Bulletin – February 2016
Tax and budgets
It is nearly the end of the tax year. The Chancellor will have plenty to say next month, not just because it has become part of his repertoire to drop significant changes into the arena without much warning, but because the financial world looks quite different today than it did in December.
The past few years have seen him start with a demand for austerity, and then to deliver headline grabbing giveaways on the day. This is why we will soon have:
- A rising personal allowance
- A new £5,000 dividend allowance
- A new personal savings allowance of £1,000 (£500 for higher-rate taxpayers)
- The potential for a further £5,000 of interest tax-free
- Pension funds free from inheritance tax
- An exemption from inheritance tax that could see £1,000,000 of a married couple’s estate passing on free from this tax (by 2020, but see back page).
You can now receive more of your income tax-free and leave more to your beneficiaries than ever before. These are all sizeable benefits, so we need to be sure about your income position. If it seems as though we are asking for more specific information than before regarding your income, it is to make sure you benefit in the best way possible from all these tax breaks.
This Budget might be different. We have talked about the disinflationary effect of technology and falling energy prices. Squeezed profits, an internet generation that is accustomed to getting more for less by means of technology and crowdsourcing solutions on phones, this will all add pressure to the tax system.
Profits are lower, tax takes are hard to come by, and we all demand more services from the UK government – one reason for more pressure on Google and Starbucks.
How long before the bubble bursts? If we continue to rely on foreign money to fund our lifestyle. How will the vote on Europe play out? Will investors be prepared to give our government billions of pounds, if they now that not only will there be a negative interest rate (i.e. they would be paying our government for the privilege of lending the UK money), but who knows if they will get their money back in the end? Will international investors still lend to us?
We are in a difficult, uncharted territory. Osborne may not be able to give money away this year. He certainly could not sell the UK stake in Lloyds!!
There is a reason why we take a diversified view with your capital. Nobody knows what will happen next week, even less next month or year.
Patrick sent you an article recently arguing about why we believe in the long-term growth of the global economy, but also why, for some, cash could be an option. This view has not changed.
In the immediate future, Osborne faces a tough task – to reduce our nation’s dependence on borrowing. This may be the year where austerity really begins to bite – or taxes have to rise!
Lightbulbs, kettles and maps
We are living through the Fourth Revolution and we are all engaged. This revolution is not about imposition from above, it is a self-inflicted improvement.
We must all recognise that we are sowing the seeds of our own destruction and at the same time creating a new world of exciting opportunity.
Whether you call it constructive destruction or disruptive technology, the fact is, the world is changing at a fantastic pace and we are all doing it together. Here are some simple examples.
When we replaced all the old lightbulbs here at KMG’s office, our energy consumption declined from 5kW per hour to 0.5kW per hour – a 90% saving in ongoing electricity costs just on that one simple event. The bulbs last much longer saving real factory costs and reducing the workforce required to make new bulbs.
Until recently here in the office of KMG, we exhausted two or three kettles a year. They were constantly in use as individuals made coffee and tea. We realised that by installing our instant boil tap in the kitchen we could dispense with kettles and our water consumption declined along with electricity consumption because we were not boiling unnecessary water from scratch. A simple time and cost saving device embracing new technology, which allows on tap, boiling water to be supplied instantaneously. (I am not sure this is economically viable in a domestic house, but I know that some clients have done so).
So not only have we saved water and electricity, we have also saved on the construction of kettles which saves metal components, but of course it also means the people who made the kettles have less employment.
We take electronic maps on our phone for granted, but not long ago you would have purchased a standalone Satellite Navigation system that cost a lot of money or even a map book. As we now have maps on our phones, we move around more effectively and efficiently using less petrol and time and improve productivity. It means that mapmakers have less work and the paper consumption has declined. It also means that black cab drivers in London are now under pressure because of course Uber taxis can use maps on mobile devices to carry out their trade at a much lower cost.
These three examples (just a tiny fraction of all the things that we are doing every day to improve the quality of our lives) mean that each and every one of us is now threatened by the probability that technology will overwhelm current employment strategy, business strategies and will revolutionise our way of life.
Those that survive will be those that can adapt quickly and we at KMG are doing just that. We are adapting our business by embracing technologic advancements, because we know that in a very short space of time the old traditional way of providing financial advice will disappear.
As with all transformational actions, we do not know what the timeline may be for any evolution, but here is an example of KMG’s foresight from the past.
The business model that we set up for KMG in 1986 was eventually adopted under the Retail Distribution Review (RDR) about 25 years later; that is why KMG has evolved so successfully through the regulatory change in business practice. Indeed, KMG has survived through so many transformational events that have challenged us since the end of the Second World War. Each transformational event, however, gets quicker and quicker in coming to fruition.
The future is to embrace technology to our advantage.
The FSCS temporary high balance protection scheme
Most readers will be aware of the Financial Services Compensation Scheme, the UK government’s compensation scheme for customers of UK authorised financial institutions.
If a financial institution fails, the FSCS scheme protects deposits up to a value of £75,000 per individual customer account with each financial institution, or £150,000 for a joint account (remember that these figures were reduced on 1st January 2016 – previously they were £85,000 per individual and £170,000 for a joint account).
What is less well known is that from 3rd July 2015, the FSCS introduced a £1m protection limit for temporary high balances. There are various rules covering this new scheme. Firstly, the deposit must be “temporary”, which means it must have been credited to your account no more than six months before the financial institution fails. Secondly, the deposit must have been made as a result of a specified list of circumstances. These are set out in full on the FSCS’s website, but some of the more important examples are as a result of a property transaction, benefits from an insurance policy, personal injury compensation (in which case the amount protected by the FSCS guarantee is unlimited), redundancy payments, divorce payments and death benefits.
The FSCS will not automatically pay compensation if you have a temporary deposit arising from one of the specified circumstances, with an authorised financial institution which fails. If this occurs, you must apply to the FSCS setting out the details of the claim and supplying all supporting documentary evidence. Assuming all is in order, the FSCS will pay the claim within three months of the date of the failure of the financial institution.
For those of you who are still to make up your minds as to which way to vote in the BREXIT referendum, it is worth noting that both the reduction in the individual FSCS compensation limit from £85,000 to £75,000 and the introduction of the temporary high balance protection scheme have come about as a result of the UK implementing the EU’s Deposit Guarantee Schemes Directive. Proof that EU legislation has both its good and bad sides!
Yet another bit of impossible legislation to get your head around
The 2015 Budget introduced us to the new Residence Nil Rate Band (RNRB). In addition to the existing nil rate band available on death (an amount of £650,000 for a couple or £325,000 individual), the new RNRB will allow a further £175,000 per person to pass from your estate to the next generation without any inheritance tax. The allowance is phased in from 2017, so that by 2020 a joint estate could be exempt from tax on the first £1m.
But is it that simple? Unfortunately not, and as ever, the devil is in the detail.
Interesting points to note are:
The RNRB is transferrable. If it is not used on the first spouse’s death, it will carry forward to the second. There may be good reasons to use it on first death, however, and this should be considered.
If your late spouse has already passed away prior to April 2017, they may have still qualified for an allowance and therefore this will be carried forward to offset against your estate, along with the usual transferrable NRB.
Your estate must be less than £2m (per individual) for the allowance to apply in full. If your estate exceeds this, it is tapered down and is eventually lost. It may therefore be appropriate to redistribute asset between spouses now to ensure that your estate will be qualify on first and second death. You should also consider other ways to reduce your taxable estates to this level to ensure that they qualify of death.
Property in your estate will need to be worth at least £350,000 and you must have lived in this property at some time whilst you have owned it (but this period need not be long).
If your property is sold, e.g. if you need to move into residential care or downsize, your estate may still qualify for the RNRB under the “downsizing” provisions, which protect the allowance in certain circumstances.
You may apply the allowance to more than one qualifying property – careful planning will be required.
At least the value of the allowance (although not necessarily the property itself!) must pass to your “direct descendants”. This has been given a broad meaning but may not include discretionary trusts.
The opportunity for your estate to save £140,000 in tax is significant, but it may not apply without some planning. There are many opportunities available to you to maximise your use of the allowances and reliefs from inheritance tax: the new RNRB, pensions, gifting allowances, trusts, business property relief investments, and charitable giving, to name a few.
Careful structuring of your assets and Wills can make a big difference and we recommend that your estate plan and Wills are revisited and reviewed in light of recent developments.