[ad_1]
Are you doing Dry January? Many of us regard the start of the year as an opportune moment to get back in shape. At the risk of driving you back to the bottle, it can also be a good time to take a close look at your personal tax situation.
The past two years have been, let us say, quite a surprise. My job is all about planning. We try to make sure the surprises are minimised — because the only thing worse than a tax bill is an unexpected tax bill.
This means getting your finances into as robust a position as you can. We need to look ahead, evaluate our situation and stress test our plans.
One place to start is the outlook for the public finances. It is clear that the government cannot continue to find new war chests to help fund its big spending commitments. At some point — perhaps not this year, but over the next few years — the country needs to pay back the money created via quantitative easing and the large bill racked up for Covid support. There will need to be a method of repayment — inflation can only reduce the debt by so much.
So who will pay? The answer is you, the taxpayer. Which taxes will change and by how much is a matter of speculation, but my best guess would be that the chancellor looks to raise money from the wealthy, not least because the upcoming rise in national insurance contributions has sparked calls for broader shoulders to carry more of the burden. I can see three areas where ministers might look to make significant changes.
The first is trusts. These are typically used by the wealthy as a tool for inheritance tax planning. It has been several years since the last overhaul of trusts, so further changes might be seen as timely. And if the government excludes so-called “vulnerable persons trusts”, it is sure to hit the pockets of the wealthy.
What kind of changes might be coming down the track? Look out for higher periodic or exit charges and the removal of the capital gains and dividend allowances.
In case any of these changes come to pass, look carefully now at your structure but also think about whether you should put new funds into trust. It’s very easy to get into a trust but usually quite tricky to get the funds back. At the minimum, you would need to pay the likes of me for advice. And why would you want to do that if you didn’t have to?
Second is our old favourite, pensions. Whenever a chancellor looks into the coffers and sees that they are bare, pensions relief swims into view. Yet the lifetime allowance has already been reduced. Could the government go further?
Currently, the lifetime allowance is £1,073,100. For most people in Britain that is a lot to have in pensions. I suspect this could be dropped to £750,000 with little danger of a march on Parliament by the millionaire pensioners being taxed. Another change could be a cut in the maximum annual amount of pension contributions on which you can earn tax relief, say from £40,000 to £10,000.
Even if you’ve reviewed the plan for your pension and your retirement needs in recent years, it’s worth going back over it given the constant changes being made to the system. Make sure you don’t sleepwalk into tax charges. Ask yourself: how much do I want in my pension? How much do I need from it? Who will I leave the fund to? Most importantly, at what point will I be required to pay tax?
Finally, we have capital gains tax (CGT). There is currently a maximum of 20 per cent tax on shares and 28 per cent tax on property. You may not believe this to be reasonable, but historically, it is quite low. Everyone also gets a personal CGT allowance (annual gains you can make before paying tax) of £12,300. On top of this, when you die, CGT dies with you.
Some or all of these could change. The worst-case scenario is that CGT goes to 40 per cent and they remove the CGT death exemption. This would mean that property you bought for £12,000 in the 1970s — now worth £1m — would almost all be taxed at 40 per cent and then taxed for inheritance tax — so that £1m becomes £367,680 overnight.
This may be an extreme scenario for any government, let alone a Conservative one — but these are extraordinary times, and this is no ordinary Conservative government.
Whichever way you fall in that debate, a CGT rise is well within the realm of the possible. And the timing is worth considering. To my mind, a smart exchequer would announce a CGT rise for 12 months hence. That would get everyone crystallising gains for a year, providing a nice immediate boost to the Treasury coffers, followed by a higher tax rate in future. They can have their cake and eat it.
That means you should give serious consideration to crystallising some funds at 20 per cent. Would you prefer to be certain of your tax rate today rather than gamble on an unknown future rate?
So make sure your trusts are in good order, your pension plans are up to date and be sure of those gains by getting them banked. If you’re unsure, always seek regulated financial advice. Remember that taxation will depend on your individual circumstances — and that tax policy seldom stands still.
I have no special insight into the Treasury’s thought processes but it is hard to imagine any of these areas escaping its scrutiny in the months and year ahead. When the tax bell tolls, it will toll for thee, FT readers — which is enough to send anyone to the bar.
Michael Martin is a private client manager at Seven Investment Management. The views are personal. Twitter: @7IM_MichaelM
[ad_2]
Source link
