GIVING AND INHERITANCE TAX 2021/22

TODAY’S BLOG

GIVING AND INHERITANCE TAX

Part of your tax year end planning may involve making some gifts that help reduce the value of your estate with the knock-on effect of reducing inheritance tax (hopefully a long time in the future though… right?!).

Anyway, the uncertainty that Capital Gains Tax faced last year was mirrored by IHT (inheritance tax). That too had been subject to a review by the OTS (Office of Tax Simplification … yes it does sound like something from a Peter Sellers sketch) commissioned in January 2018, which had seemingly got lost in the Chancellor’s in-tray. Thankfully, after nearly four years, the end of November 2021 saw a statement confirming that there would be only one administrative change to IHT (first announced in March 2021), easing the paperwork burden for many executors. IHT year end planning is, thus, also business as usual, meaning that you should consider using the three main IHT annual exemptions:

THE ANNUAL EXEMPTION

Each tax year you can give away £3,000 free of IHT. If you did not use all the exemption in 2020/21, you can carry forward the unused element to this year (and no further), but it can only be used after you have used the current tax year’s exemption. For example, if you made no gifts in 2020/21, and you gift £4,000 in 2021/22, you will be treated as having used your full 2021/22 exemption and £1,000 from the previous tax year.

THE SMALL GIFTS EXEMPTION

You can give up to £250 outright per tax year free of IHT to as many people as you wish, so long as they do not receive any part of the £3,000 exemption.

THE NORMAL EXPENDITURE EXEMPTION

The normal expenditure exemption is potentially the most valuable of the yearly IHT exemptions and one which the OTS wanted to replace. Under the exemption, any gift – regardless of size – escapes IHT provided that:

  • you make it regularly;
  • it is made from your income (including ISA income, but excluding investment bond and other capital withdrawals); and
  • the sum gifted does not reduce your standard of living.

This last exemption is not easy to prove. It would help your Executors and therefore your beneficiaries if you follow our guidance and requests to update your income and spending each year. Honestly, we don’t do these things to simply get you to complete forms – there is a logic and it’s all for your benefit (we do appreciate that it is a pain!). You can do this using our spending plan or simply update the information on the portal. If I have worked on your plan recently, the figures there also need to be checked. Basically we need to evidence your spending – or rather your executors will.

ANNUAL IHT GIVING

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Email – info@solomonsifa.co.uk 
Call – 020 8542 8084

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Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk    Call – 020 8542 8084

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Take Survey

GIVING AND INHERITANCE TAX 2021/222022-03-07T14:25:28+00:00

TAX YEAR END 2020/21 PLANNING

TODAY’S BLOG

TAX YEAR END 2020/21 PLANNING – OVERVIEW

It probably goes without saying, but the tax year end is something that we are always mindful of. There has already been a lot of coverage in the media about what the Chancellor might do. We get to find out on 3rd March 2021. The reality is that due to the pandemic and enormous spending by the Government (and some very expensive contracts awarded to Conservative party donors), there is a obvious pressure to refill the public purse.

Last year, Autumn arrived without an Autumn Budget. To be fair, the Chancellor, Rishi Sunak, had already presented one 2020 Budget – in March – and the pandemic made forecasting for 2021/22 all but impossible. The result was that, for the second year running, the Budget was deferred to the Spring. Whether Mr Sunak’s reading of the economic runes will prove any easier on 3 March 2021 is a moot point.

It is equally difficult to assess what the Chancellor might do in his second Budget. On the one hand, he will be ending the current financial year with a record-breaking government deficit of around £400bn. On the other hand, he will be wary of trying to fill the large black hole with the near inevitable tax increases until an economic recovery is well under way. It could be one of those Budgets where the bad news is announced but has a deferred start date or is, at least initially, targeted at the more affluent.

Every year there is speculation about tax relief reducing or ending. Every year. Every year I largely ignore the speculation. However this year, to be blunt, the changes to taxes are more likely than any in the last 3 decades. There are some things that we can consider together. In truth as the Budget is 3rd March, time is against us. Whilst normally we expect Budget announcements to forewarn of rules for the following April, George Osborne was one of the few Chancellors to initiate immediate pension changes. You have been warned. As the tax year end is on the Easter Bank Holiday, the reality is that the last week of March is really your deadline. If you make allowance for slow post, many working from home, the normal efficiency of a tax year end is arguably “not as normal”… so the sooner you take action on anything important the better.

GET TUIT TAX YEAR END PLANNING SOLOMONS IFA

PENSIONS

A change in the personal tax relief on pension contributions from marginal income tax rates to a single flat rate is a regular pre-Budget rumour. That could mean a cut from a maximum rate of relief of 45% (46% in Scotland) to perhaps a flat rate of 20%-25%. Higher and additional rate taxpayers would thus lose out.

Depending upon where the Treasury pitched the flat rate, it could save billions while making most pension contributors – basic rate taxpayers – better off or at worst unaffected. Even without the revenue benefit, the result has a clear appeal to a government that regularly talks of ‘levelling up’.

Last year Mr Sunak increased the cost of pension tax relief by adding £90,000 to the two income thresholds that govern the tapering of the annual allowance. That could mean in 2020/21 you have an opportunity to make a higher contribution than in previous tax years. In any case, it is worth checking whether you have scope to take advantage of unused annual allowances from the past three years (back to 2017/18) at current rates of tax relief.

ISAs – INDIVIDUAL SAVINGS ACCOUNTS

Plans to put a cap on ISAs were reportedly considered by the Treasury in 2013, an idea that was recently revised by the Resolution Foundation in a paper examining ways to repair public finances. As with reforming pension contribution relief, the main impact would be on those who pay tax at more than the basic rate. For most basic rate taxpayers, the combined effect of the personal savings allowance, dividend allowance and CGT annual exemption is to render ISAs of little relevance.

If you pay tax at more than the basic rate, all types of ISA offer a quartet of tax benefits:

  • Interest earned on cash or fixed interest securities is free of UK income tax.
  • Dividends are also free of UK income tax.
  • Capital gains are free of UK capital gains tax (CGT).
  • ISA income and gains do not have to be reported on your tax return.

In addition, if you are eligible, the Lifetime ISA (which the Resolution Foundation said should be scrapped) gives a 25% government top-up on contributions.  The overall total contribution limit for ISAs has been frozen since April 2017 at £20,000 (of which the Lifetime ISA ceiling is £4,000). However, the limit for Junior ISAs was more than doubled to £9,000 in last year’s Budget.

CAPITAL GAINS TAX

In July 2020,Rishi Sunak asked the Office of Tax Simplification (OTS) to review Capital Gains Tax (CGT). The request came out of the blue but arrived at a time when increasing the CGT tax take was being discussed by several think tanks. It had also been proposed in the 2019 Election manifestos of both Labour and the Liberal Democrats. Mr Sunak would not be the first Chancellor to ‘borrow’ money-raising ideas from the Opposition.

The OTS published the first of what will be two reports on CGT reform in November. Its suggestions included:

  • ‘More closely aligning Capital Gains Tax rates with Income Tax rates’, which could mean more than a doubling of the current tax rates in some instances.
  • Reducing the level of the annual exemption from the current £12,300 to an ‘administrative de minimis’ of between £2,000 and £4,000.
  • Removing the rule which gives a capital gains tax uplift on death. As a result, if you inherited an asset its base value for CGT purposes would be that of the deceased, not the value at the date of death.

That trio of measures, which could be introduced with immediate effect on 3 March, is a good reason to review the unrealised gains in your investments as soon as possible. Although it is no longer possible to sell holdings one day and buy them back the next to crystallise capital gains, there are options which can achieve a similar effect, such as making the reinvestment via an ISA or a pension.

INHERITANCE TAX

A report on CGT is not the only OTS document on capital taxes occupying the Chancellor’s in tray. On taking over the job last February, he inherited a pair of reports on Inheritance Tax (IHT) which had been commissioned by Philip Hammond. These had been expected to feed through into last year’s Spring Budget. They may still do so in the forthcoming Budget, possibly alongside – and complimentary to – CGT reforms. The consequence could be a radical restructuring of capital taxation.

Ahead you should consider using the three main IHT annual exemptions:

1.    The Annual Exemption Each tax year you can give away £3,000 free of IHT. If you do not use all of the exemption in one year, you can carry forward the unused element, but only to the following tax year, when it can only be used after that year’s exemption has been exhausted.

2.    The Small Gifts Exemption You can give up to £250 outright per tax year free of IHT to as many people as you wish, so long as they do not receive any part of the £3,000 exemption.

3.    The Normal Expenditure Exemption  The normal expenditure exemption is potentially the most valuable of the yearly IHT exemptions and one most likely to be reformed. Currently, any gift is exempt from IHT provided that:

a.     you make it regularly;

b.    it is made out of income (including ISA income); and

c.    it does not reduce your standard of living.

If you have the surplus capital available, you should also think about making large lifetime gifts. This could include gifting investments, thereby also using your CGT annual exemption. One of the OTS reform suggestions was the abolition of the normal expenditure rule and the introduction of an annual limit of IHT-free lifetime gifts.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk 
Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

Take Survey

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk    Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

Take Survey

TAX YEAR END 2020/21 PLANNING2021-02-01T12:02:09+00:00

THE INVENTION CONVENTION OF CHRISTMAS

THE INVENTION CONVENTION OF CHRISTMAS

Christmas is nearly here and despite all of the preparation and expense, most of us will probably forget most of it, save a few carefully selected memories (good or bad). For some I imagine it will a story of how their Christmas was delayed or ruined by drones at Gatwick, for others it will be a particular gift, meeting with a friend or family member, or perhaps an event. Our memory, as we all know, is wonderfully selective.

Any good financial plan has to begin with understanding where money has been going. This is the account of “now” and can be a fairly depressing experience. Most people spend much more than they realise on things that in hindsight seem rather unnecessary. One of the categories of spending we ask clients to assess is their giving, both in terms of charitable giving (for tax planning) and money spent on gifts. There is invariably a link between the size of your circle of friends and family and how much this is.

Christmas – past, present and future…

I do not intend to turn you into some Dickensian character, like Mr Scrooge. However, as you enjoy Christmas this year, be mindful of how much the experience of celebrating this day has cost. The “day” of course tends to be rather more than 24 hours and likely begins when you buy (or rent) your tree. I enjoy the theatre and seeing friends and family. We tend to have a family trip to a show (perhaps more than one). In fact, there is a lot of “stuff” that we do that is an extra expense, precisely because… well… it’s Christmas.

The warm glow of honesty

All I ask is that you reflect on how much you really spend. This is not a value judgement, simply a call to be honest with your finances. If we are unable to accurately account for a day in the year, ok perhaps the “season” then we may well be fudging other numbers. It is tempting to say this is unique, but behaviours tend to be patterns. We all have limited resources and when earning money is no longer happening, for whatever reason, the harsh reality of living within budget or running out of money is the cold shower that will wake us from the warm haze of denial.

If we really want a good financial plan, we need to begin with honesty about where, when and how we spend money.

We know that many of the things we do today to celebrate Christmas have less to do with the birth of Jesus. The movie “The Man Who Invented Christmas” may help identify how much our Christmas celebrations have altered. Here is the trailer. I wish you a very happy Christmas.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

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THE INVENTION CONVENTION OF CHRISTMAS2019-08-19T15:38:26+01:00
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