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Setting new taxpayer records

Written by admin on . Posted in Employment Tax, High Income Child Benefit Charge, Income Tax, Inheritance Tax, Lasting Will & Testaments, self-assessment. No Comments on Setting new taxpayer records

New data from HMRC reveals there are now over six million people paying higher or additional rate tax in the UK.

In recent years, the end of June has been the time for HMRC to issue its annual statistics on taxpayer numbers. This series is more up to date than some of HMRC’s releases and includes a projection for the current tax year.

The latest set of data received more press attention than usual for several reasons:

  • The number of income tax payers jumped by 1.3 million (4%) for 2022/23, the largest increase since 2004/05.
  • Higher rate taxpayer numbers rose by 750,000 (16%), an increase unmatched in over 30 years of HMRC data.
  • The population of additional rate taxpayers grew by 66,000 (12%). When the additional rate of tax was introduced in 2010/11, only 0.75% of taxpayers were in this lofty band, a proportion that has since grown to 1.75%.
  • Add together higher and additional rate taxpayers and the total exceeds 6.1 million, over one in six of all income taxpayers.

This means there are more taxpayers than ever before and more of them are paying higher and additional rates due to a combination of two main factors:

  1. The then Chancellor Rishi Sunak’s decision in March 2021 to freeze the personal allowance, higher rate and additional rate thresholds from 2021/22 through to 2025/26. In fact, the additional rate threshold has never moved from its initial £150,000.
  2. Inflation has been vastly higher than anticipated back in March 2021, when the CPI rate was running at 0.7% (a year, not a month) and the Office for Budget Responsibility (OBR) was projecting that it would not reach 2% until 2025. The OBR’s projection for total inflation over the four years from the start of 2022 to the end of 2025 was 7.7%, a figure that is almost certain to be below what 2022 alone will deliver.

The winner in all of this is the Treasury, so much so that there is now talk of tax cuts being announced in the Autumn Budget, if not sooner. As with July’s ‘tax cut’ in National Insurance contributions, any new income tax cut will be a reduction in the size of the previously planned increase.

Meanwhile, if you have become a higher rate taxpayer this year, you should make sure you are using all available reliefs and allowances to the full. The one piece of good news is that tax relief on your pension contributions has potentially doubled.

Source: HMRC.

Focus on tax year-end planning

Written by admin on . Posted in Benefits, Capital Gains Tax, Inheritance Tax, Pensions. No Comments on Focus on tax year-end planning

With Christmas and New Year behind us, tax year-end planning should now be on your radar.

The 2021/22 tax year will end on Tuesday 5 April. This year there is no Spring Budget and Easter arrives on 15 April, so no obstacles stand in the way of year-end tax planning. Nevertheless, the sooner you start the better, as some decisions cannot be made quickly. There are some key areas to consider.

Pensions

Making pension contributions is one of the few ways that you can receive full income tax relief and reduce your taxable income. The second benefit matters in a world where your level of taxable income can determine whether you suffer the High Income Child Benefit tax charge or retain entitlement to a full personal allowance. The end of the tax year is a good time to assess how much you can contribute as you should have a good idea of your income for the year.

Inheritance tax

Now that we know the Chancellor does not have any plans for major reform of inheritance tax (IHT), there is a stable framework on which to plan. As ever, first on the list to consider is use of your annual exemptions, such as the £3,000 annual gifts exemption. With the nil rate bands currently frozen until April 2026, it is more important than ever not to let these go to waste.

Capital gains tax

As with IHT, the Chancellor has recently clarified his plans for capital gains tax (CGT). The annual exemption, which currently allows you to realise CGT-free gains of up to £12,300 each tax year, will not be slashed, nor will the tax rates be raised to income tax levels. That has simplified the year-end planning process, as there is now no point in realising gains above your annual exemption in case there would be more tax to pay in the near future.

If you think your personal finances could benefit from year-end planning, do not wait until the last moment to seek advice from a professional. Calculations will often need data that can take time to collect, particularly on the pensions front.

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Treasury sets aside CGT and IHT change agendas

Written by admin on . Posted in Capital Gains Tax, Inheritance Tax, Lasting Will & Testaments, Tax, Wealth, Wills & Probate. No Comments on Treasury sets aside CGT and IHT change agendas

Tax and Administration Maintenance (TAM) Day is a new phenomenon brought in by the Treasury to try and move away from the traditional all-in-one Budget. Following the first ‘Tax Day’ in March, the end of November saw another round of announcements.

The government set out steps to modernise and simplify the UK tax system, but of more interest is the response to the Office of Tax Simplification’s (OTS) reviews into inheritance tax (IHT) and capital gains tax (CGT).

Inheritance tax

The review into IHT had made various recommendations, particularly regarding exemptions and reliefs as these can be quite complicated. Given that the nil rate band and the residence nil rate band are frozen until 2025/26, the government has decided not to proceed with any IHT changes for the time being, although the door has been left open for changes in the future.

Reduced IHT reporting requirements from 1 January 2022 have already been announced, and the latest confirmation of the status quo will be welcomed by anyone who has recently undertaken IHT planning.

Capital gains tax

Wide ranging and more radical OTS suggestions on CGT, such as aligning the rate of CGT with income tax rates and significantly reducing the amount of the annual exemption, have been put on hold for now.

The time limit for reporting and paying CGT in respect of residential property disposals has already been extended from 30 days to 60 days. Other measures that the government intends to go ahead with include:

  • Integrating the different ways of reporting and paying CGT into a single customer account;
  • Extending the no gain, no loss window on separation and divorce; and
  • Relaxing the rollover relief conditions where land and buildings are acquired under a compulsory purchase order.

Although less definite than the above, the government will also review principal residence relief nominations and the rules for enterprise investment schemes; however, any changes are expected to be merely procedural in nature.

Details of the government’s response to both of the OTS’s reviews can be found here.

Photo by Tim Hüfner on Unsplash

IHT receipts reach £6 billion record

Written by admin on . Posted in Inheritance Tax, Lasting Will & Testaments. No Comments on IHT receipts reach £6 billion record

The amount of inheritance tax (IHT) collected by HMRC over the past year reached a record £6 billion, some £1 billion more than the previous 12 months. This increase comes as no surprise given booming property values and frozen nil rate tax bands. It seems the tax is no longer the preserve of the super-rich.

The IHT nil rate band has not been uprated for 12 years and is set to remain at £325,000 for another four. For a reasonably well-off couple, the loss of indexing means around an additional £200,000 of assets being subject to tax. The residence nil rate band (RNRB) is also fixed, at £175,000, until 2026.

Property

Although the nil rate bands total £1 million for a couple, the average value of a terraced house in London, for example, is now over £700,000. Unfortunately, there may be little scope for any IHT planning if the value of your estate comes mainly from your property. However, it is important to have an up-to-date will, and to make the best use of reliefs and exemptions – especially the RNRB.

You might wish to take out life assurance if you want your heirs to hold on to your home, rather than being forced to sell to fund IHT. The policy should be written in trust and increase in line with property values.

Planning

Any IHT planning will depend on your age, assets and how much you can afford to gift without impacting your lifestyle. Professional advice is always recommended, but there are some important considerations:

  • Pensions: There are various possibilities, but, for example, you could fund pension contributions for your children or grandchildren. The recipient can benefit from tax relief, and your estate is reduced over time without the need for a large capital gift.
  • Business property relief: Riskier, and there is no guarantee of future exemption, but you might consider ISAs that are invested in the AIM market. The ISAs will escape IHT after being held for two years.

HMRC’s basic guide to how IHT works, including details of various exemptions, can be found here.

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Probate fees reform, round three

Written by admin on . Posted in Inheritance Tax, Lasting Will & Testaments, Wills & Probate. No Comments on Probate fees reform, round three

The Government’s third attempt at revamping the cost of obtaining grant of probate in England and Wales is much more modest in scope than the previous two. The introduction of the new fee structure is planned for early 2022.

Proposal

There is a two-tier fee structure under the current system. The cost is £215 for an application from an individual, and £155 if the application is from a solicitor. Fees were last amended seven years ago, and at that time the cost differential reflected some of the additional administrative work required by the probate service to process applications made by individuals.

  • The cost differential between professional and individual applications has substantially reduced, so the latest proposal is to have a single fee of £273; considerably less than the £20,000 maximum suggested back in 2016, or £6,000 in 2018.
  • No fee is payable for very small estates of £5,000 or less.
  • The same fees apply for obtaining letters of administration where the deceased was intestate.

Probate

Many estates do not need to go through probate. In some cases the value of the deceased’s assets is low. The cut-off point can be anything between £10,000 and £50,000. Each bank and financial organisation has its own rules on how much money it will release before seeing a grant of probate. If all assets are jointly owned, they automatically pass to the surviving owners.

Even when probate is required, you can save the high fees charged by probate specialists if the estate is uncomplicated; approximately 40% of applications for probate are made by individuals in such circumstances. The Death Notification Service lets you notify a number of financial institutions of a person’s death at the same time, and My Lost Account will help trace lost bank and building society accounts, and also NS&I products. It is worth obtaining multiple copies of a death certificate from the beginning as the cost of requesting these later can go up.

Because of Covid-19, probate applications are taking up to eight weeks to process.

If you are involved in a probate application, the government’s guide is a good starting point, otherwise, give me a call.

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Unhappy families – challenging inheritance issues

Written by admin on . Posted in Inheritance Tax, Lasting Will & Testaments, Wealth, Wills & Probate. No Comments on Unhappy families – challenging inheritance issues

The outcome of a recent High Court case is a warning for anyone challenging a will. 

As inheritances become more valuable, the number of disputes about wills have increased. Court cases rose by almost 50% to 188 in 2019 compared to the previous year according to the latest Ministry of Justice figures. Many more are settled or abandoned along the way. The cases which do reach the High Court tend to be those involving the ‘right’ mix of large sums and elevated emotions. An example that appeared in April 2021 is Miles v Shearer.

Tony Shearer died in October 2017, leaving nearly all of an estate worth about £2.2 million to his second wife, Pamela. His two daughters, Juliet and Lauretta, born in the early 1980s to his first wife, received nothing. This prompted them to make a claim under the Inheritance (Provision for Family and Dependants) Act 1975.

Lauretta wanted a payment from her father’s estate to cover:

  • The cost of a home, so that she could move out of her mother’s property;
  • Fees for training as a dog behaviourist, to enable her to support herself; and
  • The expenses of caring for her autistic daughter.

Juliet sought funds to:

  • Reduce her mortgage by about £245,000, so that it would become affordable for her on a repayment basis: and
  • Buy out her ex-husband’s share of a flat in which she was living – about another £100,000.

In 2008, shortly after his divorce, Tony gave £177,000 to Juliet and £185,000 to Lauretta. At the time he made clear there would be no further financial support to his daughters. This was an important factor in the case as it reinforced the decisions Tony made in the creation of his will.

The judge rejected the claims of both daughters, stating that neither had established a need for maintenance to be funded from their father’s estate. Two lessons can be drawn from the case:

  • Make your intentions clear in advance to try to reduce potential disappointment and the likelihood of legal action when a will is finally read.
  • Tony’s will achieved what he wanted to happen. Had he left matters to English intestacy laws, Pamela would have received only £125,000 and personal chattels outright, with Juliet and Lauretta immediately jointly receiving half the residue (less about £285,000 of inheritance tax).

Photo by Morgan Housel on Unsplash

 

Business Relief, IHT and Holiday Homes

Written by admin on . Posted in Inheritance Tax, Tax, Wealth. No Comments on Business Relief, IHT and Holiday Homes

There are various tax advantages to a rental property being treated as a furnished holiday letting, but inheritance tax (IHT) business relief is generally not one of them. Even though the law supports HMRC’s view, property owners regularly appeal against their refusal to give relief.

The tax advantages

The most immediate benefit is full tax relief for finance costs. For normal rentals, relief is restricted to the basic rate, so a higher-rate taxpayer with a £250,000 mortgage at an interest rate of 2.5% will receive extra tax relief of £1,250 annually.

When it comes to disposing of a property, business asset disposal relief and holdover relief will be available.

Business relief

Some £225,000 in IHT was at stake in the recent appeal by the executors appointed by Sheriff Graham Loudon Cox against business relief being denied. Although the late taxpayer worked hard to ensure guests enjoyed their stay in his three furnished holiday flats, the First Tier Tribunal dismissed the appeal, finding that there was nothing exceptional about the business to elevate it beyond being one of mainly investment.

And that is the essential problem. The level of additional services provided must be sufficient that the activity is considered as non-investment. This needs to be more than just:

  • cleaning;
  • providing heating and hot water;
  • a welcome pack; and
  • being on call to deal with queries and emergencies.

These are considered as simply incidental or ancillary activities. The extra services which would have helped the appeal, such as dog-sitting, childminding, transport, breakfast and supper, were not provided to guests with sufficient regularity. Owners of holiday lets could consider making use of the CGT reliefs by gifting furnished holiday property to the intended beneficiaries during their lifetime. The property then drops out of charge to IHT after seven years.

Details about the reliefs available for furnished holiday lettings, and the qualifying conditions, can be found here.

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Wealth Divide Increase Through Inheritance

Written by admin on . Posted in Inheritance Tax, Property, Stamp Duty, Tax, Wealth. No Comments on Wealth Divide Increase Through Inheritance

Research by the Institute for Fiscal Studies provides a stark warning of how important inheritances are going to be for younger generations in terms of both lifetime income and wealth.

Wealth passed down from one generation to the next is fast becoming the most important determinant of how well off a person will become, with those born in the 1980s projected to inherit almost twice as much as those born in the 1960s. The average inheritance for those born in the 1980s will be worth 16% of their lifetime (non-inheritance) income. One in ten can expect to receive more than £500,000, and it will come as no surprise that graduates generally have wealthier parents.

Security comes from inheriting property

With a potential £1 million exemption from IHT, your inheritance may well be tax-free if you inherit the family home. Depending on your circumstances, you may then be able to live mortgage-free or enjoy rental income.

Be warned, however, that the inequalities created by inheritances could see a wealth tax imposed at some point.

Struggle for those without family funds

Without parental help, it is becoming increasingly difficult to get a first step on the property ladder. The temporary stamp duty cut should have helped, but any saving has been wiped out by a surge in property prices. Despite this, there is better news:

  • A new government guarantee scheme has been launched, alongside the return of 95% mortgages. Mortgage rates are of course lower for those who can find a 10% deposit.
  • The latest version of the help to buy equity loan scheme means you can borrow up to 20% (40% in London) towards the cost of a newly built home, so a smaller mortgage is then required.
  • First-time buyers will again have a stamp duty advantage later in 2021 once the temporary reliefs come to an end.

Guidance on help to buy, including the equity loan scheme, is available on the government website.

Photo by Elena Mozhvilo on Unsplash