Author: Charles de Lastic

Inheritance tax – No time to lose!

The wealthy have no time to lose in planning their IHT mitigation

The recent announcement that inheritance tax (IHT) mitigation via transfers into trust is likely, in future, to be included in the Disclosure of Tax Avoidance Schemes (Dotas) regime is not good news.

The Treasury and HM Revenue & Customs (HMRC) proposal is what was expected following the Finance Act 2010’s blocking of two specific trust schemes which dramatically (and arguably artificially) reduced the value of assets gifted into trust.

The new government has firmly declared its IHT plans by freezing the inheritance tax threshold, the nil rate band (NRB), for five years, it is backing this approach by supporting legislation to plug as many “leaks” as possible.

The consultation document introducing the Dotas requirement does not seem unreasonable in the circumstances, as it does not impact on most conventional IHT mitigation work using the various trust schemes that are widely available.

So what exactly is being suggested as far as disclosure is concerned?

The new rules will not require any existing schemes used extensively by Bluebond  and well known to HMRC to register, such as flexible and discounted gift schemes, because they are being ‘grandfathered’ into acceptability. The only new trust schemes that have to be registered will be those that involve:

  • chargeable transfers beyond the donor’s current allowances, including any unused NRB. In other words, where property becomes ‘relevant property’;
  • an ‘advantage’ in relation to the IHT entry charge: an advantage being defined as the avoidance, reduction or deferral of a charge.

This avoids any requirement to disclose straightforward situations where an individual simply transfers property into trust and relief, or exemption is available in the same way it would have been had the property been gifted directly to another individual. This is generally the case with most of our of trust-based mitigation arrangements.

The government’s proposal is only at the consultation phase so it is too early to be unequivocal about the requirements for plans launched in the future.

However, the grandfathering facility will ensure all existing plans of which HMRC is aware and future plans that adopt the same principles as existing plans will be safe. This is the nearest we have ever come to having a blanket approval from HMRC of all existing plans.

What does this mean for tax planners and their clients?

The proposals are bad news for taxpayers who have been relying on either the indexation of the NRB or, more recently, the Tory commitment to a transferrable £1 million NRB, to lift them out of potential liability. The coalition government has a much less generous approach to inherited wealth than that promised by the Tories.

Freezing the NRB for five years when the knock-on impact of quantitative easing is likely to be rampant inflation down the line is serious. Inflation is already rearing its ugly head, no matter what interest rates are doing.

Looking further ahead, there has been plenty of speculation that the coalition might continue until another term of government, especially if next year’s referendum delivers backing for the alternative vote electoral model. This will mean the cautious approach to raising IHT allowances will continue.

This means taxpayers who are currently close to a potential IHT liability will be severely disadvantaged by the NRB freeze, assuming inflation of 4% over the next two years followed by 8% for three years.

A potential liability of nil at the beginning would become a liability of around 40% of £117,814 after five years that is more than £47,000, simply resulting from inflation.

Hope for the best but prepare for the worst

IHT planner Charles de Lastic constantly reminds his clients to ‘hope for the best but plan for the worst’. This has served him well over many years of capital tax planning.

The message here is that everyone who, since 2008 when they were given false hope by the last labour goverment, has put off their IHT mitigation planning has no time to lose.

Remember: hope for the best but plan for the worst; start your IHT mitigation planning today.

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Inflation falls but is still above target

The cost of Transport fall, but prices for food rise as inflation drops to 3.1%, but is still well over above the 2% target.

Inflation dropped down in July, but remains far above the government target imposed on Bank of England.

The annualised 3.1% rise in consumer inflation for July was down on June’s 3.2% increase, but still above the 2% target. This means that the BOE governer will have to write yet another letter to the government explaining why price rises are above target.

Bank of England Governor Mervyn King blamed anumber of one-time factors, including the rise in sales tax in January, past rises in oil prices and the continued effects of higher import prices following the devaluation in the British pound since mid-2007.

King reiterated the bank’s projections that inflation will remain above the target until the end of 2011 — a year longer than it was predicting just a few months ago — but would then fall back as the effects of higher sales tax, energy price rises and import price increases drop away.

King said last week that inflation was likely to fall back below target in 2012, but in Tuesday’s letter to Treasury chief George Osborne he acknowledged that the recent strength in inflation had surprised the bank’s rate-setting committee and “how fast and how far inflation will fall are both difficult to judge.”

Transport costs were the main factor in the slight drop in inflation with the price of second-hand cars falling between June and July. Petrol prices also fell.

Conversely, food and non-alcoholic beverage prices added upward pressure on the overall figure. With the current prices rises in wheat this is likely to continue.

The same factors also saw the RPI measure of inflation – used for indexation of pensions and state benefits – drop slightly from an annualised 5% to 4.8%

The Bank of England said that inflation will stay above the 2% target for longer than it forecast back in May. The Bank’s new forecasts showed inflation above target until the end of 2011 but falling after that as ‘temporary’ factors such as the increase in VAT next year fade.

Inflation in the UK is higher than in the EU as a whole, where consumer inflation was measured at 1.9%.

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Consumer confidence

Consumer Confidence

This week saw consumer confidence drop to its lowest level for 15 months, it also saw the pound falling against the US Dollar as investors became nervous about the state of the world economy.Consumers are perhaps worried about the level of disposable income they will have over the months ahead and the emergency budget and inflationary pressures such as rising food and petrol costs are adding to this worry.

U.K. house prices dropped again in July and will, probably, struggle to gain for the rest of the year. Prices in England and Wales rose 0.1% from June, when they fell by the same amount. Values are up 8.1% from a year earlier to an average £220,685. The decrease in house prices in July was the first since February and came as the number of transactions rose 11% from June to about 72,100 as more people put their properties on the market.

Regional data for June showed the drop in average prices across England and Wales was led by a 0.5% decrease in the Yorkshire and Humberside region, values in London fell 0.4%.

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How long till the economic outlook will be considered “normal”?

Bank of England governor Mervyn King believes it will be a long time before the economic outlook will be considered “normal”.

Wider economic problems around the world underline the fact that we cannot be confident that the recovery in demand, output and employment  in the UK will be sustained.  The fiscal tightening measures proposed by the Government will not choke off recovery, but it will slow economic growth over the next two years.

Of course it is encouraging that we have learnt recently of the strong 1.1% estimate of GDP growth in the second quarter, however we must be careful not to read too much into one number.  We continue to face the challenge of rebalancing the economy away from consumption towards net exports and raising our national savings rate.

The new coalition’s plans to cut the deficit are certainly ambitious but with the additional tightening set to come in the second half of the parliamentary term, the recovery should be firmly entrenched and the economy should be able to deal with the headwinds from the Budget.

On the assumption that the government is able to implement the overall reduction of £40 billion set out in the budget, the UK growth is likely to  struggle to reach 1% this year but should gradually speed up in the following years to give the UK a high-quality recovery based on trade and investment.

According to Ernst & Young base rate will remain at a record-low 0.5 % until the end of 2013. They said it would be necessary to keep base rate low in order to offset the effects of the Government’s spending cuts and to prevent inflation falling below 1%.  If this forecast is correct should you consider how your savings are invested?  Is cash still a good option or are other low risk, higher yielding products more suitable for some of your savings?


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Emergency money lending – where to turn when you need cash

Apart from the obvious one for those still blessed with the option of the ‘Bank of Mum and Dad’, who do you turn to for a quick, short-term loan?

Payday loan companies thrive on high interest rates and huge APRs, but some people love them.  Personally, I think I’d be put off by being charged an effective interest rate of 458% for borrowing £200 for a couple of weeks when my car broke down, but that’s not the case for everyone.  Even the Office of Fair Trading has just finished looking into the payday loan market and has concluded that the market works ‘well’ and that there is no need to put caps on the charges involved.

I personally don’t entirely agree with this.  It is true that the charges are made clear – if you look on the website of say Wonga and you will see just how much you will be charged for however much you borrow.  The total you will repay is clearly stated, as is the typical APR – 2689%.  So that’s all good, honest and above board.  If you need money in real hurry – and are able to pay it back before things slip away from you – it’s a straightforward way to borrow money.

However, if you aren’t absolutely desperate; it’s a totally mad way to borrow money!  Wait for things until you have the money put away for them is the most responsible way of spending.  This is not always the most practical though is it?  What about when the car breaks down, for example.  What are the alternatives?

Credit cards, authorised overdrafts all have a part to play.  Some more than others depending on your arrangements with your bank.  Starting with the latter, authorised overdrafts have an average interest rate of around 13-14% (with the exception of banks like the Halifax Bank of Scotland and Lloyds, which is soon to introduce a monthly fee).  Admittedly, unauthorised overdrafts, or going over your overdraft limit, can cost you much, much more and may even make the payday loan a more reasonable option.

And so to credit cards.  If you have the right card, you can easily borrow £200 for 20 days at not cost at all.  If you pay your bills off in full every month, you shouldn’t have to pay any interest on most credit cards.  If you need money for more than 30 days, you can still find some cards offering 0% rates on new spending for the first 12 months of holding them.  The downside to a 0% card is that after 12 months your deal will run out and you’ll want, or need, to move on.  In that case, you may find a low APR card, which you won’t need to change after 12 months, more interesting and easier.  One that I know of has an APR of 6.9% – which in the context of short-term loan rates sounds good to me!  Just make sure that you don’t use one to withdraw cash to pay the garage with – otherwise there will be an instant fee, 2.075% in the case of this particular card, and then a rate of 27.95% from withdrawal until you pay it back – no interest-free period.  It is, however, still around a tenth of what you’d pay with a payday loan.

Even the credit cards aimed at those with bad credit are still a ‘cheaper’ option.  The Aqua card for example.  It charges an APR of 35.9%, but no interest is charged if you pay in full by the payment date, and it is still less than payday loan rates.

Remember, there are choices, even during a recession.  So, before undertaking any kind of loan or credit card, there are two things that you absolutely must do.

  1.       Shop around and,
  2.       do your sums!
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Capital Gains Tax – Just where are we now?

Pre-Budget Report, 9th October 2007 – CGT flat rate of 18% for gains on non-business assets made on or after 6th April 2008.

6th April 2010 – income tax rate of 50% for those with incomes in excess of £150,000.

This all adds up to a differential of 32% for those individuals.  Was this sustainable?

The new Coalition Government seemed to put the writing on the wall for this state of affairs with their document entitled “Our programme for Government”, published on 20th May 2010.  It included the sentence:

“We will seek ways of taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities.”

Just what did that mean?  Speculation began.  Well, we’ve now had the Emergency Budget and what we’ve ended up with wasn’t as bad as some commentators thought.  The position is now as follows:

  • The effective rate of CGT for gains qualifying for entrepreneurs’ relief will remain at 10%.  However, the lifetime limit on gains which qualify for entrepreneurs’ relief will increase from £2 million to £5 million for disposals on or after 23rd June 2010.
  • The rate of CGT on gains made by individuals, personal representatives and trustees before 23rd June 2010 remains at 18%.  These gains will not be taken into account in determining the rate(s) at which gains arising to individuals on or after this date should be charged.
  • For disposals made on or after 23rd June 2010, the rate of CGT will remain at 18% for individuals whose total income and net gains when added together fall within the basic rate income tax limit.
  • A rate of 28% will apply to gains made by those who are above the basic rate limit.
  • Therefore, some people will pay tax at 18% on part of their gains and 28% on the balance.
  • The annual exemption for 2010/2011 will remain at £10,100 for individuals and £5,050 for most trusts.
  • For trustees and personal representatives, the rate is increased to 28% for gains on disposals made on or after 23rd June 2010.

All of this means we have gone back to a system that is similar to the one that we had before 6th April 2008, in that gains are added to an individual’s income as the top slice, and the rate of CGT will depend on whether the total of the income and gains is within or in excess of, the basic rate income tax limit.  This time however, there is no taper relief and the indexation allowance is no longer available.  Meaning that the gain after applying the annual exemption is taxed at the flat rate of either 18%, 28% or a combination of the two where:

  • part of the gain falls within the basic rate income tax limit, and
  • part is in excess of that limit.

The increase in the lifetime limit for entrepreneurs’ relief was very welcome for that type of person.  Entrepreneurs have had a good few months.  Following the increase in the limit from £1 million to £2 million, announced in the March Budget, the limit has now risen to 5 times the level that it was on 5th April 2010.  This could be beneficial, as the less tax there is to pay on the sale of a business means there is more capital to invest in appropriate tax wrappers.

What other opportunities are there now?  Well, inter-spouse/civil partner transfers are back as far as tax planning is concerned.  Prior to these changes, the only point in transferring assets to a spouse/civil partner from a CGT perspective was to ensure that both annual exemptions could be utilised.  This is still important, but now an unconditional transfer of assets from a higher rate or additional rate taxpayer to a basic or non-tax paying spouse/civil partner will result in a tax saving on a subsequent disposal by the recipient.

Another area that should be looked at is the single premium bond versus collective investments.  An increase in the rate of CGT will make bond investment look more attractive, in spite of the CGT planning opportunities mentioned above.  The reduction in the basic rate income tax limit which will be introduced from 2011/2012, as a result of the increase in the personal allowance to £7,475, will also make the need for independent financial advice greater than ever.  It is anticipated that this increase will cause an extra 700,000 individuals to become higher rate tax payers.  Use of pension contributions could have a double benefit here as this will effectively provide a person with more basic rate band and possibly also result in a lower rate of CGT being payable.

Finally, the introduction of the 28% rate for trustees and personal representatives will make it even less attractive for trustees to hold equities direct.  This is because every disposal which generates a gain in excess of the annual exemption (£5,050 for most trusts) will produce a 28% tax liability.  The popularity of multi-manager funds may increase but this higher CGT rate will make single premium bonds look even more attractive for trustees of discretionary trusts and accumulation and maintenance trusts than they already did before.

So, even more reason to seek an independent financial adviser for tax planning, estate planning and investment advice.

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VAT – Budget rise in sales tax was ‘unavoidable’ says Chancellor

We all pay it and we’ll all feel it.  The increase in the rate of VAT to 20% from 4th January next year will bring in £13 billion of extra revenue over the lifetime of the current parliament.

In his first Budget as Chancellor, George Osborne said that the rise in VAT from its current rate of 17.5% was necessary.  ‘The years of debt and spending make this unavoidable,’ he continued. ‘That is £13 billion we don’t have to find from extra spending cuts or income tax rises.’

VAT exemptions for food, children’s clothing, books and newspaper will be preserved for the course of this parliament. 

The Chancellor has also increased VAT on general insurance premiums to 20% from 17.5% for the higher rate, which will mean more on travel insurance and product warranties for consumers.  The standard rate of insurance premium tax will also increase to 6% from 5% which will impact on the price of car and home insurance.

Retailers may benefit from this impending rise come Christmas as shoppers may not put off purchases until the January sales.  Others are sure to ‘cash in’ now too.  Have a quote now for new windows – as long as the price is held for 12 months.  You could benefit even if you don’t want to make the purchase in 2010.

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Rise in CGT could also hit basic rate taxpayers

The rise in Capital Gains Tax will hit some middle income earners who have invested in assets such as property over many years, tax experts have warned.

The announcement made in the budget last month by Chancellor George Osborne, revealed that the CGT rate for high earners will increase from 18% to 28%.  However, lower earners could also be hit by the rise if the sale of an asset takes them into the higher income threshold.  Any gain from such a sale would be added to your income and may push you into the higher rates of tax.

Property has been used by some investors instead of a pension and they may now be better off holding on to the properties and renting them out if they can.  That way, they can benefit from the monthly rental income, rather than using a lump sum from a sale for a pension (and being charged CGT on the lump sum).

Fortunately, the rental market is currently quite strong.  The government’s move can be seen as quite positive as it had not raised CGT for higher rate taxpayers to the 40% rate it was at before the flat 18% rate was introduced.  If you bought your investment property years ago, you will still be better off, as 28% is still less than the previous of 40%.

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Financial regulation in the UK

On 16th June 2010, George Osborne gave his first Mansion House speech as Chancellor of the Exchequer.  In his speech, he announced radical changes in the UK’s financial regulations, which includes the abolition of the current tripartite system.

To replace it, the Bank of England (BoE) will be given responsibility for macro and micro-prudential regulation.  The FSA will be wound down with its remaining responsibilities being taken up by the new Consumer Protection and Markets Agency.  These changes will be completed by 2012.

George Osborne said that the tripartite had failed ‘spectacularly’ and that the new government wanted to learn from previous mistakes. ‘When it came to the crunch, no one knew who was in charge.’

The Chancellor’s announcements were pretty much set out in the Conservative Party’s Financial Services White Paper, 2009.  The coalition government agreement document did not give many details of policy in this area, although it did state its intention to give the BoE control of macro-prudential regulation and oversight of the micro-prudential regulation.

Following George Osborne’s speech, Mark Hoban, Financial Secretary, announced further details of the planned changes to Parliament, including an insight into how insurance will be dealt with under the new arrangements.

The plans announced by the Chancellor will see the current tripartite system replaced by a ‘twin-peaks’ regime which will distinguish prudential supervision from consumer protection.  The FSA will be abolished with its regulatory powers passing to the BoE and the consumer remit will go the new Consumer Protection and Markets Authority.  There will also be a new Financial Policy Committee, which will be responsible for financial stability as well as a body responsible for financial crime.  The new regulators are expected to be funded by a levy paid by firms.

In his speech, the Chancellor also announced a single body to tackle financial crime, the introduction of a banking levy and the creation of a banking commission to look at splitting retail and investment banking operations.

A full consultation will be held on the changes to financial regulation, and a detailed document has been promised before the summer recess in July.  The Labour Party questioned the speed of change and whether the new system would give rise to regulatory issues ‘falling between the cracks’.

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Latest inflation figures

And so, inflation continues to alter.  In the UK price inflation, as measured by the Consumer Prices Index (CPI), has dropped to 3.4% for the year to May with falls in the prices of food, non-alcoholic drinks and petrol.  This is a fall from 3.7% and is bigger than expected.

The CPI inflation was forecast to be at 3.5% for the year to May and this slightly bigger than expected fall has meant that sterling has lost ground against both the dollar and the euro.

The Retail Prices Index (RPI) measure of inflation, which includes housing costs, also fell in May.  It is now at 5.1% down from 5.4% in April.

Whilst inflation is still above the Government target, this new data should ease some concerns about UK inflation and a need to increase interest rates to control rising inflation.

The Bank of England’s rate-setting monetary policy committee will now no doubt be hoping that inflation will continue to fall towards its target of 2%.  This new data for the year to May could be the beginning of this process, or it could be just a respite in recently rising inflation figures.

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