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News Updates - July

11th July 2019

News Updates - July

Inheritance tax changes in the offing?

Inheritance tax could be due a major overhaul, with a new report recommending sweeping changes to gifting rules, life insurance policies and even who pays the bill. After a request from the Chancellor of the Exchequer, the Office of Tax Simplification (OTS) conducted an extensive review into inheritance tax. Its new reports sets out clear recommendations for reforming the rules, which the government must now respond to. You won’t necessarily have to pay inheritance tax, as the first £325,000 of an estate is tax-free. And if your home passes to your child or grandchild, the estate can be worth up to £475,000 in 2019-20 before tax is payable. Indeed, last year just 24,500 estates were landed with a tax bill, accounting for around 4% of all deaths in the UK. Yet while the number of people affected is small, the bills can be enormous, with a tax charge of 40%. Whether you’re planning your legacy, or dealing with an inheritance, it’s vital to know how the rules work. Here’s the recommendations the OTS has made: 

  1. Shortening the time limit for taxable gifts
  2. Changing who pays inheritance tax on gifts
  3. Reforming IHT exemptions to gifts
  4. Exempt all life insurance policies from inheritance tax
  5. Remove the capital gains tax uplift
  6. Review treatment of businesses and farms 

The OTS report only contains a list of recommendations, so the current rules haven’t changed but do talk to your financial adviser.

Beware pensions scams

Pension scams cost Brits £4 billion a year and are anticipated to be the next big financial scandal, it was reported this month. A TV celebrity is among thousands of Brits who transferred cash out of defined-benefit pension schemes into inappropriate or high-risk ventures. The well-known broadcaster, who cannot be named for legal reasons, invested more than £1million into an offshore pension scheme which is now feared to have collapsed. It comes after reforms by George Osborne allowed savers access to a quarter of their pots tax-free from the age of 55. In one case a former army veteran handed over £34,000 to invest in truffle-free farms that were never cultivated. Another saw an airline pilot lose £380,000 in a scam now pursued by HMRC. Baroness Altmann, a former pensions minister, told The Times: “Pension scams have the potential to be the next big financial scandal. Commentators believe that regulators have failed to respond with adequate urgency and are leaving consumers at the mercy of fraudsters. It is thought a third of all pension transfers exhibit “red flags”, up from one in 19 three years ago.

 

The risk of a house-price crash and death tax

Families could cut their inheritance tax bills by thousands of pounds by using a little-known rule that allows them to adjust the valuation of the estate of a deceased relative if house prices have fallen. The recent decline in property values, especially in London, makes the tax concession particularly valuable now. House prices in the capital fell by 4.4% in the year to May, the biggest drop in a decade, according to data published last week by the Office for National Statistics. This follows a general slowdown in house price growth over the past three years, driven mainly by market slumps in the south and east of England. As a result of these falls, many families risk paying too much inheritance.  When someone dies, any land and buildings they own are part of their estate when it comes to working out IHT. Most estates don't have to pay because they are valued at less than the threshold: £325,000 in 2012-13. Above this, tax is paid at 40%. If HMRC believes the executors have been "negligent" in the way they have done the valuation, the estate could end up being landed with a fine of up to 100% of the extra liability. The good news is if you sell a building or land within an estate for less than the value that you paid IHT on, you may be able to claim relief, provided it was sold within four years of the death. Use form IHT38 to do so. Many people don't realise they can claim back IHT if the property sells for less than it was valued at during probate. With house prices generally falling, thousands of people could still be able to claim back any overpayment.

Pensions tax trap

Savers risk a £300 fine and further daily penalties if they dip into an old retirement pot and fail to tell their current pension provider - but it is unknown how many are falling into this obscure trap.  Ex-Pensions Minister Steve Webb, who is trying to raise awareness of the penalty for not keeping your present scheme updated, made an unsuccessful attempt to find out how many people HMRC has fined since 2015. Other dangers of tapping old pots while still making ongoing contributions have been flagged by many financial experts. Savers who access any amount over and above their 25% tax free lump sum are only able to put away £4,000 a year and still automatically qualify for tax relief from then onward. This is meant to prevent 'pension recycling' to gain a tax advantage - where people try to boost their retirement pot by generating extra tax relief. If you breach the £4,000 limit, known in official jargon as the Money Purchase Annual Allowance or MPAA, you could face a big tax bill down the line. And if you trigger the MPAA and don't inform your current scheme within three months, you can also get landed with a £300 fixed penalty and a daily penalty of £60 a day. Steve Webb, now policy director at Royal London, had his Freedom of Information request on how many people have been fined for this failure knocked back by HMRC.

 

IHT shake-up on the cards?

Inheritance tax could be due a major overhaul, with a new report recommending sweeping changes to gifting rules, life insurance policies and even who pays the bill. After a request from the Chancellor of the Exchequer, the Office of Tax Simplification (OTS) conducted an extensive review into inheritance tax. Its new reports sets out clear recommendations for reforming the rules, which the government must now respond to. You won’t necessarily have to pay inheritance tax, as the first £325,000 of an estate is tax-free. And if your home passes to your child or grandchild, the estate can be worth up to £475,000 in 2019-20 before tax is payable. Indeed, last year just 24,500 estates were landed with a tax bill, accounting for around 4% of all deaths in the UK. Yet while the number of people affected is small, the bills can be enormous, with a tax charge of 40%. Whether you’re planning your legacy, or dealing with an inheritance, it’s vital to know how the rules work. Proposed changes include: 

  1. Shortening the time limit for taxable gifts
  2. Changing who pays inheritance tax on gifts
  3. Reforming IHT exemptions to gifts
  4. Exempt all life insurance policies from inheritance tax
  5. Remove the capital gains tax uplift
  6. Review treatment of businesses and farms

Sin tax freeze a sign of things to come?

Boris Johnson faced an angry backlash over his plan to freeze levies on unhealthy food and drink products pending a review into whether they are effective. The Tory leadership frontrunner was condemned by health groups, doctors and MPs after announcing the proposal on so-called "sin taxes". Tory MP Steve Brine, who was public health minister when the tax was introduced, accused Mr Johnson of "transparent dog whistle politics dressed up as something thinking." The former foreign secretary hit back, claiming that extending the tax to milkshakes would be paid disproportionately by poorer families. The Guardian’s view is that the more plausible beneficiary of any slowdown on the sugar tax is, of course, the food and drinks industry which strenuously opposed the levy. Note that one of Johnson’s advisers is Will Walden of the lobbying firm Edelman, among whose clients is Coca-Cola – a company which has made the case for rethinking the sugar tax. Team Johnson denies Walden was involved in the policy shift. The paper goes further to suggest that this policy gives us a useful preview of the Johnson premiership to come. First, there will be cabinet splits aplenty, as Johnson cheerfully undermines or tramples on the detailed policy work of his ministers. Second, they claim, we are likely to see a very specific Johnsonian brand of populism, in which he purports to stand up for the little guy against the wagging finger of the nanny state and the PC-brigade. He will suggest that he’s on a mission to cheer us all up, against the po-faced directives of a varying cast of hand-picked enemies, whether at the BBC, Brussels or the Bank of England, who boringly urge prudence or caution. And for all the talk of representing the poorest or “the people”, his proposed action will be of greatest benefit to the powerful.

UK house prices up

British house prices rose at the fastest annual rate since early 2017 in the three months to the end of June, mortgage lender Halifax said on Friday, adding to other signs that the housing market has stabilized after weakening on Brexit worries. House prices were up by 5.7% in the three months to June compared with the same period a year ago after rising by 5.2% in the three months to May, Halifax said on Friday. A Reuters poll of economists had pointed to a 5.9% rise.  Halifax cautioned that the annual increase was flattered by weak price growth in the corresponding period in 2018. In monthly terms, prices fell by 0.3% after a rise of 0.4% in May. Commentators said the housing market was displaying a reasonable degree of resilience in the face of political and economic uncertainty. Other measures of house prices have shown smaller increases than Halifax recently — with prices in London falling — but have also suggested a bottoming out in the market after a slowdown linked to worries about Brexit.  Halifax’s measure of annual house price growth had been growing by nearly 10% a year at the time of the 2016 referendum. However, the expectation is that If the UK ultimately leaves the EU without a deal - be it on Oct. 31 or some other time - house prices could quickly drop around 5% amid heightened uncertainty and weakened economic activity.

Divorce and the best way to treat pension pots

The tricky task of dividing pensions fairly in a divorce and stamping out 'unintended discrimination' against women is tackled by top lawyers in a newly published guide. Pensions are often a family's second most valuable asset after a home, but the legal experts found a widespread lack of confidence among colleagues in the profession about how to split them, and a substantial proportion of unfair outcomes. Previous research has found divorcing women could be forfeiting thousands of pounds of pension cash, and a charity has called for lawyers to prompt couples to discuss the topic during the process.  The new good practice guide seeks to address this by demystifying pensions jargon, encouraging fairer settlements, and reducing the risk of claims against lawyers by former clients. The aim of this guide is to help judges and practitioners navigate their way with more confidence through the tricky field of pensions on divorce, and ultimately improve the fairness of outcomes for those going through divorce. Additionally the Government plans to tackle the causes of financial inequality in later life by intervening at points where women are likely to face disadvantage from school to employment, divorce and retirement. It will target inequalities in the labour market that lead to women to retire, on average, with pension savings up to 40% lower. This will include by reviewing equal pay legislation, redundancy protection and maternity discrimination.

 

 

 

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