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Bugdet 2008 - No news is good news but don't leave your tax planning to the Darling method
So, another Budget has been and gone and, as usual, the Government has told us what a wonderful job it is doing in balancing the books.
However, when the dust settles we will still be paying more tax on our income, our cars, a glass of beer or wine and a daily puff?
In reality, this year there has been very little ground-breaking news as most of what was detailed in the Budget just confirmed what had already been announced in last October's pre-Budget speech.
Mr Darling confirmed his pre-Budget announcement that Capital Gains Tax would reduce from the current highest marginal rate of 40 per cent to 18 per cent. That's great news for trustees and private individuals selling a second home, who will both see a reduction, but very bad news for small businesses who previously only paid 10 per cent Capital Gains Tax.
The Chancellor also confirmed his previous announcement that there would be a drop in the basic rate of income tax from 22 per cent to 20 per cent.
Fantastic news you might think but, in reality, when you do the maths, this 'tax cut' is actually costing the taxpayer more money. At the same time as cutting the basic rate of tax, Mr Darling has removed the 10 per cent starting rate and also increased National Insurance contributions by changing the threshold.
It is estimated that the cut in the basic rate of tax will save us
29 billion, but the 'balancing' effect of the other measures will actually cost us 31 billion. That's a net cost to the taxpayer of around 2 billion a year. Doesn't sound like a tax cut now does it?
And, of course, with the removal of the 10 per cent tax band, the people who will pay more tax are those on low incomes.
There was also confirmation of the intention to raise the overall ISA subscription limit from 7,000 to 7,200 from April 6 this year, with the cash ISA limit being raised from 3,000 to 3,600 a year. You can also now transfer from a cash ISA into an investment ISA, which is something many of my clients will be doing while the stock markets are still at a relatively low ebb. It is always a good idea to invest when markets are low – so, if you have large holdings in cash ISAs, maybe you should consider transferring these into an ISA containing a mini portfolio of unitised investment funds.
Little mention was made of the pre-Budget change to Inheritance Tax for couples, which resulted in a widow or widower being able to use the unused part of their deceased spouse's nil rate band on their subsequent death. Many people have assumed that this announcement meant that they no longer have to worry about Inheritance Tax planning if their estate is below 600,000, and that having a discretionary trust in your wills is no longer necessary. In fact, that is not true in either case.
If you are married and have an estate currently valued at 500,000 you might assume that as you can now use both spouses' nil rate bands on second death, effectively creating a 600,000 nil rate band, all is well with your Inheritance Tax planning. But, in fact, if your Inheritance Tax planning relies totally on using two nil rate bands on second death, you could get badly caught out and end up leaving a big tax bill to your children.
Over the last 10 years, the nil rate band has increased on average by around 3.6 per cent per annum. Over the same period, house prices have increased by an average of 10.8 per cent and the benchmark UK growth Unit Trust has increased by an average of almost 15 per cent a year.
So, let us assume that in the above example, the husband dies, leaving a widow who survives him for 10 years. Their individual nil rate bands will grow at 3.6 per cent compound over the 10 years before her death, resulting in two nil rate bands of 427,286 or a total of 854,572 being available for their children to offset against the value of their joint estate before Inheritance Tax is due.
However, even if we assume that this couple were property rich with little or no money invested and we use the lower growth rate of 10.8 per cent per annum for property, their estate of 500,000 would now be worth 1,394,336. That means on second death, their estate is worth 539,764 more than the two nil rate bands available to their children.
That means a tax bill of 215,905 for those children. Yet their parents did not think they even had a tax problem.
However, if the above couple had written their wills to include a discretionary trust within them, when the husband died, his trustees could have invested 300,000 into his trust in an investment bond, from which they could have advanced tax-free loans to the spouse over the following 10 years. On entry to the trust, the 300,000 is effectively capped and the capital and any growth on it will be outside of the joint estate when his wife dies.
Also, the tax-free loans from the trust have to be repaid to the trust on the death of the spouse, thus reducing the value of her own estate for tax purposes.
The net result of this is that the children of these clients would now have little or no Inheritance Tax to pay on their parent's estate.
So, if you have an estate valued at 400,000 and above you should
seriously consider taking some advice on your Inheritance Tax planning.
Don't leave your tax planning to the 'Darling method'or your children may end up paying more tax than you might imagine when you die.
Nick Plumb is an Independent Financial Adviser.
Send your questions to him at Bright Financial Planning Ltd, 58 Station Road, Sudbury, Suffolk, CO10 2SP, email them to nickplumb@aol.com or telephone Nick on 01449 675674.
Nick's answers to reader questions in this column are provided only as a general guide and do not constitute personal financial advice.
Any readers who require specific financial advice on their own position should contact Nick for a complimentary consultation.
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Thursday 09 February 2012
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