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The taxman’s revenge

Archive for July, 2014

The taxman’s revenge

Friday, July 18th, 2014

taxmanHM Revenue & Customs is expected to start a new crusade in its battle against tax avoidance very soon.

The Finance Bill 2014 should become the Finance Act 2014 in July 2014, bringing into law about 600 more pages of tax provisions. Among the new legislation will be a potent weapon for HMRC in its battle with users of artificial tax avoidance schemes.

Finance Act 2014 law will allow HMRC to seek “accelerated payments of tax” from users of tax avoidance schemes which are either subject to the Disclosure of Tax Avoidance Schemes (DOTAS) requirements or are counteracted by the General Anti-Abuse Rules (GAAR). If the scheme is subsequently judged to be effective by the courts, then HMRC will refund the tax paid. In an approach was has been described as retrospective, HMRC will be able to demand payment for schemes set up years ago which have yet to go through the courts. This is no small beer: HMRC is said to be looking at cases involving £5.1 billion in tax and 33,000 taxpayers. The first tax demands are expected to be issued by HMRC as soon as the Act comes into force.

The result is likely to be a flood of litigation, as the users of the schemes caught in HMRC’s net try to delay payment to HMRC by proving that their schemes are valid. It has already been reported, that, in response, the Ministry of Justice is busy recruiting more solicitors and barristers to sit as judges at Tax Tribunals.

This latest twist in HMRC’s fight against tax avoidance is another reminder that one of the few areas where the Treasury is happy to increase spending is in countering lost revenue. Perhaps that is why the numbers of new tax avoidance schemes reported under DOTAS is continuing to fall.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

The other property market

Tuesday, July 15th, 2014

freeimages.co.uk workplace imagesRecent figures show that it is not only residential property that is growing in value.

There has been much debate about whether the residential property market is overheating, with the latest (May) figures from Nationwide showing UK house prices up 0.7% on the month and 11.1% over the last year. Less attention has been paid to UK commercial property, which has also been staging a healthy recovery.

The May numbers from Investment Property Databank (IPD), the leading property analysts, show that the growth in UK commercial property values outpaced the residential market, with a rise in the month of 1.1%, the largest increase this year. IPD says that marks the 13th month of consecutive growth for commercial property values, taking overall capital growth across that period to 8.5%. Equally important from an investment viewpoint is rental income, which added another 0.5% to the property returns in May. Over the 12 months to May 2014, IPD says UK property delivered a total return (income + capital growth) of 16.0%, comfortably ahead of both UK shares and bonds.

Investor demand for UK commercial property remains strong, according to IPD, with interest no longer confined to just London and the South East. Even the retail sector, which has been dogged by corporate failures and stories of empty High Streets, is now enjoying capital growth and rising rents.

Real estate investment trusts (REITs) had a wobble when Mark Carney started talking about interest rate increases in 2014 (see “Interest rate rise speculation”). Nevertheless, the average equivalent yield on commercial property of nearly 7% remains, as IPD says, “attractive for income-focused investors, compared to the pricing of other alternative asset classes.”

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in property should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

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Inheritance Tax and Trusts

Friday, July 11th, 2014

The Treasury has proposed new inheritance tax (IHT) rules for trusts.Tax

Trusts are regularly used for estate planning for two main reasons:

  • They can be used to retain an element of control over gifted capital. Some parents are wary of their children’s ability to handle money properly, even when those ‘children’ are well beyond adolescence and have their own offspring.
  • There can be tax advantages from the use of trusts, although over the years these have been whittled down by successive Chancellors.

The IHT treatment of trusts is arcane, to put it mildly. It is one of those areas of taxation where at times the professional fees needed to calculate the tax due can match or exceed what ends up with the Treasury. The 2012 Budget proposed that there should be consultation on simplifying the rules, which mostly dated back to the era of capital transfer tax.

As often happens when the words ‘simplification’ and ‘tax’ appear in the same sentence, HMRC’s ideas for making things simple looked to those on the other side of the fence as a mechanism for increasing revenue. In this instance the difference of opinion resulted in a trio of consultation documents, the last of which arrived in June. This largely marks the end of the consultation process: the latest paper makes it clear that while new legislation will not begin to operate until 6 April 2015, it will then apply to any trust established or added to from 7 June 2014.

The good news is that it appears trusts created before that date will benefit from some genuine simplification without suffering from the less welcome revisions that apply to new trusts. But be warned – once the legislation eventually emerges, you may well need to review your estate planning.

Tax laws can change, the Financial Conduct Authority does not regulate tax and trust advice.

 

Interest rate speculation

Tuesday, July 8th, 2014

Base rates

The Lord Mayor’s Banquet for Bankers and Merchants of the City of London at the Mansion House is one of the City events of the year, with speeches by both the Chancellor of the Exchequer and the Governor of the Bank of England The speeches are often used to reveal new policy initiatives. This time around George Osborne announced that he was giving greater power to the Bank of England to curb mortgage lending to prevent a housing bubble. However, his speech was overshadowed by one short sentence from the Bank’s chief, Mark Carney, on the subject of raising interest rates: “It could happen sooner than markets currently expect.”

Until Mr Carney’s remark, the markets had generally earmarked the first half of 2015 for a move away from 0.5%, with speculation focusing on February or May, when the Bank issues its Quarterly Inflation Report (QIR). Mr Carney’s words have now made November 2014 the favoured month, again coinciding with a QIR.

The markets reacted the following day to the Governor’s words, with yields increasing on two-year government bonds, shares in house builders falling and the pound rising to €1.25 and nearly $1.70. Even so, there is no expectation of a sharp rise in rates – at least not yet. Later in his speech Mr Carney said, “…we expect that eventual increases in bank rate will be gradual and limited.”

Strangely, less than two weeks later Mr Carney hinted to the Treasury Select Committee that a rate rise was not imminent. His comments prompted the Committee’s chairman to remark that the Governor had provided “quite a lot of guidance, not all of it seeming to point in the same direction.”

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

 

Inflation falls at last

Friday, July 4th, 2014

Inflation is finally falling – after remaining stubbornly ahead of the Bank of England’s 2% target.

The headline Consumer Prices Index fell from 1.7% to 1.6% in the year to March 2014. The Retail Prices Index, which includes housing costs, rose by 2.45% over the same year.

But if you feel your personal costs are mounting faster than these figures suggest, you could well be right. An index assumes a typical spending pattern – and we are all different.

The over 75s and under 30s have the highest inflation rates, according to the Economic Research Centre at Alliance Trust who have looked at the impact of rising prices on five different age bands. Older people use more gas and electricity when price changes remain high, while rising student tuition fees are a significant burden on younger people. Those aged 50 to 64 come off best – thanks to a fall in petrol prices.

Even moderate inflation at 2% a year can upset long term financial planning goals. Someone who today takes out a £100,000 life or critical illness policy over 20 years would need £148,590 in 2034 to match today’s spending power. A 30 year-old looking at retirement 40 years ahead would need £220,800 to equal a £100,000 pension pot today.

Inheritance Tax rolls onwards and upwards

Thursday, July 3rd, 2014

The unloved tax is generating a rapidly rising income for the Government.20s

The Inheritance Tax (IHT) nil rate band has been frozen at £325,000 since 6 April 2009 and measures in this year’s Finance Bill will maintain that freeze until at least 5 April 2018. Such a prolonged freeze is inevitably dragging more estates into the IHT net and increasing the IHT paid. The Office for  Budget Responsibility projects that the tax will raise almost 75% more for the Exchequer in the final year of the freeze than it did in 2012/13.

If you have not reviewed your estate planning in recent years, you could be surprised at the slice of your wealth destined to disappear in IHT rather than pass to your children or grandchildren. 40% of today’s house price rise could be tomorrow’s IHT bill.

Fortunately there remain a variety of planning opportunities that can help you reduce the impact of IHT. As is so often the case, the sooner you can start the planning, the better. Why not arrange for an initial discussion with us to assess your IHT liability and the options open to you?

The Financial Conduct Authority does not regulate tax and trust advice and inheritance tax planning.