KEEP IT SIMPLE, STUPID
I listened to the Budget on the radio while playing "avoid the pothole" which, in other countries, is called driving. This wasn't ideal as the more George Osborne droned on I felt my eyes starting to droop, but thankfully my front wheel disappearing into a six inch deep hole soon brought me back to life.
As expected the Chancellor emphasised at length how poor the nation's finances were when he inherited them last year, and to expect them to be fixed in less than ten months was never going to happen. Based on the announcements made we can expect a number of years of increased tax take, as personal allowances are only going to increase by CPI rather than RPI as they have in the past. A subtle stealth tax that Gordon himself would be proud of.
I was most interested to hear that the Chancellor has set a goal of simplifying the ridiculously complicated UK tax system. A start was made with the abolition or restructure of 43 different reliefs, and he outlined his plans to merge employee National Insurance Contributions with Income Tax in the future. However, before we start fantasising about a world with fewer accountants* perhaps we should remember the result of the previous Government announcing similar initiatives.
When Gordon Brown introduced the concept of "self assessment" in the UK tax system he did so with a promise of a far simpler regime. Ten years later the HMRC guide to completing a tax return is bigger than the London phone directory.
In 2006 Pension Simplification was introduced. This promised a new world of pension legislation that would make saving for retirement much easier. However thanks to almost constant tinkering from the day the new legislation was enacted the current rules regarding pension contributions for high earners are virtually incomprehensible and impossible to explain to those affected by them. We can only be thankful they did not set out to make things more complicated!
The KISS (keep it simple, stupid) principle is one that I feel most people could benefit from when looking at their personal finances. I have come across many different schemes over the years that promised the earth in terms of avoiding tax, at considerable cost I may add, but actually ended up costing far more than the tax they were designed to avoid.
One of the most popular was changing ownership of the family home by putting it in a Trust to avoid IHT. As a result a simple change in legislation was announced that introduced Pre-Owned Assets Tax, and meant the schemes that had been set up having to be revoked and the fees paid wasted.
Since then anti-avoidance legislation has been beefed up even more and in the Budget the Chancellor stated that HMRC are looking into a number of schemes designed to artificially avoid tax. Anyone considering one of these may be wise to think again, as changes in legislation to catch these has tended to be retrospective.
The good news is that for the vast majority of UK taxpayers there is no need to consider such schemes as there are still numerous ways the effect of tax can be mitigated without attracting the attention of the anti avoidance legislation. For example;
- Pension funds remain free of IHT on death before taking
benefits. Therefore for those in a position to do so, it is
possible to use other assets to provide the income or capital
required in retirement as this can have the double benefit of
reducing any IHT liability and paying less income tax. Also,
from the new tax year, Income Tax relief at the individual's
highest rate will be allowed on contributions made.
- The Capital Gains Tax exemption is increasing to £10,600
next tax year, which is over £3,000 more than the Income Tax
personal allowance. How many people use this in full? I
would guess less than 1% of the population.
- ISAs continue to be one of the best ways of accumulating
personal wealth and sheltering it from tax. The fact that
£10,680 can be saved from the new tax year, and that ISAs are
continuing until at least the end of this parliament, means that
over £50,000 can be saved into these plans, per person, over the
next five years.
- The announcement that a Junior ISA will be introduced in
the autumn is also interesting as the earlier anyone can save into
ISAs the better and, although we await details of how this will
work, it could be an ideal way for parents and grandparents to put
money away for their offspring's benefit.
- The tax reliefs for investing in Enterprise Investment
Schemes have been increased, as has the maximum amount that can be
invested, and although these are certainly not for everyone, they
can have their uses.
- Although not altered in the Budget, Investment Bonds are
also an excellent way of deferring tax until a later date when the
fiscal environment may be more benign.
- And it is still possible to give assets away, and if you survive seven years they will be out of your Estate for IHT purposes.
Maybe none of the above would be regarded as exciting, but they will not result in sleepless nights worrying if HMRC are going to come calling. And, let's be honest, we need to save as much as we can to pay for the new suspensions our cars will inevitably need thanks to these damned potholes!
*if anyone is offended by this comment, i.e. any accountants, please note it is a joke.
For and on behalf of Alan Steel Asset Management