In this current turbulent political landscape, certain issues are being overshadowed. Something under the radar has recently been highlighted by the Centre for Policy Studies. The Rt Hon Damian Green has put proposals forward to address the issues of the ongoing social care crisis. As a politically toxic topic, with various possible remedies branded as dementia or death tax, there seems an impasse on how best to address it. Given the resulting uncertainty, what can anyone do to minimise the potential impact of the current care crisis lottery?
The fact remains that there is a very real risk of individuals losing their home and life savings to care costs. The average annual cost of nursing home care is estimated to be £44,000 annually and support to pay these fees is means tested.
Anyone with savings of over £23,250 often has to pay for their case costs in full without support. Figures estimate that around £7bn of personal funds are used to pay for social care each year and for people going into a residential or nursing home it can mean having to sell their home if their partner is no longer living in it.
Many individuals want to be able to pass on their assets to their wider families but can still require the use of them during their lifetime. This could potentially be achieved by making a gift to wider family members or a discretionary trust established for the benefit of the family. Alternatives to making gifts could be an investment in financial plans known as immediate care plans. These generally provide a tax-free annuity income if it is paid to a care provider.
Trusts are generally used in family situations where individual wishes to give assets away for the wider and long-term benefit of the family but still wishes to retain control of them during their lifetime. They, therefore, provide some comfort that a rented property will not be sold without their permission.
Thought should be given to the wider consequences of making a trust, as part of a wider review of their personal affairs. For example, what are the IHT implications of making such gifts and will the individual have sufficient funds to support themselves throughout their retirement? In general, a gift of the main residence is unlikely to have any significant advantage from an IHT perspective while the individual continues to live in it unless a full and fair “arm’s length” market value rent is paid. Even then there are income tax and capital gains tax implications on the beneficiaries of the gift, so experienced advice is essential.
Even if a property is gifted or put into Trust, it is crucial to be aware that local authorities may challenge the validity of this as ‘deliberate derivation’ of assets. The two key areas that will be looked at are firstly did the individual know that they may need care and secondly, is avoiding care costs the significant reason for making the gift? The timing and importantly the intention of any gift is hence decisive, and if the individual making these financial plans is not fit and healthy at the time, the assets could well be counted in any means-tested calculation.
There are some maverick marketed trust schemes available in which the primary motive is the blatant avoidance of social care costs. Early advice as part of a wider succession planning exercise is important if gifts are to fall outside the lottery of paying for care.
For the peace of mind that efficient planning brings contact us now. Our experienced, professional and impartial financial planning advice can help with your family succession planning.
Estate Planning Myths That Just Won’t Die!
Estate planning remains probably the most misunderstood area of Financial Planning. Some clients think they just need a little Financial Planning but not any Estate Planning. Some consider themselves too old or too young to even think about it. Policy changes from HMRC that hit the headlines do nothing to inspire confidence in a notoriously complex system.
It is important to redefine Estate Planning in your mind as a crucial part of Life Planning. It is about defining and living out your legacy during your lifetime, enabling you to enjoy the impact it has on the people and the organisations you choose to support. It’s about ensuring loved ones who depend on you or your income are protected in the event of your incapacity or your death, and it’s about ensuring your wishes are communicated clearly and can be met.
Let’s clarify the most common misconceptions about Estate Planning:
Is Estate Planning is only for the very high net worth?
Often people assume Estate planning is designed purely for the ultra rich to protect their assets. However if you own property and assets, have a bank account and investments, you have an Estate. If you have a spouse, minor children or other dependants, an Estate plan is critical for protecting their interests and their future needs. There are many potential aspects to an Estate plan but among the factors you can consider are ;
Protecting those who depend on you and naming guardians for minor children.
Specify the recipients of all your property after your death
Transfer property to your heirs in a tax efficient manner, and manage all tax exposure
Name your executors and potentially avoid probate
Document the type of care you wish to receive if you become incapacitated
Express your detailed wishes for your funeral arrangements and all related expenses payment.
Is Estate Planning only about Distributing Assets after death?
Legacy and incapacity planning are two areas that encompass far more than just distributing assets. Legacy planning is unique to you and your family. Being able to pass on a meaningful bequest is life-affirming. Incapacity planning helps plan and prepare for unexpected events at every stage of your life and can significantly impact on your loved ones.
Does a Will oversee the distribution of all of my assets?
Your Will is a legal document that instructs how your property will be distributed after your death. It allows you to name an Executor, who is your personal representative charged with overseeing your wishes are carried out and ensures probate is correctly executed.
Probate is the court process that’s required to validate the Will and ensure all assets are rightfully transferred. However, certain assets sit outside most Wills, including life insurance policies or Pensions. These assets transfer directly to the names beneficiaries and are not subject to probate. That’s why it is important to review your account beneficiary designations from time to time. For example, if your Will and/or Trust names your current spouse as the beneficiary or co-Trustee since these assets sit outside a Will or Trust they are not governed by those documents, and previously named beneficiaries will prevail.
In addition to a Will its important to prepare a Power of Attorney to empower someone to carry out your financial or legal decisions if you are unable to act. A Living Will is also extremely beneficial. It is a written statement detailing a persons desires with regard to future medical treatment in circumstances where they would be unable to express their informed consent. It can also include an advance directive. This is a Living Will which gives durable Power of Attorney to a decision maker, remaining in effect during the extent of the incompetency of the person making it.
Trusts can provide a watertight plan for the safe and accountable management of family assets and to direct their use and distribution in accordance with your wishes.
Once a Plan is Established I Never Refer to it Again
Estate Planning is never a one-off proposition, as life is constantly evolving. Factors such as your preferences, goals and of course families are changing over time. A marriage, a divorce or the arrival of a new grandchild, or perhaps tax law changes or major economic events can all change our priorities. Consider for example your ex-spouse ending up receiving absolutely everything after your death because you didn’t update your Plan. Keeping family members and your Executors informed about where to find your legal documents, and your financial details is crucial. Communication is key because it can mean the difference between loved ones hoping they did what you wanted and knowing with certainty that they carried out your wishes.
For the total peace of mind that efficient Estate Planning brings you need to contact an experienced, impartial and professional advisor. Contact us now https://www.bluebond.co.uk/contact-us/
The Proverbial Elephant in the Room?
Inheritance tax (IHT) receipts are predicted to reach a staggering £10bn annually by 2030, almost doubling the current figures, according to analysis from leading financial institutions.
Basing the prediction on current revenue trends and assuming a continuation of the current regulatory environment, this comes as the nil rate band (one of the most important means of protecting an Estate from IHT) reaches its 10th anniversary of being fixed at £325,000.
As asset values particularly property increase rapidly but the nil rate band remains static, more people than ever are caught in the IHT trap. Figures indicate that around 18% of Estates worth up to £1m are failing to put in place an IHT plan, even though there are options available within the existing rules to reduce an IHT bill.
Unfortunately discussing this kind of financial planning remains very much the ‘elephant in the room’ and many people are reluctant to discuss it, even with their financial advisers. The consequence of this is that many families are paying hefty tax bills that proper planning could have completely avoided. Being uncomfortable about discussing financial matters with loved ones can mean families lose out financially not only because of tax issues but also with family conflict and significant disputes over inheriting.
The most important thing to consider is making a Will. A surprising number of high net worth high profile celebrities have passed away intestate. This causes literally years of legal wrangling over their Estates, with the lawyers perhaps benefiting more than the deceased’s family. The very idea that the law will decide how your Estate is distributed should be enough to motivate anyone to get their affairs in order.
In a recent survey taken by Censuswide it was noted that
24% of parents with adult children have talked openly to them about the issue of inheritance
30% of parents have talked to their family about their Will – only 36% have made their children executor of their Estate.
Although 36% of parents have made their children executors of their estate, only 11% of young people are aware that they are an executor.
Children assume their parents have made provisions with 19% saying their parents had no Will. In reality 44% of parents don’t have a Will.
In the survey 62% of millennials would be unhappy, citing feelings of betrayal, jealousy or financial insecurity if their parents favoured their siblings by leaving them more in their Wills or left them out entirely. Despite this 19% of parents admitted they are not planning to divide their estate equally amongst their children.
Most people admit to not understanding the principles of IHT. IHT rules can be complicated, but there are a number of steps an individual can take to reduce or entirely avoid IHT provided they plan ahead. It is worth giving some thought to this sooner rather than later to maximise control over your assets after your death. Giving away money is one of potential solutions, since gifts out of regular income which are not deemed to affect the giver’s standard of living are IHT free on day one, as are certain smaller gifts. Investments in companies that qualify for business property relief is also recommended as these typically become IHT free after 2 years. Investing in an AIM ISA will have a similar outcome. It is important to be aware that all these actions have both positive and negative implications and so any decisions need to be carefully made.
However you decide to bequest your assets it is crucial that you speak to an experienced professional and impartial advisor to ascertain the best outcome for your loved ones. Contact us now for the peace of mind that effective planning brings.
Controversial New Probate Fees Imminent
With the continuing issue of Brexit still hovering over the Government, the less urgent approval motion to controversially increase probate fees has been delayed. It had been suggested that the new probate regime would be introduced this month. Then 21 days after the order has been made the new fees will come into force unless MP’s strenuously object to the approval motion. In this case, the issue would have to be debated in full and put to a vote.
Surprisingly, HMRC has introduced a temporary process for probate applications as it is preparing to switch to this new fee structure. It has announced that it will accept applications for probate before an Inheritance Tax (IHT) account has been processed. Currently to get Probate the Executor must first submit an inheritance tax account, which must then be processed by HMRC before any further application can be accepted.
The rationale behind the fee hike is the Lord Chancellor seeking to generate revenue. He is striving to improve the Court and Tribunal Services in order to provide a “world class courts service”. Estimates anticipate around £155m will be raised annually by the new fees charged on higher value estates. In February MPs of the delegated legislation committee which had probed the nature of the fee agreed with the Ministry of Justice that the mandatory charge on the Estates of the deceased was a fee for the provision of services, and not a tax.
Dubbed a stealth tax and an abuse of power by critics, this bill ensures probate costs are subject to sliding scale of fees. Currently fees are £215 for personal applications and £155 for solicitor applications.
These new fees mean Estates are effectively being double taxed, once for Inheritance Tax (IHT) of 40% above the nil rate band, and then again through tiered probate fees. This is of course on the understanding that the contents of the Estate were taxed at source to begin with.
The fees are linked to the gross value of an Estate and the smallest estates will avoid fees entirely. In fact according to the Ministry of Justice this new lower threshold will exempt around 25,000 Estates annually from any fees. The fee breakdown is as follows:
Estates less than £50,000 are unchanged
Estates worth £50,000-£300,000 will pay £250 a rise of £95
Estates worth £300,000 up to £500,000 will pay £750 a rise of £595
Estates worth £500,000 up to £1 million will pay £2,500 a rise of £2,130
Estates worth £1 million up to £1,600,000 will pay £4,000 a rise of £3,845
Estates worth £1,600,000 up to £2 million will pay £5,000 a rise of £4,845
Estates worth over £2 million will pay £6,000 which is a rise of £5,845
These increased fees are potentially going to leave bereaved families struggling. Many banking institutions will allow access to the deceased accounts for funeral expenses and inheritance tax bills. The real concern is that there may not be sufficient capital available to meet all of these expenses. If that is the case, the executors could have to fund the probate fee personally or take out a loan, the latter of course causing additional fees and interest.
We could see families considering life policies written in Trust to cover probate fees. This is something common practice to either cover or assist with the burden of payment of IHT. This will involve the payment of premiums which will be an added expense for families. Another solution is for appropriate amounts of cash to be put into joint family accounts for ease of access.
An option available for married couples is the simplification of their Estates such as unravelling property ownership to reduce the value of their Estates. This may seriously impact on tax planned Wills and the protection under those Wills for spouses with children from different relationships. Aside from gifting and joint ownership, there is limited action that can be taken.
Given the changing landscape of probate and IHT it is crucial that you speak to an experienced professional and impartial financial expert. Contact us now for the complete peace of mind that efficient financial planning brings for you and your loved ones.
What Is Inheritance Tax?
Inheritance Tax (IHT) is a tax on the transfer of assets from one person to another. It is usually encountered when someone dies, and they leave their Estate to either one individual or a range of beneficiaries. However, lifetime gifts also have IHT consequences. The rate of IHT is generally 40%.
Not everyone has to pay Inheritance Tax. The principal deciding factors are:
- What is the value of your Estate at the time of your death?
- Did you make any lifetime gifts within 7 years of death and if so what was the value of the gift and who received it?
- Do any of your assets have relief from, or are they exempt from, IHT at the time of your death?
- Who are you leaving your Estate to? Are any of the beneficiaries exempt from IHT?
- How much “nil rate band” and “residence nil rate band” do you have available at the time of your death?
The Nil Rate Band
The first £325,000 of every Estate is entirely exempt from Inheritance Tax. This is referred to as the nil rate band and it applies to everyone in the UK. It’s called a nil rate band because assets up to that value are taxed at 0%. If one spouse doesn’t use or only partially uses their nil rate band at the time of their death (for example if the value of their estate is less than the nil rate band or all their assets are passing to the surviving spouse who is an exempt beneficiary) then the unused proportion can be transferred to the surviving spouse and is available at the time of death. This is known as the transferable nil rate band.
Generally speaking if you have made no substantial gifts in the last 7 years and your estate is worth less that £325,000 (for an individual) or £650,000 (for married couples) it is unlikely that there will be an IHT charge at the time of your death. If the value of your estate is worth less than £500,000 (for individuals) and £1,000,000 (for married couples combined) again it is unlikely that there will be an IHT charge at the time of your death (after 2021) if you qualify for the residence nil rate band.
The Residence Nil Rate Band
This is an extension of the nil rate band and is available to homeowners who leave their house to their direct descendants, typically children and grandchildren. It is being phased in over time and by 2021 will provide an additional £125,000 of nil rate band. However, the extension starts to be withdrawn if your estate exceeds £2,000,000 at the time of death.
Any transfer of wealth during lifetime or on death from a person to their spouse is exempt from Inheritance Tax. There is an exception to this where the recipient spouse is not domiciled in the UK, in which case the spouse exemption is capped at £325,000.
Any transfer of wealth during lifetime or on death to a UK charity is exempt from IHT. If you decide to leave at least 10% of your estate to a UK charity on your death any IHT is payable on the remainder of your estate it is paid at 36% (instead of the usual 40%).
Are Some Assets Exempt from IHT?
There are 2 main classes of assets that are exempt or partially exempt from (or technically have relief from) IHT.
- Interests in businesses that have been owned by you for more than 2 years and qualify for “business property relief”. This may include interests in sole-trader businesses, interests in trading partnerships and unlisted shares in trading companies. Investment businesses do not qualify.
- Interests in agricultural property that have been owned and occupied for the purposes of agriculture by you for more than 2 years or have been owned by you but occupied by someone else for the purposes of agriculture for more than 7 years. This relief only extends to the agriculture value so if the market value exceeds the agricultural value, APR doesn’t provide relief for the excess value.
Some assets are not technically part of an Estate and although they may provide valuable payments on death, they are not usually subject to IHT. These may include life assurance payouts on your death, pension death benefits and death in service payments through your employment.
Can you Use Financial Planning to Avoid IHT
Yes, IHT planning is lawful but care must be taken to engage a professional and experienced Independent Financial Advisor to assist with this. The legislation sets out a number of reliefs and exemptions that can help to mitigate the liability. There are a variety of ways and the traditional ones are:
- Lifetime giving to reduce the Estate on your eventual death. Many gifts can be made without incurring any IHT consequences providing that you survive the gift by 7 years.
- For married couples making use of the spouse exemption, to prevent any IHT being payable on death of the first member of married couple to die.
- Taking out life assurance to provide funds on death to pay or help towards paying the IHT liability.
- Investing in various financial products that provide a form of investment but also seek to secure an IHT benefit. These include Discounted Gift Trusts, Loan Trusts and flexible Reversionary Trusts Lifetime giving to reduce the Estate on your eventual death. Many gifts can be made without incurring any IHT consequences providing that you survive the gift by 7 years.
- Considering the use of Deeds of Variation and other methods to reduce and IHT bill even after a person has died.
It’s worth remembering that individuals who are domiciled in the UK are subject to UK IHT on their worldwide assets. It is UK domicile rather than residence that triggers UK IHT. Domicile is more a concept of the country your regard as your home and is not necessarily the country you live in. There are also rules that deem you to be domiciled in the UK based on your pattern of residence.
For the peace of mind that efficient estate planning brings you need to ensure you engage an experienced, professional and impartial expert. Contact us now and take the first step in ensuring you leave your loved ones the legacy you worked hard for.
Tough New Tactics from HRMC
Getting people to pay HMRC the money they owe has always proved to be tricky. In 2016 it spent £24m on private sector debt collectors but in 2017 the figure soared to £39m. HMRC now has a new, more aggressive tool at its disposal, known as an Attachment of Earnings Order. These are being used alongside the feared Accelerated Payment Notices (APNs).
APNs are issued to people that HMRC believe owe them money. They are an upfront demand for immediate payment without the need to actually prove through the courts that the money is owed. Reliable data sources illustrate that use of APNs has more than quadrupled since January 2017.
It’s clear that the tax office isn’t troubled by making individuals bankrupt or forcing companies to cease trading in order to get hold of disputed funds. APNs have given HMRC the power to create an environment best described as tax now, ask questions later. Taxpayers are routinely remortgaging their homes or selling all their assets to pay these tax bills that often HMRC has not proved in court.
An Attachment of Earnings is a new method that HMRC will be using to retrieve money. It is designed to retrieve unpaid maintenance payments, county court judgements, or benefit overpayments. Both the individual concerned and their employer will receive a document from the courts, detailing what is owed and how much the employer will need to deduct from the salary each month in order to repay that money.
The Court will assess the individuals financial situation to deduce what they need to live on (this is referred to as the protected earnings rate) and then deduct the owed money from whatever is left. Data obtained by a national accountancy firm reveals that 428 people had money ‘recovered’ directly from their earnings by the taxman in 2017/18.
This new ploy ensures that HMRC gets the money it is owed conveniently and without the hassle of repossessing the debtors goods and selling them through auctions. This is always a lengthy process and sees those goods sold for far less than they are really worth. The Attachment of Earnings has the additional advantage of being completely non confrontational as there is no interaction with the debtors. It’s a tried and tested method that the Student Loan Company has been using for some time, collecting about 9% of graduates earnings every month, provided their earnings remain above a specific threshold.
Despite the ongoing disputes about unpaid tax whether from reluctant individuals or expert evaders that are giant multinational companies, HMRC have published an analysis of income tax paid in the UK by salary band, region and gender. In total 2016-17 saw £174 billion paid in income tax, which is the latest year for which figures are available. Of that amount, almost a third of it (£52.6bn) was paid by the 381,000 taxpayers who earn more than £150,000 per year. The tax paid by those overwhelming male individuals was more than all the income tax paid by the first 20 million taxpayers.
Unsurprisingly, London has 4.2m income tax payers but just the 87,000 earning over £200,000 paid nearly half of the £43.8billion that was raised. It is awkward to admit it, but if we really do lose all these high earners to Brexit, the hit to the Treasury will be significant. After all, these bankers, lawyers and accountants paid more income tax in 2016-17 that the entire sum raised from every taxpayer in Scotland and Wales combined.
Thinking about your next tax bill? Tax planning advice should only be taken from a professional experienced and impartial advisor. Call us now for the peace of mind that efficient and lawful tax planning brings.
Why Are Death Bed Marriages Fashionable?
As drastic as it sounds, statistics show that more cohabiting couples are deciding to marry when one partner is literally on their deathbed. Evidence from the Home Office and the Passport Office shows a significant rise in the number of urgent marriages, often from people in heath service providers. In fact there was an 11% increase in the number of urgent applications for a Registrar General’s Licence to get married or enter a civil partnership. The marriage can then take place in any location, 24 hours a day.
This is of course generally motivated by the curse of Inheritance Tax. To ensure the surviving partner avoids a potentially life altering inheritance tax bill, a last minute marriage albeit on a partners deathbed, ensures they have a greater level of future financial support.
A very high profile example of this was comedian Ken Dodd, who died 2 days after marrying his partner of 40 years on his deathbed. The estate of Mr Dodd was apparently around £7.2 million and the reported potential tax bill if he had not married before his death would have been £2.6m. This hastily arranged marriage meant the estate was exempt from the tax and everything passed to his surviving spouse.
The other advantage that is largely overlooked, is that the surviving spouse inherits at the probate value. This means when a major asset is sold the Capital Gains Tax (CGT) will only apply on the increase of value from when the person actually died.
It is interesting that death bed marriages can bring about a new set of disputes. Typically this scenario involves adult children (perhaps from a different marriage) who are dissatisfied with their own lack of inheritance from their parent. An example was a case wherein the husband was diagnosed with cancer, and made a Will leaving everything to his partner of 32 years. He also married his partner a few days before he died. After his death his three daughters brought a legal challenge to the Will claiming that he was unable to understand the meaning of the Will and that he had been unduly influenced by his partner. The daughters argued about their fathers’ lack of mental capacity at the time the Will was written, but eventually a solicitor provided evidence that the deceased had fully understood what was happening. The Court accepted the evidence and the sisters had to withdraw their challenge.
Of course if there is no Will written and there are surviving children of the deceased, then the spouse or civil partner will inherit the first £250,000 and all the personal possessions, but the remainder is shared 50% to the spouse/civil partner and the remaining 50% shared between the children. A death bed marriage can certainly clarify a situation and ensure a partner is duly protected after someone dies. However, a watertight Will is essential, in order to ensure all parties about clear about the deceased intentions.
It is really important that all couples should consider taking tax advice. Many unmarried couples are under the misapprehension that the ‘common law wife or husband’ concept will provide them with the same benefits as a married couple. Unfortunately many only discover on the passing on of their long term partner that there is no automatic right to inherit. The tax advantages suddenly become apparent but sadly it is then too late.
Getting the right kind of advice is crucial. To obtain impartial, professional advice from an experienced professional contact us now, for the peace of mind that sound financial planning brings.
HMRC Investigations into Inheritance Tax up by 5%
In 2015-16 24% of all taxable estates were investigated by HMRC. With rapidly increasing prices in the property market, the amount of IHT potential is very significant. Figures just released show that HMRC made 5,400 estate investigations last year. This is a year on year increase of 5%. Challenging the value of estates and investigating IHT figures in tax returns is a lucrative method for HMRC of reaping extra tax.
Interestingly the House of Lord’s Sub Committee for the Finance Bill 2018 has recently revealed that they want to investigate the amount of power HMRC currently possesses, so statistics such as these are being increasing scrutinised.
The Report detailed that the area HMRC is querying in greatest detail is the valuation of residential property that is passed onto heirs. HMRC may argue that much higher value be attributed to land which has the potential for development or to properties that have potential for refurbishment.
If an HMRC investigation concludes that IHT has been underpaid, the estate may have to pay all the tax that is owed plus a hefty penalty. This could even be 100% of the tax at stake in the estate.
Areas of particular interest to HMRC in relation to IHT include the validity of claims for business or agricultural reliefs, omitted assets and whether submitted figures accurately reflect the current market value.
Currently, when assets of an estate are in excess of £325,000 IHT is payable. As of June 2018, 24,500 estates are now liable, compared with 23,200 June 2017. This chiefly reflects the increase in average house prices in the UK.
Property prices have soared particularly in the South East. The average property in London five years ago cost £324,518 whilst elsewhere in the country the average was £172,655. This year however the London average is £476,000 and the rest of the UK £245,076. Unfortunately HMRC have chosen to leave IHT frozen at £325,000. This goes some way to explaining why there has been an increase in investigations.
Of course there is a huge temptation to undervalue residential property to save IHT as it is likely that property is the biggest figure on a tax return. The increased scrutiny and rise in investigations means that HMRC could fine more beneficiaries and estates who may not necessarily be cash rich. These fines are life changing amounts of money in some cases.
The crux of the investigation is that HMRC may deem that there has been a lack of care in carrying out property valuations. Given the power they have to impose fines, taking professional advice around IHT is absolutely critical.
By choosing a professional, experienced and impartial expert to guide you through the minefield of IHT you and your loved ones are guaranteed the peace of mind that financial planning brings. Don’t put it off. Contact us now,
A Sea Change for Landlords?
The Government is determined to build a housing market fit for the future. It aims to make the private rental market fairer and more transparent for tenants. In doing so, it will reduce the number of private landlords in the UK by making it less lucrative. Landlords across the country are now resigned to the fact that due to more new legislation their profits will be reduced. A stamp duty surcharge was introduced 2 years ago, and the 10% wear and tear allowance has been discontinued. Landlords can now claim only actual costs spent on repairs, rather than a blanket 10% reduction for wear and tear.
The latest attempt by the government has been to phase out tax relief on mortgage interest. Higher taxation is forcing many landlords to rethink their strategy, and in some cases to sell up. The gradual loss of tax relief from now until 2020 will hit higher rate and additional rate taxpayers. Indeed the loss in tax relief is also likely to push around 450,000 lower rate tax payers into a high band, according to the National Landlords Association.
Until April 2017, Landlords could deduct all their mortgage interest payments before calculating their tax bill, meaning they would be taxed purely on their profits rather than their overall turnover. With the majority of landlords utilising interest only mortgages, this meant the savings on offer were potentially significant.
However mortgage interest tax relief changes will be phased in soon and Landlords 2017-18 tax returns will be the first to fall under new government regulations. Originally announced in the 2015 Budget, this means the amount of mortgage interest landlords can offset against their tax bill will be reduced.
This figure is set to drop each tax year until it is fully replaced by a tax credit for mortgage interest in 2020-21. Investors could see thousands of pounds of potential profit wiped out. When tax returns are filed for the 2017/18 tax year (due January 2019) they will only be able to claim tax relief on 75% of their mortgage interest. They will get a tax credit on the rest of their mortgage interest payments. The following year, the relief will only be available on half of their interest and they will get 20% credit on the rest.
Some are calling this latest move from the government the end of Buy to Let for all but the richest. The number of new Buy to Let borrowers plummeted from 29,100 in March 2016 to around 4,000 the following month when the stamp duty surcharge was introduced. According to the Council of Mortgage Lenders it has struggled to pick up substantially since.
New rules are also on the way to stop landlords and property owners pocketing tax-free cash on holiday let income. Rent-a-room relief was aimed at helping home owners let their space rooms in a bid to reduce the housing crisis. Instead, many are using this as an opportunity to rent out their homes to tourists while they moved out and claimed up to £7,500 a year in tax free income. In an attempt to stop home owners from profiting from websites like Air BnB, the Government has stepped in with new legislation.
It will be introducing a new “shared occupancy clause” for rent a room relief, which will require the individual to be resident in the property and physically present for at least some part of the letting period. Doing so will return the relief to its original purpose of incentivising the letting of spare rooms.
For example a home owner letting their main residence during the Wimbledon tennis tournament to a visiting player whilst they go on holiday for the whole rental period is not eligible for rent a room relief. This is because there is no shared occupancy so it is taxable rental income and must be declared. However a landlord renting a room to a student for an entire term who goes on holiday for a week during that period is qualified for rent a room relief as occupancy is shared for part of the rental.
A final concern for landlords is the new Government bill to ban letting fees across England. Unexpected letting fees and high deposits can cause a substantial affordability problem for tenants and are often not clearly explained. This leaves many residents unaware of the true costs of renting a property.
A recently introduced bill will bring an end to costly letting fees and save tenants around £240m annually, according to government figures. The Bill will also give tenants greater assurances that the deposit that they pay at the start of the tenancy cannot exceed 6 weeks’ rent.
The Tenant Fees Bill will stop letting agents from exploiting their position as intermediaries between landlords and tenants and prevent unfair practices such as double charging for the same service. It will also help to increase competition between agents and landlords, which could drive lower costs overall and a higher quality of service for tenants.
The Tenant Fees Bill builds on the government’s work this year to protect tenants and landlords through the introduction of new rogue landlord database, banning orders for rogue landlords and property agents as well as new code of practice to regulate the letting and managing agents sector.
For all landlords who already abide by the current legislation and who treat their tenants fairly the changes will unfortunately only be visible in their year end profits.
For all landlords, tax and financial planning and the peace of mind that it brings is paramount. Contact us now for professional impartial expert advice.
What are the Tax Implications of a Civil Partnership?
Rebecca Steinfeld and Charles Keidan are celebrating their recent win in the Supreme Court. By a unanimous vote, the 5 judges ruled that the Government’s refusal to allow opposite sex couple couples to have civil partners was ‘incompatible’ with human rights law.
Everyone agrees that this is discrimination, but the Government says it’s acceptable to treat different groups of people in different ways while they make up their minds, over a number of years. If this case can establish that a “wait and see” policy is a breach of rights, it could help lots of other people facing discrimination to challenge unfair delays by the Government.
So what’s all the fuss about? A civil partnership ceremony does not require vows to be exchanged and civil partnership certificates include the names of both parents of the parties, not only the fathers of the parties. There is no mention of consummation of a civil partnership. The dissolution of a civil partnership is also not the same as a divorce in that civil partners cannot rely on adultery as a factor for the irretrievable breakdown of the relationship.
In this remarkable case, Rebecca and Charles wanted to cement their commitment to each other and wanted to strengthen the security of their family unit. They wanted to do it in a way which reflected who they are, how they see their relationship and also their roles as parents. They wanted, in their words, a partnership of equals, without the negative connotations of marriage.
Since the landmark legal victory, the idea that a civil partnership could be available to heterosexual clients, as well as same sex couples is looking likely. The case has proved to be of real significance to family and human rights law practitioners.
Currently there are over 3 million cohabitees in the UK with virtually no legal protection. The opportunity that they could possibly be able to formalise their relationship with a civil partnership will automatically provide the same protections that marriage does. Family law specialists will be keen to see people being removed from a legally problematic area. Providing a way for couples to commit in a formal and legal way has a drastic impact on their long term financial situation. Significant tax savings can be made which cohabiting couples simply don’t qualify for.
People who live together are taxed separately and each person has their own personal allowance entitlement. However married couples can qualify for the Married Couples Allowance which entitles them to an unused Personal Allowance of up to £1,190 to be transferred to their spouse or civil partner if they earn more.
Transfers of assets between cohabitees are subject to Capital Gains Tax. However, a spouse or civil partner doesn’t have to pay CGT on the transfer of assets between them because they are able to claim spouse exemption, provided that they are living together.
The most significant tax saving is likely to be Inheritance Tax. Assets left by one spouse or civil partner to their surviving partner or spouse are not subject to Inheritance Tax, because spousal exemption can be claimed. There is no limit to this exemption where both spouses are domiciled in the UK, although there are limits if one member of the couple is not domiciled in the UK. Cohabiting unmarried couples or those not in a civil partnership on the other hand, have to pay Inheritance Tax on everything over the Nil Rate Band (£325,000) passing to their cohabitee. Married couples and civil partners can transfer their unused allowance to be used on the second death, as well as transferring the new Residence Nil Rate Band.
In a situation of Intestacy, a married couple or civil partner will automatically inherit from their spouse or partners estate, although this will be limited if the deceased has children. A cohabitee will not automatically inherit, unless the property is jointly owned.
Surprisingly there are some negative considerations to marrying or entering into a civil partnership. For example a married couple or civil partner can only nominate one main residence for principal private residence tax exemption if sold. Cohabitees each owning a property would not have to do this.
Charles and Rebecca have achieved their aim of receiving a declaration that the Civil Partnership Act is not compatible with sections of the European Convention on Human Rights. It is now up to Parliament to act upon this declaration and take action to rectify the situation.
If you are a cohabitee unsure of your personal financial situation now is the time to obtain professional impartial advice from an experienced financial planner. Contact us now https://www.bluebond.co.uk/directions/.