IHT – the ultimate wealth tax

In my previous update I mentioned that I would explore some of the Personal Finance implications of a shift of emphasis away from the taxation of income and towards taxing assets and wealth. The ultimate wealth tax is the Inheritance Tax, or IHT for short. A few years ago IHT was commonly regarded as being “voluntary”, inasmuch as it was generally perceived as being pretty easy to avoid. The great and the good could employ various trust or business-related strategies to avoid the worst ravages of this attempt to take a second bite out of a lifetime of taxable earnings. Most of the rest of us were unaffected as the thresholds were proportionally higher in real terms.

Things aren’t as straightforward anymore. While the Conservatives pledged to raise the inheritance tax threshold to £1 million, the promise has gone the way of many political sweet nothings and the current £325,000 threshold has been frozen until at least 2018/2019.

IHT revenues have been rising steadily, bringing in £3.4 billion last year, an increase of around 10% on the previous year’s take.

The frozen threshold, and rising house prices, mean that more and more estates are falling into the clutches of the tax. At the same time HMRC is seeking to limit the extent to which trusts can be employed to circumvent the tax.

What this is likely to mean is that the only effective tool for limiting the vulnerability of your estate to inheritance tax is to give away your assets while you are still alive. Even this is not entirely straight-forward because a) it simply passes on the problem to a future generation and b) while you might avoid IHT, there are often capital gains tax implications when assets are given away or sold.

All of this will require detailed (and expensive) financial advice with considerably less scope for your advisors to come up with something “special”.

One possible consequence though is that it will provide an additional incentive for people to downsize their homes in good time, while also keeping a more careful eye on the capital gains implications of any investments they might have.

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A step closer to higher UK interest rates

This morning it emerged that two members of the Bank of England’s Monetary Policy Committee voted for an increase in interest rates at August’s meeting.

A bit of background first.  Base rates have been at a record low of 0.50% for more than five years.  Immediately before the crisis began in 2008, the base rate stood at 5.75%.  Those of us with a few more miles on the clock will vividly remember base rates of 14.875% or even 17%.

With unemployment falling fast and UK growth the strongest in the developed world, ordinarily interest rates would be considerably higher than they are currently.

A large part of the reason why rates haven’t already risen is that wage growth remains subdued, barely matching inflation.  As a consequence, in real terms (i.e. adjusted for inflation), many workers have yet to feel the benefit of the economic revival.

However, many of those who had mortgages prior to the crisis have been able to refinance at significantly lower rates, often saving themselves hundreds of pounds a month in the process.  If you were also fortunate enough to live in the South East, you’ve very likely benefitted from considerable appreciation in the value of your property.

This begins to get to the heart of why current policies are unsustainable over the longer term.  Those with assets and access to credit have generally done very well.  Those without either have found things pretty tough.

You only have to read the comment sections in even the higher brow newspapers to appreciate the disaffection this has caused.

The upshot is that it is inevitable that policy will shift from monetary stimulus, which favours those with assets and credit, to fiscal measures that attempt to capture a portion of that action for the Treasury.  The idea being that budgets can be balanced by increasing taxation on assets perceived to be less economically productive, such as property.

The political attraction of taxing assets and wealth is immense, especially if it also allows governments to lift the peddle on austerity and/or cut rates of basic income tax.

We’ve already seen significant increases in top-end property stamp duty, whilst the proposed Mansion Tax is merely the thin end of a wedge which will herald the biggest change in taxation policy in a generation.  Promised increases in the inheritance tax threshold have also gone by the wayside.

From a personal finance perspective it is very likely that the costs associated with property ownership will increase significantly and these will need to be covered in retirement.  Equally tax planning will become both more important, and also more difficult to achieve.

In my next few updates I’ll explore some of the personal financial issues raised by this brave new world.  In the meantime though:

Take care out there



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It’s not always good to have a pension – small is not beautiful

In my last post I mentioned that investing in a pension might not be the best solution for someone on a low income.

Consider that, according to the Association of British Insurers, the average pension pot at retirement is £36,800. In the annuity market this would probably generate an income of approximately £40 per week. Using the government’s Pension Service Pension Credit Calculator an individual in receipt of the basic statement pension of £113.10 per week would be entitled to pension credit of over £38 a week.

However, had they saved hard to achieve the average pension pot size of £36,800, the £40 extra income would see their entitlement to pension credit drop to barely £16 pounds per week. Thus their £40 pension would mean that they lost more than £22 a week in pension credit.

Faced with such a calculation, it would be far more effective for them to pay down debt and anticipate unavoidable expenses than to save for a pension.

Take care out there


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The advice gap

I guess it’s appropriate to kick off a blog on personal financial education by discussing what makes people seek advice in the first place.

Although I consider myself fairly savvy on matters financial, I am nonetheless perfectly happy to seek the advice of professionals where I require their expertise.  Sometimes it can even be the reassurance of confirming my own understanding of a situation.

In an ideal world everyone would have access to unbiased and affordable financial advice.

Unfortunately many, including some earning substantially more than the national average salary, fall into the so-called “advice gap”.  These people need financial advice, but aren’t considered wealthy enough to be financially viable for advisors to provide them with a fee-based service.

This is one of the unintended consequences of the government’s Retail Distribution Review, which was designed to protect investors and savers from opaque commission structures on financial products.

How this works in practice though is that many high street financial advisors have withdrawn face-to-face services from those with less than £100,000 of investable assets.  Indeed it is not uncommon for the threshold to be as high as £250,000: an impossible hurdle for many earning even pretty decent money.

According to the Financial Conduct Authority the average cost of financial advice is between £75 and £100 per hour, while an initial review could easily cost £500.

Even if you were able to afford the fee, it is quite possible that, if your means are limited, the advice might be totally unsuitable.

If you rock up saying that you are concerned about retirement income, you will be sold a pension, regardless of whether this is actually the best solution for you.  If you have a low income you might find that your expensively acquired pension pot will achieve little more than rendering you ineligible for certain benefits, such as the pension credit top up.

This is why it is important to be able to make many of the more basic financial decisions for yourself and where financial education can help.

The good news is that this isn’t necessarily as difficult as people fear.  Many of the concepts are pretty straightforward if expressed in a form that is not designed to automatically channel you towards a particular financial product.  There is also an abundance of material out there if you only know where to look.

Going forward the idea is to regularly post on key issues related to understanding personal finance.  These will be interspersed with tweets on the latest developments in the news in what is becoming quite a fluid situation.

These are early days, but over time I’ll be building a body of work that will allow people to confidently make many of their own critical financial decisions.

Take care out there


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Teddy needs some financial advice

Teddy cartoon

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