Tuesday 22nd November 2022
After the mini budget in September, the autumn statement last week from Chancellor Hunt achieved two aims of reassuring markets, by way of showing fiscal responsibility, and raising funds. It didn't contain any nasty surprises, as much had been leaked in advance, which seems to be the current way of such announcements (other than the Kwarteng mini budget of course!). It was also accompanied by growth forecasts from the Office for Budget Responsibility (OBR), that were missing from the mini budget, which was major error of judgement by Truss and Kwarteng.
You will have all seen the detail of the announcement, so we focus here on the financial planning implications and when we refer to couple below, this means those married or in civil partnerships.
Capital Gains Tax (CGT)
A big announcement is the reduction in the annual CGT exemption from £12,300, in the current tax year, to £6,000 in 2023/2024, and then £3,000 in 2024/2025. Any profits (gains) that exceed the exemption will continue to be taxed at the existing rates of 20% for higher and additional rate taxpayers and 10% for basic rate taxpayers (28% or 18% on gains from residential property).
Implications and Action
The ability to transfer assets between couples to maximise the annual CGT exemptions remains and is very important to utilise. In the current tax year total gains of £24,600 could be sheltered where assets are owned jointly by a couple. It may mean that action is taken now to move assets between couples and to then realise any gains within both the annual exemptions before 5th April next year. Indeed, we utilise Personal Portfolios where investments are held and use those funds to move money into tax efficient ISAs. This action will need more careful consideration and, may well lead to a higher use of Offshore Investment Bonds, due to their inherent tax advantages. In the main, our clients hold funds within tax advantaged portfolios, and it emphasises from a tax planning point of view how stocks and shares ISAs are beneficial due to the freedom of CGT.
The Inheritance Tax (IHT) nil rate band of £325,000 is unchanged, and has remained at this level since 2009. It will now remain frozen until 2028 and means that families will have missed out on almost 20 years of inflation linked increases to the nil rate band. The residence nil rate band of £175,000 was last increased in April 2020 and remains at its current level.
Implications and Action
Prior to October 2007, to maximise nil rate bands between couples, a Will, on first death, would make use of a Discretionary Trust. Once the ability to transfer the nil rate bands between couples became available in 2007, many Wills were reverted back to doing so on first death, as indeed for new wills since that date. The move by the Chancellor may well mean that the Discretionary Will Trust becomes much more important. It was already important from the perspective of potentially protecting against care fees and having assets protected to pass to your offspring on first death. What this now adds is the ability to pass the nil rate band, i.e. the £325,000 into a Trust on first death, and any growth, before the survivor passes away is free of IHT. If assets pass straight to the survivor, then ultimately they will form part of their estate for Inheritance Tax purposes and any growth be potentially taxed at 40%. The survivor also has access to the Trust funds, and indeed clever planning for any funds they require, is best done via a loan so reducing the survivor's estate even more. Where your Wills leave assets to each other on first death, it may be sensible they be reviewed
The Pension lifetime allowance and tax relief on Pensions have remained unchanged and, indeed, the Pension lifetime allowance has continued with the existing freeze until the end of 2026, so hasn't been extended beyond this. There are issues still at play in this area due to the number of NHS staff who have left the NHS due to the double tax impact of the annual allowance and lifetime allowance on their Pension. We expect this area will be revisited at some point. The good news has been that State Pension has maintained the triple lock with an increase in line with inflation by 10.1% due from April 2023. For those of you who qualify for the full State Pension, you will receive an extra £870 from the next tax year.
Implications and Action
The 45% tax will now start at £125,140 and with the personal allowance lost at income above £100,000 means tax rates of 60% from £100,000 to £125,140 and now 45% above £125,140. Tactical planning of when to make pension contributions is important as you may pay the higher taxes one year in order to make larger contributions in another, by combining your annual allowances, in order to maximise the tax reliefs.
The annual dividend allowance is, like CGT, being reduced gradually, so the first £2,000 of dividends in the current tax year are free of tax and this will fall to £1,000 in 2023/24 and then £500 in 2024/2025. Tax on dividends had already been increased by 1.25%, so increasing it to 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. Again, this links to similar comment with CGT in that utilising ISA allowances to shelter dividends from tax is highly important, as dividends on investments held in ISAs are tax free. Non tax-sheltered investments, such as a Personal Portfolio or directly held shares, will be impacted with the reduction in allowance, and may necessitate completing a Tax Return for relatively small sums.
High inflation is expected to result in a decline of living standards by 7% in total over the 2 years from 2023/2024, which would wipe out the previous 8 years of growth. The OBR warned that the squeeze on real incomes, rise in interest rates and fall in house prices, would weigh on consumption and investment, which will tip the economy into recession, although we already believe that we are now in recession.
Chancellor Hunt seems to have managed to avoid any market turmoil created in the way that Kwarteng's now scrapped tax cutting measures did, and has demonstrated to the markets that the UK Government is capable of making sensible spending and taxation decisions. Higher taxes and lower spending now correspond with the Bank of England's aim of increasing interest rates, both of which are designed to bring down inflation, which rose to a 41 year high of 11.1% in October. Time will tell how effective the changes have been, as the underlying issue is to increase the productivity and growth within the UK economy, to combat what we have seen over recent years. There were some measures announced confirming funding for Sizewell C Nuclear Power Station and the HS2 rail project that were among measures to demonstrate that growth was an important part of the balancing act from the Budget, but time will tell if this is successful.
Any questions following the Budget or, indeed, our bulletin, then please contact us.