Wealth Management

Autumn Budget 2021 – actions to consider

On Wednesday 27 October, the Chancellor of the Exchequer, Rishi Sunak delivered the 2021 Autumn Budget and his first five year spending review, dubbed as delivering a stronger economy for the British people.

8th November 2021


Setting the scene

The common consensus at the beginning of the year was that in order to pay for the borrowing created by the pandemic, there will have to be tax rises at some point. Whilst there was an acknowledgement of the scale of borrowing that had been necessary to pay for the pandemic support Plan A at the moment seems to be reliant on growing the economy in order to increase both personal and business taxes to raise revenue to repay the country’s debt.

For now, some of the widely anticipated changes to Capital Gains Tax, Inheritance Tax and possibly Pension tax relief appear to be off the agenda. Of course, if plan A appears not to be working in the coming years or indeed once we are through the worst of the pandemic, tax changes may be introduced to increase the pace of repayment. No changes in this budget at least give us time to plan although we still think that personal taxes could go up in the years to come.


Actions to consider

In light of the recent Budget, we look briefly at the actions you can take now to maximise your allowances or mitigate the impact of some of the changes we expect to see in the next few years. The list is not exhaustive, and we would urge you take advice before acting on any of the points raised.


1. Income taxes

Individuals should aim to utilise all allowances and it may be advantageous for couples to look at the ownership of assets and therefore income to ensure both personal allowances, starting/basic rate tax bands and the dividend and personal savings allowances are used to the full.

For those with income exceeding £100,000, and especially where income falls between £100,000 and £125,140 which is caught under an effective 60% rate of tax, personal pension contributions and charitable Gift Aid donations can remain an extremely effective way of retaining the entitlement to the personal allowance. Effective tax relief at 60% in the current climate is very generous.

Those with children receiving child benefit and income falling between £50,000 and £60,000, can be liable for an even higher effective rate of tax, as a tax charge is applied to reclaim child benefit of 1% of the total for every £100 of income over £50,000. Again, personal pension contributions and charitable Gift Aid donations can remain an extremely effective way of retaining the entitlement to child benefit.


2. Capital Gains Tax (CGT)

With non-property gains taxed at half the equivalent Income Tax rate at present and rumours that rates may increase, this may be an area to consider if you hold assets that can easily be sold to realise a gain taxable at the current tax rates.

We detail later, the treatment of gains on gifting but it may be appropriate to sell some assets now either to crystallise gains in assets that have gone up in value or to ‘capture’ losses in assets that have fallen. Losses can then be offset against gains in the future to reduce tax paid.

Assets can also be transferred between spouses before sale to ensure that both can use their allowance.

Rebalancing portfolios and CGT

The rebalancing of Old Mill portfolios for ISA and Pension portfolios is undertaken automatically each year to keep the risk in the portfolio at a level that you can emotionally and financially tolerate and to capture the returns from the original asset allocation agreed.

In taxable General Investment Accounts (GIA’s), smaller portfolios can usually be rebalanced with any gains within the CGT annual allowance of £12,300 so there is no tax to pay. For larger accounts there is always a balance between keeping the portfolio in line with the risk that you want to take and not paying any unnecessary tax.

There is much speculation about the chance of a change in CGT in the future – either a reduction in the annual allowance or bringing the absolute level of the tax paid to a level commensurate with Income Tax – which will be a big rise from current levels of 10 or 20% (18 or 28% for residential property gains).

Historically it has been the case that gains are wiped out when a client dies. It has been proposed that this relationship may end and by not managing CGT there could be large tax bills (at potentially higher rates of tax) for the beneficiaries of your estate in the future.

So, for the reasons given it could be timely to discuss with your financial planner about the CGT position on your portfolio and if you have avoided paying CGT in the past, to bring the portfolio up to date and paying some tax now at historically low rates may prove to be beneficial in the future.


3. Investment allowances

Individual Savings Accounts

  • The Individual Savings Account (ISA) annual subscription limit for 2022-23 will remain unchanged at £20,000
  • The Junior ISA and Child Trust Fund annual subscription limit for 2022-23 will also remain unchanged at £9,000
  • The Lifetime ISA (LISA) limits are unchanged, allowing those aged between 18 and 39 to save up to £4,000 a year towards their first home or retirement, and gives them a 25% cash bonus of up to £1,000 a year on top.

Pensions

  • The Annual Allowance (the amount you can pay in) remains at £40,000, together with the ability to bring forward unused allowances from the previous three tax years
  • This is good news as it is possible to obtain up to 60% income tax relief on your pension contributions (where your income subject to tax relief is in the range £100,000 to £125,140), 45% relief (where your income subject to tax relief is over £150,000), 40% relief for higher rate taxpayers (where your income is over £50,270) and 20% relief for basic rate taxpayers
  • The Pensions Lifetime Allowance (LTA) is to be maintained at its current level of £1,073,100 until April 2026. This is likely to have an impact as inflation starts to take off again.

If the standard LTA had continued to be uplifted with inflation it would be around £1.2 million by April 2026. It will now be around £125,000 less than this which means individuals approaching £1 million now without any specific LTA protection would miss out on up to £31,250 of extra tax-free cash. If the value of all of your pension benefits, across all schemes exceeds the LTA, any excess attracts a tax charge of 55% if it is withdrawn as a cash lump sum, or if it is withdrawn as an income (for instance from an annuity or a drawdown arrangement) the tax charge falls to 25% plus there will also be an Income Tax charge on top.

  • Some larger funds may have a protected higher LTA of £1.25 million, £1.5 million or £1.8 million in place.

With tax rises potentially on the horizon, we would strongly recommend you shelter savings and investments in tax efficient products such as ISAs and Pensions. With plenty of time left before the new tax year, an individual who has not already taken out an ISA could shelter up to £40,000 in the next six months and a couple up to £80,000.

As discussed earlier ensure you have used, as far as possible, your annual ISA allowance and, if applicable, topped up your pension.

Both these allowances are very generous and there is a risk they could be reduced in the future.


4. Gifting

We have spoken with a number of clients recently who wish to help family who may be struggling financially as a result of the pandemic or are worried about the implications of future Inheritance Tax (IHT) changes. There are a number of areas to consider and it is important that advice is taken. While the primary reason for gifting will often not be for tax reasons, it is nevertheless possible to structure gifts in a tax efficient way.

Helping your family

Our cash flow planning tool can help identify where you may have excess funds over and above those needed to support your long-term financial plans which could be available to provide financial help to family and friends without undermining your own financial security. Such gifts can be particularly tax efficient if organised properly.

Your financial planner can discuss with you some of the issues around how best to structure such support as there can be pitfalls if it is not organised properly or safeguards not put in place.

Buying property

Many of our clients help younger family members by gifting some, or all, of the deposit needed for their first property. Recent figures from Legal and General ‘The Bank of Mum and Dad’ report (August 2020) suggested that over half of first-time buyers would not be able to go ahead without the help of the Bank of Mum and Dad. With the Government mortgage guarantee scheme having started in April this year, this may be an opportune time to help younger family members with their minimum 5% deposits so they can take advantage and get onto the property ladder.

The Government mortgage guarantee scheme provides a guarantee to lenders across the UK who offer mortgages to individuals with a deposit of just 5% (for homes with value up to £600K). These low deposit mortgages will help to make home ownership a more achievable goal for first time buyers. The scheme is available for new mortgages up to 31 December 2022, meaning that there is plenty of time to make the most of the scheme. Additionally, it allows individuals to fix their initial mortgage for at least five years.

Gifts of assets and managing tax

With some investments being lower in value than they would otherwise have been due to the impact of the COVID-19 crisis, there may be an opportunity to gift some of these investments to family now where the value of the gift for IHT purposes is lower.

Any tax implications on the transfer of the investment are likely to be lower and quite possibly by taking advantage of available Capital Gains Tax (CGT) allowances and structuring the gift properly there will be no tax implications.

From an IHT point of view, this has the advantage of ensuring any recovery in the value of the investment funds will be immediately free of IHT.

If you wait for values to recover however, the increase in value will still be in your estate and what is more if you decide to gift the investment, the potential gain for CGT purposes will be higher. If you can do so, it may be better to transfer the investment now.

Transferring assets is a chargeable event for CGT purposes so if there is a gain you will be able to offset your Annual Allowance (currently £12,300 in 2021/22) and then pay 10% or 20% tax on gains (NB if the gift is of residential property the rates would be 18% or 28%) depending on your marginal rate of tax.

With much talk of CGT rates being aligned with Income Tax, this may see rates increase significantly to as high as 45% for additional rate taxpayers. By taking action now, it may be possible to crystalise gains at the current lower rates.

Gifts and Inheritance Tax (IHT)

With changes to IHT possible, here is a timely reminder of the key exemptions that are currently available and with the end of the tax year looming you may like to take advantage of.

Annual Gifts exemption – One of the main allowances available is the £3,000 annual exemption. This is the total amount that you can gift without the value being added to your estate. If you do not utilise this allowance it can be carried forward a year.

As a couple, that means you will usually be able to give away £6,000 and potentially £12,000 if you have not made a gift the year before.

Small gifts allowance – The small gifts allowance allows you to make as many gifts of up to £250 per person as you want, although it cannot include someone you have used another exemption on.

Gifts out of normal expenditure – A flexible way to make regular gifts out of normal income. These gifts are immediately out of your estate as long as you are able to maintain your standard of living without having to draw on additional capital. This is particularly useful if you have surplus income and can facilitate sizeable gifts over time that are immediately free of IHT. Your financial planner will be able to advise you on the level of regular gifts you are be able to make that should be eligible under this exemption.

It is worth bearing in mind that your executors will need to prove to HMRC that these gifts fulfil their criteria, so it is worth keeping a record of your available income/ cash flow each year.

Gifts in respect of marriage – If congratulations are in order, you are able to make wedding or civil ceremony gifts of between £1,000 and £5,000 depending on your relationship to the bride or groom.

A gift would need to be made before the wedding and the wedding does need to go ahead!

Larger gifts and Trusts – Larger gifts can be particularly beneficial from a tax point of view later in your life when the seven-year rule may become an issue. The seven years is the period of time you would need to survive in order for the gift to fall out of your estate and therefore not be liable to IHT. For larger gifts, generally meaning amounts over £325,000, it is possible for the value gifted over this amount to benefit from something called the taper relief. This reduces the tax payable on the gift on a sliding scale provided you survive at least three years.

In the case of larger gifts, if you are concerned with giving the funds outright, a Trust can be used. This can both protect the funds and also be used to hold funds until you are happy to distribute them at a later date. In the meantime, the seven years commences from the time that funds were placed in the Trust and not from when the funds were distributed.

There are a number of ways to structure gifts to both take account of tax and family considerations. If the money is needed before age 18, a trust structure is a tax efficient way to give money, while still giving you some control of how it is used.

Junior ISAs

When gifting, you could fund a Junior ISA (JISA) for someone under the age of 18, as once set up by a parent or guardian £9,000 (2021/22) can be invested each year. A Junior ISA can be a good option as it grows tax-free and they cannot dip into it until they reach 18 – but it is theirs to spend how they want to after that.

Tax efficient gifting using pensions and Lifetime ISA’s

A gift that costs you £2,880 can be worth £3,600 when made to a pension fund.

Pension contributions for non-taxpayers and particularly young children or grandchildren seems very generous – contributions can be made for a child up to £2,880 each year and attract £720 tax relief, yet someone who has taken income from their pension over the age of 55, or those earning over £312,000 can only pay £4,000 and receive tax relief.

Pension funds can provide a valuable benefit even for young children. Setting up a pension fund early may mean later in life when the child has lots of other financial responsibilities, they will need to direct less of their income to pensions as they may already have a sizeable pension pot thanks to those contributions paid when they were young. The reliefs currently available for young pension savers look overly generous hence why early action may be beneficial.

For older children who are working and higher rate taxpayers, gifting funds to make pension contributions can be very worthwhile tax wise. For each £1,000 gifted, this can secure tax relief worth £500.

While making gifts into an investment that cannot be accessed until retirement will not be for everyone, the fact that the recipient cannot immediately access the money may be desirable.

There are limits on the maximum amount that can be paid into pensions so you should take advice before making third party pension contributions.

A similar situation is possible with Lifetime ISA’s (LISA) which can be highly attractive to first time buyers as way to save for a house deposit with the benefit of tax relief.

Although the tax relief is applied slightly differently, as a gift would have to be made to the individual first who can then open and pay it into a LISA. A gift of £4,000, which is the maximum annual contribution, would have a bonus of 25% – £1,000 added.

No higher rate tax relief is available, but it is possible to access the capital to purchase a first property without the bonus being withdrawn. Other than that, it is not possible to access the capital until 60 without incurring a penalty.


If you would like to discuss your own situation, please contact your usual adviser, or alternatively click here…

If you would like to read Old Mill’s review of the Spending Review and Autumn Budget please click here