it takes is a willingness to seek advice, discuss the issue and take action.
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The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
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