Political uncertainty and practical steps to protect wealth
Some investors fear the arrival of a potentially harsher tax regime. This piece sets out actions they could consider taking now
The Government’s slender majority, intertwined as it is with the process of Brexit, is making investors anxious.
A global backdrop of potential trade disputes and a raft of of other issues add to uncertainty.
At home, both Labour and the Conservatives have in recent years mooted changes to tax and pension regimes which could disadvantage higher earners.
Whatever unfolds politically in coming months and years, individuals with significant assets and those hoping to pass on wealth to younger generations remain at risk of higher direct taxation or the loss of existing reliefs.
Families and their financial planners can’t prepare for outlying eventualities. But many are taking practical steps now to capture existing benefits and prepare for a possibly harsher tax regime.
Within the wider context of an investor’s needs and financial position, these are some of the actions being considered.
Capital gains tax: are there investments that should be sold now to crystallise a gain?
One recent trend in taxation has been to treat gains more generously, particularly where they do not involve residential property.
Individuals have an annual CGT allowance – £11,700 for the 2018-19 tax year – above which gains are taxable.
The allowance has crept up only slowly, but the rates have fallen more sharply: most notable was the cut introduced by the Conservatives in 2016-17, when CGT rates fell from 28% to 20% for higher-rate taxpayers. (This reduction did not apply to residential property investments, where gains continue to be taxed at 28%.)
The historically low rate of 20% presents opportunities, again within the wider context of the investors’ needs and position.
“Capital gains tax rates are arguably as low as they have ever been for non-business assets,” said James Gladstone, Cazenove Capital’s Head of Wealth Planning. “In some circumstances there will be a case to crystallise gains in order to re-base assets and make them available for further planning.”
Pension action: capitalise on tax reliefs while they remain
The current pension system is especially beneficial for higher earners as contributions to pensions attract tax relief at earners’ marginal income tax rates.
But politicians and other leading figures across the spectrum are calling for reforms in which higher rates of tax relief would be replaced with a lower, single rate.
The Royal Society for the encouragement of Arts, Manufactures and Commerce is the latest organisation to call for this move in a well-publicised paper issued on 18 April.
Under the existing system, a higher-rate (40%) income taxpayer needs only contribute £6,000 for every £10,000 they wish to add to a pension. Under the RSA’s proposals, for example, a higher-rate taxpayer would have to pay £7,000 to achieve the same result.
Annual contributions to pensions are capped at £40,000, but careful planning can utilise previous years’ unused allowances, creating an opportunity for substantial one-off investments and significant immediate tax savings. For those whose pension assets are at risk of reaching the lifetime allowance – which has been subject to successive reductions and now stands at £1 million – additional planning will be needed.
The existing system also grants tax relief on modest pension contributions for non-earners including children. These reliefs may be targeted by future policymakers and so the benefits could be grasped now, where feasible, by parents and grandparents.
Pension action: consider taking tax-free cash earlier
A further benefit which is perceived to be at risk is the tax-free element of an individual’s pension which becomes available when investors are old enough to access the money.
Currently 25% of a pension can be drawn tax-free. Otherwise pension withdrawals are taxed as ordinary income.
It is uncertain how any future government might act to limit this relief, but the benefit as it exists is clearly of greater value to those with larger pension pots.
Today’s rules allow many pensions to be accessed from age 55 and withdrawing the tax-free element sooner rather than later – particularly if there is an immediate alternative use for the capital – could ensure the perk is utilised.
If there is no immediate use for the capital then other considerations come into play: once removed from a pension and invested elsewhere, the capital may attract other income and capital gains taxes which would need to be considered.
Inheritance tax: bring gifts forward
The most effective means of limiting inheritance tax for many is to give assets away long before death. Under current rules gifts fall outside the donor’s estate entirely provided they survive the gift by seven years.
Any move to limit this concession would be a severe blow.
“It may be worth having a conversation about bringing forward planned gifts in order to benefit from the rules as they stand now,” James said.
Current rules also allow for “gifts out of income”. Where it can be demonstrated that regular gifts do not impinge on the donor’s standard of living, they fall out of the estate right away, and are another useful tool in mitigating death duties.
Bringing this form of gifting forward would protect against a number of eventualities including a fall in future income.
Revisit old and complex inheritance tax planning
“Chasing simplicity is a good thing,” James said, raising the potential need for many families to review previous inheritance tax and/or asset structuring arrangements.
Tax structures established some time ago may have been superseded by changes to inheritance tax legislation. In recent years there has also been a cultural change in which complex arrangements are less favourably viewed – both by HMRC and the wider public and media.
Changes to the pension regime introduced in 2015 have provided further opportunities to pass on wealth tax-efficiently, providing another reason to review existing arrangements.
The prospect of a potentially dramatically harsher tax environment might prompt many reactions including, from some individuals, life-changing decisions such as emigration. Such substantial decisions require additional tax advice that goes beyond the remit of financial planning, where advice takes into account the needs of a client but remains based on the current tax landscape.
Significant or unexpected political events – such as the calling of a snap election – might trigger the need for more immediate planning.
But for now the measures outlined above, taken on a costed basis and within the context of an investor’s wider circumstances, offer some security from which to face possible political and other upheavals.
This article is issued by Schroder Wealth Management (US) Limited, a firm authorised and regulated by the Financial Conduct Authority and registered as an investment adviser with the US Securities and Exchange Commission. Registered office at 1 London Wall Place, London EC2Y 5AU. Registered number 10761882 England. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Schroder Wealth Management (US) Limited unless otherwise stated. For your security, communications may be recorded and monitored.