Will increased tax burdens drive the need for financial advice?

There is absolutely no doubt that the Government’s response to the budget deficit and financial crisis will impact your customers and clients in 2023. Frozen tax thresholds and a cut to dividend tax allowance will see individuals and firms paying more tax this year which should, and we hope will, lead to more people seeking financial advice.

According to calculations by a leading financial services company, Hargreaves Lansdown, the typical middle-income household in the UK, is estimated to pay an extra £700 in tax this year. Indeed, they suggest there are as many as 8 ways that your clients might be hit for more tax. Your corporate clients will also not be immune with the cutting in half of the dividend tax allowance affecting them, as well as investors, whose portfolios include shares. The dividend allowance will fall from £2,000 to £1,000 in April this year and will halve again in April 2024.

Business owners and investors will also be taxed at the higher rates introduced last April – 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.

The bad news does not stop there as investors could also be affected by the halving of the capital gains tax thresholds. The capital gains annual allowance will be halved from £12,300 to £6,000 from April, and in similar fashion to the dividend tax, will half again in 2024.

On a more personal front, frozen income tax and National Insurance thresholds will also see those on higher incomes paying considerably more tax on their salary. The personal allowance has been held, until further notice at £12,570, and the higher rate threshold has been stuck at £50,270 since April 2021. With wages rising an average 6.1% over the past 12 months due to inflation, this means far more tax will be coming out of your clients’ monthly pay packets.

The £100,000 level at which the personal allowance starts to be withdrawn has remained frozen. Meanwhile, the additional rate threshold has not moved from £150,000 since it was introduced in 2010, which already meant more people moving into the tax bracket through wage before this year. However, from April it will fall to £125,140. The outcome of this alteration is that anyone earning between the old threshold and the new one will lose an average of £621 a year and those earning over £150,000 will lose an average of £1,256. It is expected to make HMRC an extra £420m in the tax year starting in April. Whilst this is revenue we all know they desperately need, it does not make it easier to swallow as an individual, family or household.

As solicitors you will be more than aware that the continued freeze in Inheritance Tax (IHT) thresholds combined with higher house prices is already, and will continue to see clients paying more inheritance tax.

We all know that the IHT nil rate band will now remain at £325,000 and the residence nil rate band at £175,000 until at least 2028. Meanwhile, the IHT annual tax gift allowance is spending its fourth decade at £3,000. With average house prices rising 10.3% in the year to November, according to the ONS, it is inevitable, even though property inflation is slowing slightly, that more estates will be liable to IHT this year and beyond.

The bottom line is that the average household’s tax burden is increasingly swiftly with estimates that most households contributed about 10% more to the revenues coffers last year. 2023 shows no sign of any let up, and all that is without double digit inflation. It could be even worse for your small business clients.

What seems obvious is that those who already benefit from professional financial advice, either from accountants, or qualified financial planners, such as Forrester Boyd Wealth Management, will be better positioned to weather the storm over the next few years. The tax pressures will continue until the UK economy is back on an even keel and professional advice can often mitigate or lessen the tax burden, whilst simultaneously offering current and/or future financial benefit.

Whether it be to reduce your clients’ tax burden now using tax reliefs available via vehicles such pensions, or assisting you plan to reduce an estate’s potential IHT liability, Forrester Boyd Wealth Management are on hand to help.

HMRC Steps up its investigations on IHT

We read this article in Today’s Wills and Probate with great interest, particularly given it was written by a senior member of the private client team at leading law firm, Kingsley Napley. The piece is inspired by the Telegraph reporting, in almost tabloid fashion that ‘the HMRC are targeting bereaved families’ after they clawed back a record £326 million in IHT from their 2022 investigatory efforts.

Of course, with the continuing IHT threshold freeze, and the huge growth in house values in recent years, it is increasingly obvious that this tax is no longer just an issue for the wealthy and this in turn increased the need for, and value of advanced planning.

This need for proper advice is made more evident because the Telegraph article suggests that many are not knowingly or intentionally trying to avoid paying IHT. Families or chiefly the executors may not have the knowledge required when pulling together the information/fact-finding to complete the IHT papers. One area identified for common errors is around gifts made in the 7 years preceding a death, particularly where no records were kept. Valuing of an estate’s assets can equally be an area where a willing but inexperienced layperson may fall down, perhaps trusting a local estate agent.

The following tips are offered by Stephanie Mooney at Kingsley Napley LLP, most of which will be obvious to you but gave raise to some soul searching at Forrester Boyd Wealth Management.

• Ensure that, where possible, an accurate written record is kept of any gifts made during lifetime.
• Have a valid, professionally drafted will in place which is structured so as to take advantage of any IHT exemptions, makes wishes completely clear, and appoints appropriate people as executors.
• Ensure executors are encouraged by the family to take legal advice when dealing with the administration of an estate. They can then show to HMRC that considerable care has been taken when preparing the IHT papers.

Nevertheless, executors should always read the declaration they will have to make in the IHT return, understand their responsibilities and only submit the IHT return when they are confident they have satisfied their obligations.

Once the value of the estate has been ascertained and all IHT has been paid, an application to HMRC should be made for a clearance certificate using form IHT30. Clearance from HMRC confirms that no further tax is due, albeit it is important to note that this is subject to certain conditions, so it does not completely guarantee that the estate will not have to pay more tax later on.

Reading the above pointers made us consider just how important it is for financial planners and private wealth solicitors to work collaboratively when embarking on an estate planning advice journey.

We both may individually suggest clients utilise gift allowances but are we ensuring the other professional adviser is aware and documenting them. We should always suggest a solicitor we know, and trust, to draft a will that takes into account advice we have given. This will give us and our mutual clients confidence that everything before and after is properly explained and documented.

At Forrester Boyd Wealth Management we continually strive to ensure our clients receive the best possible estate planning advice and we recognise we can only do that working with the best private client solicitors.