£20k ‘death tax’: Government new Tax charge

The Government’s dramatic increase in probate fees is attracting more outcry as it emerges the Ministry of Justice does not know how much it costs to handle an application for probate.

From next month, a new system takes effect that will see the largest estates pay £20,000 in probate fees. Probate must be granted to execute the wishes of the deceased as expressed in their wills.

Currently applications cost £155 if submitted by a solicitor or £215 if you do it alone. This is charged irrespective of the size of the estate but is waived for estates worth less than £5,000.

Under the new model estates valued at less than £50,000 will pay no probate fees but above this threshold families will be charged a minimum of £300 and up to £20,000 for estates over £2m.

The MoJ has said the measure would raise £300m towards the billion-pound cost of running the courts and tribunals service. However, a Freedom of Information request reveals the MoJ does not even know the average cost to the Government of processing probate applications.

Steve Webb, former pensions minister and director at Royal London, the pension company that filed the request, said the changes are a “backdoor way of raising money from people in their time of greatest need”.

He said: “The Government is treating bereaved families as if they were a ‘nice little earner’. It is one thing to make a reasonable charge for the provision of a public service.  But the Ministry of Justice has now admitted it does not know the cost of handling a probate application and sees no reason to find out what it is.

“This is clear evidence that the new charging structures are nothing to do with recovering the reasonable cost of processing probate applications.”

The increase in probate fees had also been challenged in Parliament. Last week a committee of MPs said the Government may be acting beyond its powers. They argued the probate fee actually appears more like a tax, because it is unrelated to the costs involved in handling probate applications.

Changes to taxation require the consent of Parliament and are therefore put under far greater scrutiny.

Rising probate fees come as more families are being taken out of inheritance tax. From this month, each individual has a £100,000 allowance in respect of their main residence in addition to the usual £325,000 allowance.

This new “main residence nil-rate band” will rise each tax year until 2020, when a couple will be able to pass on £1m tax free

HMRC Capital Gains tax increases by 60%

HM Revenue & Customs (HMRC) collected an additional £140m from investigations into unpaid capital gains tax (CGT) over the last financial year.

Through analysing data from HMRC, £55m of the figure came from investigations relating to ‘wealthy individuals’ and mid-sized businesses with the remaining £85m stemming from regular taxpayers and small businesses.

The substantial numbers involved make it clear HMRC is focused on this area and taxpayers should be sure to have their affairs in order.

“The Revenue has kept the spotlight on CGT avoidance schemes, abuse and error over the last year,”.

“It has proved a fruitful area for enquiries and they are likely to continue in this vein. A continuous stream of high-profile tax avoidance cases in the media – including the Panama Papers Scandal – means that pressure on HMRC to stamp out what it sees as abuses remains intense.”

CGT is paid on profit when disposing of an asset or, more specifically, on all personal assets worth £6,000 or more, property other than a taxpayer’s main home, any shares not in an ISA or Personal Equity Plan and business assets. New CGT rates were introduced in last year’s Budget, with the higher rate dropping from 28% to 20% and the basic rate from 18% to 10% from April 2016 onwards.

Investors should be aware of how the HMRC are attacking this and  “Ensuring tax affairs are in order and seeking professional guidance where necessary should be considered paramount if taxpayers wish to avoid lengthy investigations and hefty penalties if underpayment is uncovered.”

“HMRC can be expected to look closely at anything which it thinks goes against the spirit of the law and of course any deliberate or negligent underpayment so, while in many cases there is likely to be a legal justification for any scheme or discrepancy, taxpayers need to be prepared to answer any questions.”

Top Trump -So what now ?

His inauguration on Friday 20 January. Trump was sworn in as the 45th President of the United States on the steps of the US Capitol at noon, when current president Barack Obama’s term expires.
Initially, the clear winners of this seismic election result appear to be US infrastructure and business. Trump has pledged to
rebuild roads, rail, hospitals and schools,and promised US corporations will pay no more than 15% tax on profits: the biggest
concession since Reagan’s tenure.Fossil fuel companies could benefit given Trump’s disbelief in global warming and
promotion of US energy independence.
Pharmaceuticals could benefit too, with price controls less of a concern than if Clinton had won. Finally, banks could flourish as
regulations are potentially relaxed.
Areas of greatest impact for the US economy are increased fiscal spending, an issue with clear bipartisan support and the more
negative uncertainty associated with Trump’s trade policy. On international trade, there is potentially greater uncertainty as a result of Trump’s ability to act unilaterally on tariffs without Congressional approval. This is as far-ranging as withdrawals from trade agreements such as the North Atlantic Free Trade Agreement (NAFTA) or as tactical as his much talked-about China tariffs.
The UK, European and Asian markets initially fell on news of America’s election result, but markets then largely recovered.
The short-term market reaction reflected this uncertainty, but for investors the long-term outlook is more important.
First, the US economy that President Trump inherits is in relatively good shape.Economic growth picked up in 2016, while the unemployment rate is close to any economist’s definition of full employment.Profits of companies in the S&P 500 rebounded smartly from the oil-and-dollar-induced slump of 2015, and inflation is still moderate. Moreover, the global economy is also showing signs of life, with the global manufacturing purchasing managers’ index– a survey of activity in the manufacturing sector – hitting a two-year high towards the end of last year. All of this, absent political uncertainty, would be positive for share prices and negative for bonds.Second, the uncertainty and volatility following the election will (for now) reduce the probability of US interest rate rises,although the Federal Reserve will want to leave its options open until it can assess the market and economic fallout from the election result.Third, while the results represented a Republican sweep,actual policy change may be far less dramatic than was proposed by Trump during the campaign.
It should be noted that there is a wide gulf between Trump’s agenda and that of many ‘establishment’ Republicans, and the latter may well balk at unfunded tax cuts or spending increases. In addition, both the new president and Congress will likely act more slowly on dismantling the Affordable Care Act or trade agreements until some better alternatives can be found.
It should also be noted that, as was the case elsewhere in the world last year, voters have chosen change over caution – and politicians tend to respond to what voters want rather than what they need. While the Trump agenda is unlikely to be implemented in full, members of Congress may be willing to go along with some proposals toincrease spending, lower taxes, reduce illegal immigration and increase tariffs. If they do so, they may well further stoke inflation in an economy that is already heating up. Longer term, increasing government debt to fund these initiatives has obvious dangers.
In the medium term, a warming economy– further stoked by expansionary fiscal policy– could favour equities over government bonds. In the long term, maintaining a diversified portfolio of investments may be more important than ever. In light of the Brexit vote and the US elections, 2016 proved decisively that populism is a good political strategy – whether it proves to be good for long-term economic fortunes is another question entirely.


Breaking the Taboo of Defined Benefit Pensions

Conventional wisdom has historically seen ‘final salary’ pensions being held up as the gold standard of retirement provision. This is due to the benefits of these pensions typically outweighing what most people in an alternative ‘money purchase’ arrangement could receive in retirement.

As such, transferring benefits away from a final salary pension into an alternative money purchase arrangement was often seen as not being in the member’s interests.

In addition, the ‘Financial Conduct Authority’ (FCA) stress the starting point for final salary pension transfers should always be that a transfer will not be in the member’s best interest.

This has led to final salary transfers being seen by many in the industry as a taboo, with advice firms placing too much reliance on the output of a ‘Transfer Value Analysis’ (TVAS) report, and in particular the ‘critical yield’, in determining suitability.

Yet this over-reliance on the critical yield in isolation means individuals can receive unsuitable advice – relative to their personal circumstances, needs and objectives – to retain benefits with the final salary pension. All the while, the advice firms hide behind the critical yield.

However, without taking into consideration the individual’s personal circumstances and needs, an unsuitable recommendation to retain benefits within a final salary scheme can be as damaging as an unsuitable recommendation to transfer benefits.

As such, individuals are reliant on the skills, knowledge and experience of their advisers. This means the adviser must have the ability to provide holistic financial planning that takes into account the bigger picture rather than limited advice that looks at the final salary pension in isolation and that is heavily reliant on a single figure – the critical yield.

At Advanced Asset Consultants Ltd we fully agree with the FCA stance that the starting position should be that a transfer will not be in the individual’s best interest. However, we believe it should be exactly that, a starting point from which we should start our review.

In addition, while the critical yield is an important part of our analysis, it is merely one of a number of wider factors taken into consideration as part of the advice.

As such, the emphasis of our advice is to understand the bigger picture and to account for all the moving parts in retirement rather than focusing solely on the final salary pension.

Many client are receiving transfer values in excess of 30/35 times the pension being offerred an example of a client aged 55 has a pension  built up a pension within his scheme of £23,000.

the client intended to retire earlier than the schemes normal retirement date and had left and decided to ask the trustees for a transfer figure.

Having received the information from the trustees he was offerred  a sum £867,000 after careful consideration the client decided that it would meet his lifetime income as well as create a legacy for his wife and children.

These are the options that are available which many people are unaware of that can be provided although careful consideration is a must and can be a life changing amount of capital.

BREXIT :Two Weeks on from decision

A brief look at the FTSE 100 would suggest that not much has been happening since the UK voted to leave the European Union (EU). In fact, the FTSE 100 was at its highest level since August 2015 on Friday 1 July.

The initial reaction in financial markets to the referendum result went as expected. As the result was confirmed, the FTSE 100 fell around 8%. The pound was down around 12% against the US dollar and European stock markets fell as uncertainty on both sides of the English Channel spooked investors.

Which sectors suffered?

House builders and banks were the main sectors to bear the brunt of the sell-off. These are both sensitive to the strength of the UK economy. Airlines also suffered as a weaker pound meant it would be more expensive to go overseas and fuel costs could rise.

Which sectors benefited?

Defensive sectors rallied as investors looked for companies that were likely to benefit from the fallout. Gold led the way after the result, followed by consumer goods, tobacco and pharmaceuticals. By and large these are international industries which are not as sensitive to the UK economy.

What’s the outlook for the UK economy?

Economists have downgraded UK growth forecasts with some predicting a recession. While we think the UK will narrowly avoid a recession, growth for 2017 is likely to fall to 0.4% from the 1.9% predicted before the referendum.

The timeline so far:

Friday 24 June

By the end of ‘Brexit Day’ the FTSE 100 had staged something of a recovery, ending 3% down on the day but still up nearly 2% over the week. The value of the pound played a part in this, having fallen 12% against the US dollar early on, before recovering to 8% down by the time UK stock markets closed.

Monday 27 June

Things regressed from Friday. The value of banks, house builders and airlines all fell again as did the pound. The price of gold also went up.

By Monday evening things seemed to go from bad to worse. While England’s football team suffered a humiliating defeat against Iceland, the UK also lost its last remaining AAA credit rating. Standard and Poor’s cut the UK’s rating two places from AAA to AA citing concerns over the referendum vote and the likelihood of a recession.

Tuesday 28 June

The markets rebounded as bargain hunters came in looking for opportunities.

Thursday 30 June

Mark Carney, Governor of the Bank of England, gave his more considered reaction to the news. He hinted at the Bank cutting interest rates as early as July and emphasised the possibility of further Quantitative Easing (QE). He also spoke of the benefits of a weaker currency.

His words soothed investors and by Thursday evening, the FTSE 100 had reached new highs for 2016. The more domestically-focused FTSE 250 meanwhile was 6% below its pre-Brexit level, with its companies more sensitive to the falling pound.

Friday 1 July

The UK market continued its rally while government gilt yields entered negative territory for the first time. Expectations of interest rate cuts and more QE drove yields to record lows.

What could investors be considering?

While things have calmed down for now, we expect there to be more volatility ahead. Some companies saw their share price rise while others saw it fall after the vote. However we’d expect the change to continue to benefit some companies while harming others.

It’s impossible to predict the future which is why it’s important that any decisions made are based on your clients’ long term goals.

Is Lifetime Allowance to be cut to £750,000 ?

The next stage of the pensions revolution has been cancelled, it seems, or at least postponed.

After his sweeping pension freedoms, introduced last year, Chancellor George Osborne had been expected to order even more radical changes in the Budget on March 16.

But with the Brexit vote in June and a possible Conservative party leadership battle ahead, Mr Osborne has backed away from moving to a controversial system of “pension-Isas” that would have incensed many MPs.This does not mean there won’t be some sort of pensions tax raid.

The most likely options are a cut in the amount you can save each year. This annual allowance, currently £40,000 for all but the highest earners, could be cut. The amounts suggested by pundits vary from £10,000 to £25,000.

Perhaps more likely would be a tinkering with the tapering on the annual allowance that sees it steadily reduced to £10,000 for those earning between £150,000 and £210,000. Here, the experts suggest the threshold for those affected could fall to £125,000 or even £100,000.

Finally, there could be a further reduction on the lifetime allowance. All of this is explained below.

The next pensions revolution: the background

In the summer Budget last July, he said a consultation would be undertaken on whether wholesale changes to the pension system were needed, citing concerns about the fairness of handing out billions in tax relief largely to better-off savers.

For instance, the annual limit on pension saving, which is £40,000 for most, could be reduced. It could fall as far as £10,000. The lifetime allowance, once as high as £1.8m, will be cut from £1.25m to £1m from April. According to some news reports, the Treasury has consulted on a £750,000 limit.

The proposals for pension change

While the chancellor appears to have backed away from these options for now, they could just be delayed. Another process of consultation could be announced.

Option 1

The most radical proposal was a move to so-called pension-Isas. Today’s pensions, which are untaxed on the way in but taxed on the way out (apart from a 25pc tax-free lump sum), would be kept but closed to new money. A new system would be set up more in the spirit of Isas, where contributions receive no tax breaks but the money will eventually be withdrawn tax free. The appeal to the Treasury is a huge saving on the tax-relief bill today, with the cost handed to governments of the future.

The main reason not to do this would be the complication that would follow. A two-pots pension system would create headaches for companies to operate and for individuals to understand and plan their finances around.  The other reason would be the  blow to confidence in retirement savings, a point made by former pensions minister Steve Webb

Option 2

Keep the existing structure but remove the tax relief that is so beneficial to higher-rate taxpayers. It is expected that a flat rate of relief might replace the current rates – so that basic-rate taxpayers would receive more and higher-rate taxpayers would have less.

Pension would money would still be taxed on withdrawals, apart from the 25pc tax-free lump sum element.

The savings industry has lobbied the Treasury that if a flat rate is necessary, it should be 33pc. This could then be marketed to savers as “buy two get one free” because every £2 invested would be topped up by £1. However, it would save little money for the Treasury.

Option 3

The Treasury might go with the flat rate system but instead opt for a 25pc rate that would offer substantial savings to the public purse.

With both options two and three, critics point out that tax relief on higher rates may be costly but the principle is fair. Without it, savers would effectively be taxed twice on their pension money: when they invest and when they withdraw.

Option 4

The hybrid option is to take some of the above. Namely, a move to a pensions-Isa system but where basic rate tax relief is retained, or what has been called a 20pc ‘bonus’. This was mooted as a proposal but faced a backlash, forcing a rethink.

Budget predictions

The lifetime allowance, the total each person can hold in a pension without facing penalties, was once £1.8m but it will fall to £1m in April.  A further cut could be announced. Treasury officials have been reported as considering an eventual £750,000 limit. This would provide a guaranteed income of just £19,450 a year, based on a man aged 65 taking 25pc tax-free and buying an index-linked annuity with the rest. The Government may deem this to be a livable amount for most pensioners, when put together with the state pension.

The annual allowance on pension contributions may also be changed, especially now the wider proposals appear to have been dropped. This limit, once as high as £255,000, was reduced from £50,000 to £40,000 in 2014. Experts have suggested a cut to £25,000, although it could be deeper now that changes to the rates of relief have been all but ruled out.

The tapering on the annual allowance could also be altered.

Increasing the personal allowance, the amount you can earn before income tax kicks in, has   been a favourite Budget sweetener for Mr Osborne for many years. From £10,600 this year, it will rise to £11,000 next year and £11,200 in 2017/18. The higher rate threshold will be £43,000 next year, then £43,600.


LTA cut – it’s decision time

The £1M LTA is fast approaching and that means decision time for those clients who believe that they may be caught by the latest cut. Should they stick or twist? The price for protecting funds from an LTA charge by locking into a higher allowance may be that pension funding has to stop. And that means it could be the last chance to boost funding.

Top-up before protecting?
Unlike previous protections, there’s no application deadline for fixed protection 2016 (FP16) or individual protection 2016 (IP16). But FP16 means stopping pension saving after 5 April, so time is running out to make a decision.

There’s only five weeks for clients looking to go down the protection route to maximise funding and build a bigger retirement pot to protect.

  • For those opting for FP16, the run up to 5 April represents their final funding opportunity.
  • Clients considering IP16 may want to make additional funding to boost their protected LTA.

Clients looking to use FP16 to lock into a £1.25M LTA going forward also need to think about the practicalities of stopping pension funding by the 5 April deadline:

  • Opting-out of future DB accrual, or stopping contributions to a Workplace pension, often requires at least a month’s notice to the employer to allow the necessary payroll changes to be processed. This means employees may need to act soon, otherwise the decision will be taken out of their hands.
  • Business owners who pay single rather than regular premiums may have a little more breathing space. By maximising funding before April, they can leave their options open a little longer.

Where to save after April?
Affected clients will still need to save for retirement after April. But a decision needs to be made on the best place to save, based on their circumstances. And the best place to save could still be their pension, even at the expense of missing out on fixed protection.

There’s a natural aversion to paying tax charges – that’s understandable. But what has to be considered is whether carrying on funding and paying the LTA charge will give clients more in their hand than their protected pension fund plus what can be saved outside of the pension wrapper.

Stopping pension funding – what to think about?
FP16 might mean that LTA charges are limited, or avoided completely, by increasing the LTA by an extra £250k. But a single pound of additional funding, or an extra day’s DB accrual, after 5th April could blow protection – potentially costing as much as £137,500 in LTA tax on a £1.25M pot. Of course, if retirement benefits only just creep over the £1M, the benefit of protection will be much lower.

And remember that the LTA will be indexed again from April 2018. This means the value of protection will begin to erode as the LTA starts to increase in line with CPI.

Clients with fixed protection will need to seek an alternative home for their retirement saving. But this will come from their income after both tax and NI has been deducted. And none of the investment alternatives will match the returns available in the pension as all but ISAs are likely to suffer some form of tax on the investment returns.

Carry on funding – what to think about?
The benefit of fixed protection has to be balanced against the potential loss of employer contributions for some clients. Employer pension contributions are essentially ‘free money’. Even if they suffer an LTA charge of 55% on their entire future employer funding, they’ll still be better off. They’re still receiving 45% of something they would otherwise miss out on.

But some employer contributions are only payable if the employee also pays into the scheme. Even so, depending on the ratio of employee to employer contributions, it may still make sense to continue their own funding and take the LTA charge on the chin to retain the funding from their employer.

Some employers may be prepared to offer some other financial incentive instead of making pension contributions. Most employers are only likely to provide the employee with a cash compensation which equates to the same net cost of the pension contribution (i.e. salary sacrifice in reverse). So the amount of additional salary will be reduced in line with the employer’s additional NI liability. And of course, any alternative package will be taxable in the employee’s hands.

So that leaves the employee with much less in their hand to invest, compared to what they would have received as an employer contribution.

A difficult decision
It’s only natural to think tax charges should be avoided – especially one designed to act as a cap on funding. But it’s always important to weigh up all of the options available. And the alternatives will generally have their own tax consequences to be worked through before arriving at the most suitable outcome for the client. With the outcome of the pension tax relief review expected on 16 March, it leaves only a very short window to crunch the numbers.


The new state pension what I need to know

How much am I really going to receive? This can seem straight forward question however its not the case, National insurance record can vary greatly depending on if they were members of a pension scheme that contracted them out of the state system to benefit from national insurance rebates for the schemes in question.

So where does this leave you when the new scheme comes in to force in April 2016.

Under the old scheme you had to have 30 qualifying year at the full rate (not contracted out) from April 2016 the qualifying years move to 35 years and an adjustment is taken into consideration if you had been contracted out, which means the new flat rate scheme amount £155.65 may not be paid.

We advise that clients due to the complexity to apply for a pension forecast using the form BR19 or BR20 (if been divorced) however this is not worth doing until after April 16 as the DWP can not work out what you will be entitled to until the flat rate scheme goes live.

If retiring after April 2015 you will continue to build up additional years under the new scheme, so prior to retiring its vital to check your number of years as even paying a small amount may mean a higher pension.

The Department for Work and Pensions (DWP) has been trying to improve the forecasts, so as to provide accurate information prior to retirement however this is still a work in progress as I have seen various values for the same client and the information can be very confusing.

Topping up state pension

One key question we receive is whether the state pension top-up system is worth considering. We tell our clients this system is a sound investment.

It makes sense to filter cash into this system and it is good value too.

If you compare it against any form of annuity purchased on the open market you would not find anything else like it, so we advise people to go down that route.

The only circumstances that make it unsuitable are poor health or impaired life expectancy.

If we have a full projection of that income we will use it, but if not we will work using the older basic state pension figure.

We do this because there seemed to be a ‘blackout’ period where it was difficult to obtain information about the new system at present.

No client will be upset if you estimate conservatively and they end up receiving more money than they expected, and it is arguably a waste of our time and the client’s time if the information you have about the new system is inaccurate, or it leaves you guessing.

There has been criticism of the new state pension but there is a lot of useful information on the government website.

You just have to commit to sitting down and going through it, rather than trying to understand everything in a few minutes.

It is worth having a good grasp of statutory law when you do this because much of the government’s information is linked to parliamentary documents and statutes, which explain entitlement in legalistic terms. However, it is not rocket science.

With all our client we run through all the forms and send off for the detail to held guide then through the process.

HMRC-an additional 3% from Buy-to-let Landlords on purchases over £40k

HMRC have been granted yet more power and resource in George Osborne’s Autumn Statement. Not only is the object to collect more revenue – but to collect it sooner.

The eye-catching measure related to the sale of residential property where, in future, tax due on gains will require payment within days.

The move is just the latest in a string of changes that will lead to a more rapid collection of tax and a “pay now, question later” culture which could see the roles of taxpayers and the taxman reversed.

Today, taxpayers calculate and submit tax due to HMRC – over and above the tax already deducted via wages or pensions – in what is typically the annual process of a return. Where HMRC believes more is owing, it pursues the taxpayer.

In the future, taxpayers could routinely find they are the ones chasing money they are owed by HMRC.

The following are just some of the ways in which HMRC is bringing forward the collection of tax.

Wider ‘digitisation’ of tax declarations with more frequent reporting (and earlier payment)

Buried in Mr Osborne’s Autumn Statement was the requirement for “businesses, self-employed people and landlords” to keep track of their tax affairs digitally and “update HMRC at least quarterly”.

This system would apply from 2020, with HMRC assisting those who “need help using digital technology”.

Employees and pensioners wouldn’t need to file digitally unless they had secondary incomes of £10,000 or more per year.

Although the document made no reference to earlier collection of tax due, most commentators believe that is the primary purpose of the change.

Andrew Hubbard of RSM UK Tax and Accounting, said: “There is to be a consultation on payment dates for tax generally, and you can be sure this will not propose extending the current payment periods.

“HMRC will be looking to bring forward the payment date closer to the point at which the profits are earned.

“It would be wrong to think of these as mere timing differences. A change to tax payment dates generally might help get the Chancellor out of a hole if the rosy picture he painted on the state of the public finances doesn’t turn out as expected.”

Real-time information

Introduced in 2013, and now fully implemented, HMRC’s “RTI” system required employers to submit staff pay information at every payroll interval – whether monthly or weekly.

The result is that HMRC can more quickly adjust tax codes to reflect any changes in income. Coupled with other technologies and more frequent reporting by taxpayers, it will enable tax collection to be “brought significantly forward”, accountants say.

Acceleration of capital gains tax payments on property sales

This was one of two noteworthy measures in Wednesday’s Statement bringing forward the payment of tax.

Mr Osborne declared that from 2019, where a capital gains tax liability arises on a property sale, the tax will be payable within 30 days. Under the current regime such tax bills need not be settled for periods of up to 22 months, this could mean investors over-pay.

An example of a higher-rate taxpayer who has sold a property with gain of £200,000. The top capital gains tax rate is 28pc, so they owe £56,000.

If in fact the taxpayer subsequently crystallises £100,000 losses from other transactions in the same year, the new tax liability is just £28,000 – leaving the individual chasing HMRC for a rebate.

It is unclear how the tax will be calculated and paid, with one suggestion being that solicitors dealing with property sales would estimate a “worst case scenario” and deduct it from sale proceeds.

Most accountants, expects the process to be complex and “burdensome”.

“For many people it will be impossible to work out the correct tax due,” as losses or lower earnings in the rest of the year could have a major effect.”

Again, HMRC will be helped in tracking such transactions by another recent investment in technology – its £80m “Connect” platform.

This brings together databases where property sales and other transactions can can be tracked in real time.

Any mis-match between information supplied on a tax return and information retrieved by Connect could trigger an immediate inquiry.

Faster collection of stamp duty

The second move in the Autumn Statement to draw forward the collection of revenue was aimed at stamp duty.

Not only did will the rate of stamp duty rise dramatically for purchasers of buy-to-let properties and British holiday homes but the duty will need to be paid far sooner.

From April 2017 those buying residential property will have less than half the time to pay stamp duty on the purchase of residential property. Until then buyers get 30 days to pay the duty, and thereafter just 14.

Fron April 2016 and additional 3% stamp duty will apply for all new Buy-To-Let purchases over £40,000 on top of current Stamp duty thresholds ,purchasing a £250,000  BTL property this  equates to  8%.  (rates differ in Scotland & England).

Will earlier collection of tax make any real difference?

Submitting more information to HMRC and paying resulting tax earlier might flatter the Exchequer’s receipts – but only in the short term.

Tina Riches, a partner at Smith & Williamson and one of Britain’s leading personal tax experts, said: “HMRC needs to haul in more revenues to help the Treasury meet its necessary targets. Measures that drag forward the collection of tax are becoming a common theme, but they are a short-term fix to the problem.”

If the problem is one of needing more revenue, she said, it would not be solved simply by collecting the same amount of tax sooner.


Dividend changes – what it means for investors

Next year will see major reforms to dividend taxation. What will this mean for the Investor? Will it alter where you should save? It  may trigger a review of your  existing investment structures.

There will be both winners and losers when the £5,000 annual dividend allowance is introduced April 2016. Higher rate taxpayers could be better off by up to £1,250 a year (£1,530 for additional rate taxpayers) but some basic rate taxpayer could be worse off by as much as £2,025.

Personal circumstances will ultimately determine the most appropriate investment solution for clients. But in this insight we look at;

  • What’s changing?
  • Which clients will be better off or worse off as a result of the changes?
  • How the changes will impact on the main investment wrappers?
  • What to consider when moving existing savings?

So what’s changing?
From 6 April 2016, the method for taxing dividends received by individuals will change.

The 10% tax credit will disappear. Instead the first £5,000 of dividend income will be tax free for everyone. And the rates of tax are changing too for dividends exceeding this allowance.




Non taxpayers



Basic rate payers



Higher rate payers



Additional rate payers



The table above compares the tax rates on dividends in excess of £5,000 with the rates currently paid on the net dividend (i.e. 25% of net dividend = 32.5% of gross dividend).

What this means is that most basic rate taxpayers will be no worse off than this year, unless they have dividends in excess of £5,000. While £5,000 should be sufficient to cover the dividends from most basic rate taxpayers they will have to pay 7.5% on amounts over the allowance from next April.

The real winners are higher rate taxpayers and additional rate taxpayers with dividends of less than £5,000 each year. On dividends up to the allowance they would be £1,250 (HRT) and £1,530 (ART) better off each year.

But what about when the dividends received is greater than the allowance,There is tipping point where the tax savings on the first £5,000 are outweighed by the higher rates of tax imposed on dividends in excess of the allowance. That point arrives when dividends hit;

  • £21,660 for higher rate taxpayers, and
  • £25,400 for additional rate taxpayers.

Where dividends are below this figure clients are still better off. Above this figure clients will be paying more tax on their dividends than in previous years.

It is important to note that the full amount of dividend received, even if covered by the £5k allowance, will still count towards total income when determining income and capital gains tax rates, as well as entitlement to the personal allowance.

What does it mean.
The abolition of the 10% credit will not affect the of amount dividend that is distributed.

The tax credit was only ever a notional credit – 10% tax is not deducted on distribution. The credit merely reflects the fact that the dividend was paid out of a company’s profits after corporation tax. So investors will receive exactly the same amount.

But how dividends are taxed will change. No tax credit means no more grossing up is required. The amount received is the amount subject to tax, with the first £5,000 of dividends tax-free (note: if an investor has unused personal allowance, dividends would be used against this first – so these individuals could receive even more than £5,000 of dividends tax free)


John has an annual salary of £60,000.

He has shares in XYZ Ltd who make the same post tax profit in the business years ending in the 2015/16 and 2016/17 tax years.

John receives the same dividend cheque for £9,000 in both years.

The tax he will pay is:

The net dividend of £9,000 plus the tax credit of £1,000 gives him a ‘gross’ dividend of £10,000.

This will be taxed at 32.5%. The tax is therefore £3,250.

But john has a tax credit of £1,000, so the ‘extra’ tax he has to pay is £2,250, leaving him with £6,750 in his pocket.

The £9,000 received is the gross amount.

John will pay no tax on the first £5,000, and 32.5% on the rest.

So the tax he pays is £4,000 x 32.5% = £1,300. This leaves him with £7,700 in his pocket.

In this scenario, John is better off under the new rules even though his dividend exceeds the new allowance. But this won’t always be the case for larger dividend payments, which is why advice will be so important.


Creating a ‘tax free’ portfolio
All these changes present an opportunity for investors to build up a tax free fund alongside their ISA, simply by using the allowances available to them.

This can be achieved by keeping dividend income to below £5,000 pa, and realising capital gains annually from their portfolio within the annual CGT exemption (£11,100 for 2015/16).

The portfolio value at which no tax will be due will of course depend on performance. But they could look something like these if allowances are fully used:

Portfolio size

Dividend Yield

Tax free income

Cap. growth rate

Tax free growth
















Of course, any re-allocation of assets to achieve income and gains at these levels would also have to be appropriate to the risk profile of the client.

Where to save now.
There are many non-tax factors which will need to be considered. But putting these to one-side and just focusing on the tax planning aspects it is the availability of reliefs and allowances which will generally determine the best place to save.

So, purely on the basis of tax, and all things equal (e.g. investment funds, charges), the order appropriate for most people would be:

The combination of tax relief on contributions, tax free investment returns and the ability to take a quarter of the fund tax free mean pensions will like for like outperform other wrappers. Only where the tax rate on withdrawing funds exceeds the rate of tax relief on contributions will it fall behind an ISA.

With tax free investment returns and unrestricted access ISA will remain the next best thing to a pension.

However, for many they may still be the vehicle of choice because of their simplicity, where funds may be needed before age 55, or where the client needs an ’emergency’ fund.

But the tax advantaged status of pensions and ISA’s come with limits on how much can paid in. So for those with higher surplus income, or who have lump sums to invest (e.g. from inheritances or other maturing investments), where should they go next?

Equity unit trusts and OEICs v Offshore Bonds
The new dividend allowance makes a compelling argument for building up a collective portfolio where income and gains can be managed within the respective allowances. The result would be a ‘quasi’ ISA which has been built up without a tax drag, and importantly which could be accessed in the future without a tax charge.

Where fund values produce a dividend in excess of the allowance, and capital growth cannot be managed out annually using the annual CGT exemption, the choice becomes more difficult.

Offshore bonds can protect the excess dividends from an immediate tax charge as they arise, because they defer the tax charge until surrenders are taken. When this happens, bond holders are taxed at their highest marginal rates of income tax (20%, 40% or 45%) on the bond gain.

But if they can take their bond profits at a time when they are non-taxpayers, then they have an advantage over OEICs. OEICs will have suffered a tax drag on income during the investment period, and capital gains in excess of allowances on withdrawal could be hit with an 18% or 28% tax charge.

So to maximise the benefits of a bond, the trick is to extract at 0% tax, for example as a bridging pension by deferring taking benefits from pension plans, or assigning to non-taxpayers such as grandchildren at university who can cash in to finance their studies.

If this can’t be achieved, top slice relief may be available to avoid or reduce higher rate tax on their gains.

Existing investments
The changes may trigger a review of clients existing investments. But of course any future tax savings by changing investment wrappers must be balanced against any immediate tax charges as a result of disinvestment. And a phased strategy of disinvestment across a number of tax years may be considered to maximising the use of available allowances and reduce the tax payable.

The new dividend allowance presents a fantastic  opportunity for individuals to extend their ‘tax free’ savings capability, albeit this will require careful monitoring and advice. But for most, pensions and ISAs will still be the first port of call for savings.