The Budget 2015 – A New Mad Max
So, the Budget is already ancient history, the political hoo-hah has been left to fester, tweak and develop into an election manifesto campaign. So what, if anything grabbed my attention?
Firstly, I have to admit that I was expecting there to be a little more of an electoral bribe. Whilst the Chancellor certainly made much of the fact that he wasn’t going to (and thus seek to be understood as prudent or sensible) the truth is that, well… he didn’t really offer a bribe (unless its one I missed). Frankly with the national purse in the shape its in, I was rather glad, (though I remain open to the possibility of solving the problems differently).
That said, the first time buyer ISA does sound like a good idea. The detail needs further examination, but in essence there is 20% tax relief on the annual ISA allowance for people that are 18 or over and don’t (and have never) own a home. £3,000 of the £15,000 ISA allowance will be paid by the Government. Whilst everyone that qualifies will benefit, in practice, this will be a very good way of saving if you qualify… if not you, perhaps your children… opening up further options for more wealthy parents.
Pensions and Politicians… taking the …point?
As for pensions, I have to admit that the utter folly of politicians in relation to pensions has shifted gear over the last 10 years. Whilst knowing that we all need to save more so that there is less reliance on the State system… perhaps even the prospect of a means-tested State pension (who knows?) they are determined to punish successful investing and saving.
Here in the UK we are now restricted on how much can be paid into a pension and how much the pension fund can be worth. Utter madness. Yes £1m is a lot of money, but are we also going to cap how much can be held in a bank account or the value of property? what about the value of a business? These are measures to appear a poorly informed crowd by a poorly informed media. I would immediately abolish the Lifetime Allowance and simply restrict how much tax relief is provided on payments to pensions. It doesn’t have to be more complex than that. However we have a new maximum pot size for your pension. To say that this complicates life further for anyone in a Defined Benefit (DB) pension such as the NHS, would be a masterful understatement. Just so that we are clear… the Lifetime Allowance has reduced from £1.8m to £1.25m already and the Budget has reduced this to £1m in 12 months time. Ok, there will be some form of protection, but if recent experience is to go by, this is about as useful as pushing someone out of an aeroplane with an umbrella instead of a parachute. As for those that put a commercial property in their pension pot… good luck with that! The Annual allowance is now £40,000 a year as the maximum value of contributions to pensions, which may as well be written in algebra when attempting to calculate this for DB members.
Final note: our free APP is updated with all the changes announced for personal allowances, savings rates and so on.
Planning for the Tax Year End?
The tax year end is rapidly approaching and you don’t have long to use up various allowances that expire on 5th April 2015, so it really is time to take action now should you wish to do so. Despite the media and politicians doing their best to confuse everyone about tax, tax avoidance is actually perfectly legal and something that is encouraged. By way of example….
- NS&I Premium Bonds & Children’s Bonds
- ISAs – Annual Allowance
- Pensions – Annual Allowance, Lifetime Allowance, Carry Forward Allowance
- Capital Gains Tax Allowance
- Personal Allowance
- Nil Rate Band Allowance (inheritance tax planning)
- Giving Allowance (£3,000 per person)
- Enterprise Investment Schemes, Venture Capital Trusts, Small Enterprise Investment Schemes
- Business Property Relief
There are lots of ways to reduce tax, married couples have even more options. Tax evasion is illegal not tax avoidance. It is certainly true that some schemes are deliberately aimed to test the law on this, but nothing that any of our clients use or would even want to use. Hopefully by now you will have received the lates copy of Talking Money, let me know if you haven’t – we have run out of stock, but you can see an online copy here.
Money and Power
Perhaps my age is showing, but it is only day 6 of the new year and I am already fed up with the election campaign. I ought to be celebrating our democracy and the opportunity to hear reasoned arguments, however inevitably we seem stuck in a cycle of who will tax or cut most, the prospect of genuine change and improvement for all seems rather unlikely with the inevitable tension around money and power.
In a more reflective moment, I remind myself that this is not a dictatorship and we at least get to vote and I don’t really think we are at the mercy of a despot who has anger issues and a twitching finger poised over an end-all button. This isn’t the case for millions of “voters” around the world who are marched off to vote for egomaniacs. This in mind, a relatively new musical to arrive via New York at the National Theatre “Here Lies Love” is based on a 2010 concept album of the same name, which gives musicals a nightclub injection. If you think that a nightclub is exclusively for the “young” perhaps think agains as, the creators Fatboy Slim (Norman Cook) is 51 and David Byrne is 62. The production has the flavour of community theatre, with the execution of high-end night club. A moving stage and audience, all combine to great effect and an entertaining, immersive experience.
This is the story of Imelda Marcos, her rise and fall from power. Byrne and Cook wanted to explore what makes powerful people behave the way they do. I’m not so sure that this was explored terribly well, whilst displaying a delusional, drugged up Imelda, she isn’t portrayed that badly – a little bit too vanilla in Manilla – little about her excessive flamboyancy and penchant for hundreds of shoes. The story is chronological, revealing the fragility of her marriage, her inability to cope with her rags to riches story and a familar narcissism of Heads of State that seem to believe that they “give their all to their people”.
The Price of Democracy
There was little in the musical that gave me reason to believe such behaviour was understood or how to spot it in others and take precautionary action…so no tips for our elections. The world seems to have done little during the period of martial law and assassination of the opposition including the shooting of Benigno Aquino on the steps of his ill-advised return flight to Manilla on 21 August 1983 (age 50) which you may remember. In the Philippines, the Marcos regime was eventually cast out by a peaceful protest, following a corrupt election (February 1986) against Aquino’s widow following which the public simply decided enough was enough. Marcos and his family took US advice and support then fled to Hawaii along with 24 suitcases of gold bullion and jewellery. Sadly for Imelda this took precedent over her 2,700 pairs of shoes. It is estimated that Marcos stole over $10billion from the country, much was invested into various family related businesses and Swiss accounts. The Swiss have so far returned about $684 million. So for me, this musical, whilst being entertaining does little to understand how and why power corrupts so absolutely. Indeed one might argue that the catchy tunes, flashing lights distract from the real story… but then, perhaps that’s the point.
Tax, Votes, Spending and Debt
In the UK, despite our unpredictable and often disappointing weather we are undoubtedly in a very privileged position, some of the richest people on earth. We can easily forget our liberties and the many advantages we enjoy and should be unsurprised that others might wish to come here to create a future for their own families. Whilst we clearly need to exercise care in who we allow into Britain, we are all here largely by chance.
I’ve been reflecting on history and taxation and to be blunt, was surprised by my own naivety. As taxpayers, at least here in the UK, we get to vote (unless you pay tax and are under 18). This is perhaps the best example of “money talking” if you pay tax; you have an interest in how it is spent and why. One might build an argument for those that do not pay tax, should not have a vote (remember that there are various forms of taxation, not simply income tax – VAT, stamp duty, road tax, council tax and so on)… fairly hard to see how any adult in Britain would possibly be a non-taxpayer (unless they don’t live here).
Anyway, what I had forgotten or perhaps not appreciated was the involvement of suffragettes in the taxation system, who argued that taxation without representation (political) was unjust. Today it seems hard to imagine a counter-argument or why women would have been prevented from voting. Yet many women today are paid less than their male colleagues for doing precisely the same work. On occasion this is obvious, but sometimes it isn’t and frankly this is seriously out of order with where we ought to be by 2014.
May I ask you a question? When you initially read “those that do not pay tax should not have a vote” did you have a reaction to a fairly bold statement? Most people would think immediately of income tax and recall that not everyone pays income tax… many of the elderly, the infirm, unemployed and of course some parents looking after children. To deny these of the right to vote would be somewhat outrageous right? But most people pay tax, invariably through “indirect taxes” that we tend to forget about when we consider our actual net income. We are now in a period of confusion about tax avoidance, when terms are being quite deliberately muddled or misrepresented. Who really believes that the state should fund nothing? (or very little? or conversely everything?). There is a societal dynamic to taxation, yet our disconnection from community and engagement in politics tends to repress this social (not socialist) memory. Tax is good for us, but that does not mean that we should assume that paying less tax is “bad”. We are encouraged to save for our own futures by having some tax advantages (pensions and ISAs) or to encourage entrepreneurialism – which hopefully creates jobs and greater wealth. These are designed ultimately to reduce reliance upon the State.
However I am concerned by politicians that seem to think that reliance upon the State can be reduced before independence is even achieved. The new pension rules are undoubtedly liberating, but please remember that “once it’s gone it’s gone”. This isn’t a “bad” thing, it is simply the reality of living within our means. The main problem being that most people don’t and the reason they don’t is due to the cost of living and an inability to say “no”.
I am conscious that it is very easy for a financial planner with wealthy clients to say this. Surely just a bit of self-discipline is required. Just say no… which I believe, but am also aware of my own hypocrisy. I am just as inept in some aspects of self-discipline. The most obvious for me is my fondness for wine and good food (which sadly in middle age does not mix well with an Adonis physique). I also have the ability to spend money on things that I don’t really need, but would like. Again, there’s not much “wrong” with this, but when I use a credit card that I don’t repay straight away, I am really in denial about my own unhealthy habits – and perhaps delusional. However more significantly, is that the wealthier I become, the more readily I can spend and the more I forget what it was to have less. I am lucky. Yes I work hard, have taken “commercial risk” but lucky even so.
I don’t judge how my clients spend their money, merely help them account for it and create planned spending. It is a very worthwhile exercise, but invariably a “painful” one…. If I asked you to sit down now and account for your spending in the last year/quarter/month, I dare say I would meet with some resistance. I often wonder why, after all, it is little more than historic information that cannot be changed. Yet it often reveals information which we probably know but would rather not see. As a nation we are quick to point to politicians claiming expenses that we think unfair, or companies that “charge too much” or “make too much profit”; how much aid is “wasted” but where does this come from? It is simply envy? Shouldn’t we start with getting our own affairs in order first?
Look, I’m not trying to be “political”. I am merely attempting to reveal that simply saying “no” is only a partial answer. I have more questions than answers and I have already confessed to you my own hypocrisy. Despite this, (perhaps in spite of this) I do believe that as a nation we need to consider why we feel the need to overspend and how we handle our own money…of course when its other people’s money, we are even more detached from it (hence the problems within financial services)….where “bankers gamble with your money” (I am repeating a phrase I have heard many times, not necessarily an accurate one)…I do know that some of my clients are very good at running a budget and sticking to it, some get frustrated with those that don’t. However, we all have our failings and whilst I am not excusing parents (for example) for failing to say no and somewhat arm-twisted by commercials aimed at children, closely followed by adverts for loans, it is a modern-day pressure which not everyone has experienced in precisely the same way. I’m not sure that banning things is a mature approach to life, but I can see an argument for banning adverts for loans during children’s TV programming, which is why I support the #DebtTrap campaign that The Children’s Society are running (which I came across over the Bank holiday weekend.
If I might therefore make a suggestion or two. Firstly, that we start with ourselves, regain control (if it was lost) or at least proper knowledge of how we spend our money. If you would like an easy to use spreadsheet for this exercise, just email me for one. Secondly, have a proper personal spending plan and if this is exceeded be prepared to ask why this was… and not just dismiss the incident as “of little significance” you may find much can be learned from your own chequebook. Do let me know how you get on…. As a final request, do check out the Children’s Society Wall of Debt campaign.
Please note that I do not provide debt advice. Despite being a financial planner, this is not my area of expertise (negotiating with creditors). If you require debt advice or someone you know does, please visit the Money Advice Service website (paid for by financial planners). Oh.. and a film currently in production with a fairly stellar cast “Suffragette” is in production.
“A-List” you don’t want to be on
The Inland Revenue, these days known as HMRC, yesterday published its list of 1,172 “aggressive tax avoidance schemes” which are under investigation. These are the sort of schemes that the media has been providing significant coverage and delighting in the opportunity to have a pop at an “A-List” celebrity or two… or rather more. The list is a 2 page document of numbers, looking rather like a sequence from the film “The Matrix” which I asked my design team to parody to make the point. Like it?
Tax avoidance is perfectly legal, tax evasion is not. Tax avoidance includes everything from investing in an ISA, pension or using your annual capital gains allowance. It would also include moving savings into a lower or non-taxpayer’s name to avoid a higher rate of tax on an albeit puny amount of interest. These are of course “schemes” that are manufactured by the Chancellor and HM Treasury to satisfy number of aims. Firstly, to provide a tax-break for voters. Secondly to encourage saving and therefore reduce reliance on State support and finally to encourage trade, which is how we create jobs, raise taxes and pay our way. Most people with a modicum of intelligence will use tax avoidance schemes if they can.
Tax evasion is illegal, it always has been. Tax evasion is the deliberate and wilful, non-payment of owed taxes. This is effectively the running away to Rio with your millions out of the reach of HMRC. Society loses out and society is cheated and if the tax gap figures are to be believed this amounts to between £31-£35billion each year.
Aggressive tax avoidance schemes are a grey area, hence we are in this mess. To suggest that they sail close to the edge of the rules is fair. Some schemes deliberately creating or manufacturing losses, or moving money around offshore to avoid the UK tax system. As with most things, some of this is more obviously close to evasion than others. The motivation behind it all is to pay less tax, not necessarily to have a fantastic investment return. However in the context of 45% or 50% tax rates, the tax saving is of course a very healthy return. Invariably those that market and manufacture these schemes are paid handsomely (some might say excessively) for their cut of the scheme. For example on £100,000 investment, which might save £100,000 of tax a charge of £15,000 is not uncommon. The motivation is to save tax, because some people pay huge amounts, which they believe is unfair. This is probably due to a belief that Government has no real idea about how to spend wisely. It is often coupled with the idea that personal control over personal wealth is a defining feature of real freedom.
My view is simple. It isn‘t surprising that people want to reduce their tax bill. The tax system could be both simple and fair, but it is highly complex. I believe that this is deliberate. Complexity serves the very wealthy, who are also those with power. However some of these schemes are used by more “ordinary people” not simply the super-rich. People that fundamentally believe that they pay more than their fair share of tax. This is where the debate or argument needs to be had, as there is little real prospect of Governments (of any persuasion) having a simple Tax and Trust system, despite deceptive terms like “Simplification”.
Whatever your view, HMRC are now investigating a huge number of schemes, each of the numbers represents a scheme number. HMRC now has the power to simply take money from your bank account. This process is very much a case of guilty until proven innocent and whilst some will be, not all are, yet this approach could have a very damaging impact. Of course, those that peddle the schemes are usually covered by water-tight contracts with clauses waiving any responsibility and point to “Queen’s Council” as opinion not “fact”. Hmmm.
Anyway, we will not use schemes that “sail close to the edge” of tax rules. We will use allowances and avoidance tools of course, but not the type that land you in trouble with HMRC. There will be no need to dodge bullets…
Dominic Thomas: Solomons
HMRC Avoidance: http://www.hmrc.gov.uk/avoidance/
HMRC strategy: http://www.hmrc.gov.uk/budget2013/evade-avoid.htm
You may have picked up from the headlines in various news media, that the Government have once again pushed the notion of married couples being able to share their personal tax allowances. This is a highly inflammatory issue as you may imagine. Those of us that are married probably did not do so in order to enjoy tax breaks. Frankly, I’m not sure why this issue has raised its head again.
In truth married couples already enjoy certain tax advantages. The most obvious being that there is no inheritance tax to pay between them and essentially they enjoy (or rather the wider family does) a doubling of the personal “nil rate band”. This assumes that they have a valid Will in place – not having a Will does rather reduce the impact of this valuable benefit.
In addition, capital gains tax allowances can also be shared across a married couple and of course one could argue that the ISA allowance, whilst being individual, enables a couple (married or not) to invest twice as much between them. So whilst there are reports of “backbenchers” (never named, if indeed they exist) calling for tax advantages for married couples, one might suggest that they already exist. However, this is about the personal allowance and essentially a married couple sharing unused personal allowances between them. According to the BBC website the Government initiative will save some people about £150 a year. Hang on? If the personal allowance is £9,440 in 2013/14 (for those under 65) this is how much each individual can earn tax free. So assuming a basic rate taxpayer (20%) would otherwise not enjoy any of this, then surely the tax advantage is 20% of £9,440 which is £1,888 of tax saved. Certainly this figure reduces if earnings are in excess of £100,000, at which point the effective rate of tax is 60% as the personal allowance is gradually withdrawn.
I know tax is complex – more so the more you earn and the greater your assets, but for those on say £80,000 a year as a single income, then all that is really happening is a doubling of the personal allowance, to £18,880 before any income tax is payable. The next £32,010 will be taxed at 20% and then the remaining £29,110 would be taxed at 40%. The overall tax rate being 22.5% (income tax as % of £80,000). This against the current system of a single personal allowance and relevant tax rate of 27.2% and extra income tax of £3,776. As you will have gathered, the tax saving is on a case by case basis, but I cannot agree with the BBC’s figures of £150 saving – its closer to that each month, not each year. This prompts my often trodden path of “do they understand the figures? ” (both politicians and journalists).*
There can be numerous reasons for a spouse not to be working. This might be voluntarily, or enforced (redundancy of illness). The problem with every rule is that there is always likely to be a good case to be made for an exception and one can only really fall back on the principles of fairness to all. If this were truly any politicians cause, then we would not have such a complex tax system or benefits system. Both need to be simple and ideally with a single rate of tax and benefits across all forms of income, earned or paid as interest or dividends. This is certainly not a simple issue and as a result can only be for perceived political advantage. I don’t know about you, but I am fed up with politicians of any persuasion, trying to buy votes, we deserve better treatment than that surely. We would all like to pay less tax, naturally, but we also know that tax funds our infrastructure, healthcare, welfare, armed forces, governance and the wider economy, the real question is surely is tax fair? and if so, is is being spent wisely?
* It seems that the BBC figures are indeed correct. The current, or rather original proposal was to only allow £750 of the personal allowance to be shared between spouses, amounting to £150 (20% tax). It only applies to couples where the higher income member is a basic rate taxpayer and not available for higher rate taxpayers. So as usual, the devil is in the detail and all that this really suggests is the politicians cannot be trusted to tell a full story and frankly this is a lot of hot air….
Dominic Thomas – Solomons IFA
The 2012/13 tax year is nearly at an end. Time is running out. HMRC essentially operate a world of “use it or lose it”. For most people this means ensuring that you have maximised your pension allowances (£50,000 is the maximum permitted in the tax year, subject to a plethora of qualifying rules – aren’t we all thankful for pension “simplification”). These days pretty much the only advantage of a “pension” is the tax relief – which is applied at your highest rate of tax. Thereafter, have you used your ISA allowance, all £11,280 of it? capital gains tax allowances? and a heap of others for those with more sophisticated planning.
Most people give money to charity, so do remember that this attracts tax relief in a similar way to pensions. Also you are able to use your annual giving allowance of £3,000 per person (the giver) moving money from within your estate to those that you want to benefit, a very basic form of inheritance tax planning – it can certainly become much more complex based upon the size of the IHT problem that you expect.
There are other forms of allowances, but please treat these with caution and remember the adage “fools rush in where angels fear to tread”. I was on the train on Saturday evening, coming back from a very good performance of “The Judas Kiss” when the couple next to me started discussing their financial planning rather loudly ( I really wasn’t trying to listen). The subject of their conversations was about VCTs (Venture Capital Trusts) and the tax relief available. They had clearly not attended the same meeting as one was describing how the VCT worked to the other. Their “adviser” had not charged for his “advice” (not permitted nowadays) and I was rather concerned about their understanding of the risk involved and the lack of compensation coverage if or when things go wrong. The FSA would suggest that only around 3% of all investors are likely to find this sort of investment suitable (3% of investors, not 3% of the population). Of course some VCTs can be a great solution, others require you to be more of an expert than a Dragon in the Den. Please be aware that there will always be someone willing to discuss a “guaranteed winner” to an unsuspecting person. When it comes to investing, there is no such thing as a guarantee, despite what it may say on the tin. Be warned – and sadly I have to say that the information on the MAS website fails to adequately convey the degree of risk with a VCT. You can lose all of your money. It is not called venture capital for nothing!
We will be closed for Easter (Good Friday is this Friday!). We re-open on Tuesday 2nd April and I can assure you that despite every good effort, attempting to make a tax-year end payment by Friday 5th April will create some significant stress if you leave it late.
Crossing the Tax Avoidance to Tax Evasion Border
HMRC has a spotlight page which is aimed at drawing attention to tax avoidance schemes that may turn out to be tax evasion schemes. This is effectively the equivalent of a border patrol between the two. One would be forgiven for thinking that this has been like many physical borders in Europe – a line on a map that you can cross without even noticing. Let me disavow you of that notion. Despite the efforts of some very clever Accountancy and Legal folk, this is at best a “high risk crossing point” and more likely to be something approaching one of those films you may have seen in the past that involves check-point Charlie in days of East and West Berlin (some of us do remember them).
HMRC on target
However, in these days of better technology, I might suggest that check-point Charlie has gone one further by sending an advance text or email advising you to change course. Or to use another military film scenario – you are flying into restricted airspace and missiles are locked onto you as a target. Actually, I think that this perhaps best describes what is currently happening.
HMRC have written over 1,500 letters to people who signed up for a particular tax avoidance scheme suggesting that they pull out of the scheme or face HMRC investigation. This is the sort of post that you really should open rather promptly and respond to. This is not a “file it to do later”.
Definitions – Detail is everything
However, it seems that the language about this topic is changing. Tax avoidance always has been legal and would involve using personal allowances and reliefs – such as pensions, ISAs and so on. It is interesting to note that HMRC is now referring to this as tax planning rather than tax avoidance. HMRC now define tax avoidance as “bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter – but not the spirit – of the law“. This is an approach that seems to be heading in the direction of “guilty until proven innocent”. So please be warned – but this is precisely where expert advice is required. There are genuinely good forms of proper investment that carry tax relief or allowances. These need to be considered carefully and can be excellent ways to diversify a portfolio.