News Updates - September
12th September 2019
Inheritance tax take rises
A Inheritance tax should be reformed to reflect inflation, a lawyer has argued as receipts rose to a record £5.4 billion. HM Revenue and Customs figures showed that revenue in 2018-19 rose by 3% from £5.2 billion the previous year. Of the £5.4 billion collected, 72% was from estates worth more than £1 million. In 2016-17, 4.6% of deaths resulted in a charge. The figure was 5.9% before the financial crisis but fell to 2.7% in 2009-10. It has climbed steadily since then, due to long-term rises in property prices and the nil-rate band remaining at £325,000 for the past decade. In the past nine years the amount HMRC has raised through IHT has more than doubled. The proportion of estates which pay the tax has also been increasing, although it still remains relatively low at 4.6%. Experts believe that the introduction in 2017-18 of a top-up allowance on the normal IHT threshold had yet to have any strong impact. The residence nil rate band (RNRB) gives an additional allowance to people leaving their family home to direct descendants like children or grandchildren. It will be worth an additional £175,000 by 2020-21. The figures show the RNRB hasn’t reduced the amount paid overall in 2018-19, because so much of the tax is collected from larger estates, for whom this is a small portion of their estate — and who begin to lose this relief as soon as their estate is over £2 million. In July, the Office of Tax Simplification proposed several changes to inheritance tax. The body did not make any recommendations on the RNRB, saying it was too soon to do so.
Credit card interest rates rocket
Interest rates may have fallen to the point they have gone negative at some European banks, but that seemingly hasn’t stopped credit card providers upping the interest they charge customers who don’t pay off their bill in full each month. According to data website Moneyfacts, the average rate (APR) for those making credit card purchases hit an eye-watering 24.7% this month – the highest since the company started charting the figures back in 2006. Within the past three months Tesco Bank pulled its Clubcard credit card, which at 5.9% was, it said, the lowest-rate card on the market. During the same period, Bank of Scotland, Halifax and Lloyds Bank all increased the purchase rate on their cards. Many consumers will consider the APR increases shocking given that the Bank of England voted this week to keep the base interest rate at 0.75%, while the US central bank cut interest rates there. Earlier this month, a Guardian Money article asked whether the UK’s savings rates could be heading towards the zero mark. This told how some of Britain’s leading savings providers have been busy cutting their rates. The message is that credit card customers should take every opportunity to pay more than the minimum repayment. A borrower who makes a purchase of £3,000 on a typical credit card, and repays £100 per month, will have the debt linger for over three years, and it will cost them £970 in interest.
Divorcing couples and capital gains tax
Under new rules, if you move out of a home that was your main residence — because of a marriage breakdown, for example — you will have as little as nine months to sell that property without being hit by a capital gains tax bill on any profits. At present you have 18 months to sell your home after moving out before you have to pay a capital gains tax. However, that time period will be reduced to nine months from April 2020. For example, take a couple who bought a house for £200,000 and lived in it for 10 years. Let's say they decided to divorce and the husband moves out three years before the property is sold. They sell the property for £400,000 – so £200,000 more than they bought it. If you only have one house and you always live in it for the entire time you own it, then you don’t pay capital gains tax on any gain when you come to sell it. So the wife who has always lived in the property until the sale will get full private residence relief on her gain of £100,000 and will not pay capital gains tax. However, since the husband has not lived there for three years, he will not get the full relief and will have to pay capital gains tax. The way capital gains tax works is if you only live in the property as your main residence for some of the time you own it, you get relief for a fraction of the gain. So after the exemption period - currently 18 months - you pay tax on the time you didn’t live in the home. If he earns £50,000 a year, under the current rules he would pay tax of £840 as a higher rate taxpayer. Under the new rules from April 2020, he will pay £2,940 so the rule change has cost him £2,100.
Buy to let landlords under attack from McDonnell
John McDonnell has announced a scheme that would allow private tenants the right to buy the home that they live in a discount price. This is on top of a report commissioned by the party earlier this year that also recommended caps on the amounts buy-to-let landlords could charge tenants. Alongside the cap to the rent there would also be curbs on their ability to evict rents "on spurious grounds". The latest suggestion from the Shadow Chancellor is to apply Margaret Thatcher’s iconic right for council tenants to buy their homes to those who rent properties from millions of private buy-to-let landlords. He hopes it would reverse the fall in affordable housing seen after Mrs Thatcher's decision to allow council housing tenants to buy their homes. Speaking to the Financial Times, Mr McDonnell said: "We’ve got a large number of landlords who are not maintaining these properties and are causing overcrowding and problems." Labour could give tenants who rent private homes the right to buy them at a cut-price rate, in the Shadow Chancellor's plans. But experts believe it would decimate the rental market in the UK, creating a shortage of properties available to rent.
Study calls for overhaul of Capital Gains Tax
The Institute for Public Policy Research has called for wealth to be taxed at the same rate as income tax in a radical overhaul of the tax system. Describing the UK as one of the most ‘unequal countries in the developed world,' the study by Institute for Public Policy Research (IPPR) warns income inequality could be set to worsen as capital and property ownership become more important sources of income generation. The IPPR believes this divide could be narrowed if wealth is taxed at the same rate as income, which could boost the government’s coffers by £90 billion over the next five years in the process. The study suggests that it is profoundly unjust that those who work for their incomes are taxed more highly than those whose income is derived from wealth. This situation is all the worse when we consider that the wealthiest are less likely to generate their income from labour than the rest of us. Among the richest 1%, over one-quarter of total income is generated from dividends and partnership income alone. To address the balance, the IPPR has called for capital gains tax (CGT) on the sales of shares, bonds, property and other investments to be paid at same rate as income tax.
Half of adults still rely on parents
Almost half of adults have said that they still rely on their parents for financial support, according to a new study. Over the last year, adults have borrowed a total of £708 from their parents to assist in the costs of university fees, bills and home improvements, with some admitting to using the cash to fund coffee pods, contact lenses, mobile phone bills and dog food. Out of the 2000 adults polled, three in five said that they would struggle to cope without financial support from their parents. The research was commissioned by Virgin Media to mark the launch of its new Family Plan offering. The research shows that ‘The Bank of Mum and Dad’ is still very much in business, with Brits depending on their parents even when they’re grown-up.
Brexit recession fears ease
Fears of a UK recession eased on Monday as new data showed better than expected economic growth in July. The UK economy grew by 0.3% between June and July, according to the Office of National Statistics (ONS). Economists had forecast month-on-month growth of 0.1%, up from 0% in June. Barring a serious relapse in August and September, this suggests that the UK should avoid falling into a technical recession in the third quarter. A recession is defined as two consecutive quarters of recession. The UK economy shrank by 0.2% in the second quarter of the year and July marks the start of the third quarter. The uptick in growth in July was driven entirely by the service sector, which covers everything from hospitality to banking and is the biggest part of the UK economy. While the figures are from from stellar, after a contraction in the second quarter the chances that we see a negative GDP print in the third have now dropped significantly, meaning that a technical recession will likely be avoided.
Savings rates tumble
Since the end of August savings rates have tumbled unceremoniously, making life harder for savers looking for a good deal. So, what is going on? There are several plausible explanations for the raft of rate cuts from saving providers. And much of it joins together to paint a wider negative picture. Savings providers could be correcting their rates from wrongly-anticipated Bank of England rate rises. The global economy until quite recently looked set to keep growing and policymakers to tighten monetary policy. But in the past few months, economic indicators in the UK, Germany and other developed countries have started flashing for a recession. Savings providers could have wrongly anticipated a rate rise, and now reversed course to anticipate rate cuts. This is more pronounced thanks to fears over a no-deal Brexit that could lead to a bigger rate cut from the Bank of England too. Another related reason, and perhaps more concrete, is that investors are pulling their cash out of the stock market thanks to recession jitters. Choppy economic data, threats of a trade war between the US and China, and other events on the horizon such as Brexit, are causing ordinary investors to flee equities and pile into old-fashioned cash savings. This in turn is overwhelming demand for savings providers’ products and forcing them to disincentivise more new deposits. Whether or not the rates continue to plummet remains to be seen.