Think-tanks talking about taxes!
Scaremongering, vote gaining, lobbying for the lobbyist’s financial gain, newspaper filling, or just boring?
It’s often hard to tell.
Ignore the think-tank thoughts and we beat ourselves up afterwards. Pay attention to them, and you feel as foolish as the man who realises the bogeyman was, well, just a bogeyman.
Tax is hot on the lips everywhere, particularly with corporations and Brexit.
The EU anti tax avoidance directive has introduced five targeted measures. Preventing companies from shifting profits to low or ‘no tax’ countries, discouraging companies from creating artificial debt arrangements to avoid tax, and aggressive tax planning, have all been agreed and implemented, interestingly in mid 2016, at the time of the Brexit vote.
The two final key measures will be implemented on January 1st 2020, after Brexit ‘no deal’ would have occurred. This doesn’t fully take the UK out of this taxation crackdown, as many of these measures will be implemented under the OECD Base Erosion and Profit Shifting project anyhow.
Billions are expected to be saved if these measures are in place, all of which we would hope would make their way into services away from the colossal tax dodgers?
Meanwhile in the domestic world, the Office of Tax Simplification (OTS) and the Institute of Public Policy Research (IPPR) have both recently set out their views to make taxation fairer, and put more into the public coffers.
They are worth keeping your eye on in your financial planning, as they may well create a complete U-turn if their proposals are implemented.
Their radical overhaul of the ‘UK’s unfair and outdated tax system’ involves having Capital Gains Tax (CGT) changed to the same rate as income tax, as well as taking away reliefs on CGT.
Unlike income tax, CGT is currently applied on items such as a second home sale or, say a portfolio of unit trusts, OEICs, stocks and shares and the rate is 18% for lower rate tax payers and 28% for others. Income tax is 20%, 40% and 45%.
Whilst the expected tax savings of £120 billion these changes would create were doubted by the senior research economist at the Institute for Fiscal Studies, he admitted the CGT proposals had merit.
Most concerning however, is the removal of CGT on death, a planning tool used by many tax and financial advisers.
Currently you can build a portfolio/nest egg of the above assets, and on death the gain is wiped out and passed on to beneficiaries free of CGT.
Over the years, many investors have allowed gains to build up on that basis, and it would seem this is a retrospective piece of legislation that could seriously damage someone’s wealth, especially if they rely on that income and capital in retirement.
Irrespective of whether or not these proposals are even considered it’s a warning call to move whatever you can into tax efficient vehicles where gains are protected, such as ISAs and pensions and potentially rebalancing portfolios to equalise out gains.
The proposals also consider creating varying bands of income tax and merging the pointlessly named national insurance (given what this was effectively marketed as but now doesn’t do) with income tax, and having a gradually rising tax between 2%-50%.
Meanwhile, a tax cut could cause investors in pensions a peculiar problem. Boris Johnson talked about moving the higher rate tax threshold from £40,000 to £80,000.
Whether or not it’s an election promise will remain to be seen, but if it happens, higher rate tax payers could see a hole in their pensions.
A worker who is a higher rate tax payer saving £3,000 into a pension for example, receives £2,000 tax relief on the contributions, giving a total of £5,000 into their pension.
If the higher rate tax threshold was raised to £80,000, they would now become a basic rate tax payer, and the pension would receive tax relief at just 20%, so only £4,000 would be going into the pension.
This is a 20% reduction in their annual investment and would leave a significant drop in retirement income.
And so, if such a cut did arrive, you should consider topping up your pension to accommodate.
About the author
Peter McGahan is Chief Executive of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
If you have a financial question, please call 01872 222422 or visit WWFP.net.Last modified: June 10, 2021