18th May 2015
Prime minister David Cameron has pledged that his new government intends to execute all the plans contained in the Conservative’s election manifesto and Britons will find out how quickly they will be implemented in the Budget to be held on 8 July.
As a result, time is short so investors need to act sooner than later – below we outline a pre-Budget action plan:
Pensions tax relief
The curtain is coming down on tax reliefs for higher earners and it is now a case of when they lose out, rather than if. As outlined on page 69 of the party’s manifesto, inheritance tax (IHT) breaks on the family home will be paid for “by reducing the tax relief on pension contributions for people earning more than £150,000”.
Tom McPhail, head of pensions research at Hargreaves Lansdown recommends that investors who will be affected should make the most of the 45% pension tax relief while they still can as “past experience points to the possibility of the door being slammed shut on budget day”.
The government has relatively little room for manoeuvre on raising taxes generally and given that pension tax policy has become increasingly incoherent in recent years, it is an area which is both ripe for reform and which could generate additional revenue for the exchequer.
McPhail says: “It is quite possible that 40% tax payers could also see their tax reliefs changed as part of a wider restructuring. We believe there are more balanced solutions to pension tax relief reform; we urge the government to pause and consider alternative options before making changes which could have negative consequences for all pension savers.
“A pension commission would give the government the opportunity to review the impact of all the recent changes to the pension system before acting further. In the meantime a policy of raiding pensions to further stoke the housing market does not seem to make much sense.”
Protecting retiring investors
The pension freedoms have been hugely popular and while it is not expected there will be any change to the new rules, more can still be done to address the risks involved in drawing a retirement income from an investment fund and to protect investors from unexpected or unreasonable charges.
McPhail says: “We are looking for the government to build on the success of the pension freedoms to ensure that all investors can make the most of their retirement savings. This means avoiding unnecessary risks and not being stung by unreasonable charges.”
The Conservatives will increase the Inheritance Tax (IHT) threshold for married couples and civil partners to as much as £1m. The way this will work is by each individual being given an additional, family home IHT free threshold of £175,000 on top of the standard nil rate band of £325,000.
Hargreaves Lansdown highlights that an IHT tax break after six years of frozen allowances will be some consolation. However share prices have risen 128% compared to 24% for the average property and a fairer incentive would be to increase the nil rate band for all assets.
The population has witnessed some substantial changes to how pensions, ISAs and property are taxed on death, which turns some of the fundamental elements of financial planning on their head. For many people it will now make more sense from a death taxes perspective to avoid downsizing and spend ISA money before their pension. But Hargreaves Lansdown points out that tax is not the only consideration and investors should take the opportunity to review their plans, particularly as deeds of variation are also likely to go.
Personal allowance and other tax breaks
The conservatives have also pledged to:
Noticeable by its absence in this catalogue of tax breaks and promises is capital gains tax (CGT). However a rise in taxation here would likely reduce the amount of tax collected, as investors would simply sit on their hands rather than realise gains. Hargreaves Lansdown says a more productive would be a cut in CGT by reinstating indexation or taper relief, to reward longer term investing and boost the numbers of transactions.
It notes that investors should consider how they can maximise their tax breaks, in particular married couples who should consider moving income-bearing cash and investments into ISAs, or into the name of the person who pays the lowest rate of tax. It adds that higher earners – £100,000 and above – continue to lose their personal allowance at an effective tax rate of 60% and a pension contribution can be one of the best ways to help preserve this allowance, meanwhile ISAs remain the flagship way to save income and capital gains taxes.