News Updates - November
15th November 2018
Women lose out on pensions perks
More than a million low-earners are losing an estimated total of £72m a year in pension perks because of a little-known anomaly that mainly affects women who work part-time. According to figures from HM Revenue & Customs, some 1.2 million people lost out on government tax relief top-ups in 2015/16 - around 800,000 of whom were women. Those involved are signed up to net pay schemes, where pension contributions are deducted from pay before tax is deducted. With most pensions, the income tax deducted from the earnings is given back to savers but, with a net pay scheme, contributions are taken before tax, so a basic-rate taxpayer puts £1 into their pension and essentially saves 20p income tax they would otherwise have paid. However, people who earn less than £11,850 a year pay no income tax, thanks to the personal allowance, but may still have a pension eligible for tax relief. If they are in a net pay scheme, however, they get no relief. This is because, when money is taken for their pension, they have not saved any income tax - meaning £1 costs them 20p more than it does a basic-rate taxpayer.
Banks profit from IHT boom
Banks are "pickpocketing" bereaved families caught between long-standing inheritance tax and probate rules. This is because they are increasingly being forced to take out expensive loans to gain access to their inheritance - or fund death duty bills themselves. Experts highlight that he problem is not new but increasing house prices are dragging more estates into the IHT zone - the taxman received a record-breaking £5.2bn in IHT receipts in 2017/18, some £400m up on the previous year. Contrary to popular belief, IHT must be paid before a grant of probate gives recipients access to an estate. Quirks exist in the inheritance system and paying IHT to access the estate is one of them. Sometimes the bill can be insurmountable for a family already stretched and having to consider the cost of funeral arrangements. Some financial offerings look to capitalise on the system, such as high-rate loans to pay the IHT bill, which at its worst is akin to, according to some commentators (albeit rather emotively) pickpocketing a widow.
The end of the buy-to-let boom?
The investment case for buy-to-let property does not look so hot right now. With Brexit uncertainty and rising interest rates, UK property prices could come under pressure in the years ahead. Furthermore, with rent increases not keeping up with house price appreciation, rental income yields are now low. Add in higher stamp duty for buy-to-let properties and a sharp increase in regulation, and the outlook for landlords does not look as promising as it has in the past.
However, there are other niche areas of the UK property market that appear to have brighter prospects, including property that is set to benefit from the online shopping boom and real estate that is set to benefit from the UK’s thriving start-up scene. And the good news is that it’s possible to invest in this kind of real estate with as little as around £500, through real estate investment trusts (REITs) listed on the London Stock Exchange.
Brexit uncertainty and your money
It has been a riotous week in the corridors of power with deals done, resignations tendered and more than a few pointed pieces to camera by wannabe leaders. There are consequences not just for our individual financial affairs next March, but right now. As the headlines erupted, markets stuttered, exchange rates choked and independent experts across the country sat back and took stock. Here’s what they think all this means for your money:
- The market has taken a big red pen to stocks which are heavily exposed to the UK economy like the banks, retailers and housebuilders.
- Another interesting issue is how the Bank of England will react. Perhaps it will now take a cautious stance, meaning that the interest rate rises we were expecting will have disappeared.
- The stock market still offers attractive long-term returns but they will now need to focus even more so on what underlying exposures they have. Since the referendum, the international giants have fared rather well and many take the view that this will probably continue.
Investment trust opportunities
Investment trusts, unlike collective funds such as unit trusts and open-ended investment companies, spend far less on marketing and, as such, are often overlooked. Here are five advantages worth thinking about:
- Although charges on all funds are slowly coming down, investment trusts tend to levy lower fees than unit trusts and open-ended investment companies.
- Some investment trusts appeal to income-seekers because they are able to grow dividends.
- Trusts are, arguablby, better equipped to increase dividends than unit trusts or open-ended investment companies because they are allowed to hold back some income they receive from holdings
- unlike rival funds they can borrow money to increase exposure to markets. This can work in favour of shareholders if subsequent equity gains surpass the cost of borrowing.
- The average investment trust has outperformed its unit trust counterpart over one, three, five, ten and 15 years.
Use or lose your £40,000 pension bonus
Higher earners have six months left to take advantage of a quirk in the pension rules that allows them to double up on their tax relief. Savers can put £40,000 a year tax free into a pension, as their “annual allowance”. They are also allowed to carry forward any unused allowance from the previous three years. However, a rule change in the 2015-16 tax year allowed people to put in double the annual allowance for that year, increasing their contribution from £40,000 to £80,000. Under the carry forward rules, anyone who did not take advantage of the double tax break then must do so before April 2019 or lose it.
Landlords hit by the Budget
When you sell a property, you may have to pay capital gains tax (CGT) if you have let it out. How much you pay depends on how long you lived there. You pay tax on your “chargeable gain”, which is your gain, minus any private residence relief (PRR) you are eligible for. PRR is the tax relief that keeps people’s main homes out of the CGT net. At the moment you don’t have to pay any CGT for the years you lived in the property, plus an additional exemption for the final 18 months that you owned it, even if you weren’t living there at the time. But Hammond announced that from April 2020 this final period exemption will be cut to nine months. The other change is arguably a bigger deal and involves something called lettings relief, which currently provides up to £40,000 of relief (£80,000 for a couple) to people who let out a property that is, or has been in the past, their main home. From April 2020, lettings relief will only apply where the owner is sharing occupancy of the home with a tenant – effectively spelling the end of this perk.
Rates held but Brexit won't get in the way of rises
The borrowing costs of UK households and businesses may rise in the event of a no-deal Brexit, the Bank of England has warned. The central bank stressed that it may not be able to cushion the economic blow of the UK leaving the European Union next March with no agreement. For now the base rate is held at 0.75% but the central bank forecasts growth of 1.3% this year, rising to 1.7% in 2019. The rationale behind expected increases irrespective of the Brexit outcome is that the economy is now broadly in balance, rather than in being material excess supply as it was then. Inflation is notably above target, not significantly below. The Bank also stressed that a ‘no-deal’ scenario would probably cause another slump in the pound, pushing up inflation and supporting the case for borrowing costs to rise.
40% disparity between make and female pensions
While gender parity may have been achieved on paper - since 2010, women’s pension age has been gradually rising from 60, where it has been set since the 1940s, to equalise with men. - retirement outcomes remain shockingly unequal. In the UK between 2016 and 2017, women received 39.5% less than men on retirement – a circa £7,000 difference on average. Analysis found that the gender pensions pay gap is more than twice that of the gender pay gap which is 17.9% for all employees. There are fears that the rules of the auto-enrolment system also disadvantage women because unless you’re earning more than £10,000 a year, you’re not auto-enrolled at all.
Entrepreneurs tax relief rules tightened
The Chancellor left capital gains tax (CGT) broadly unchanged in the 2018 budget but has tweaked rules on tax relief for entrepreneurs by extending the qualifying period of the tax break from 12 months to two years, with the aim of encouraging longer-term investment in British business.
Entrepreneurs pay a lower rate of tax at 10pc, compared to the standard rate of 20pc, on capital gains when they sell all or part of their business if more than the annual exempt amount of £11,700. From on or after April 6 2019, in order to qualify you must be a sole trader of business partner and have owned all or part of a business for at least 24 months before you sell.