3 tax charges that have increased in recent years, and how to avoid them

When you think about how your finances might be affected by circumstances outside of your control in the coming months, the cost of living crisis might spring to mind.

With inflation at 9.9% as of August 2022, according to the Office for National Statistics (ONS), you could be worried about how your income will fare against rising prices.

With your financial circumstances potentially called into question by inflation, one aspect of your finances you might not be paying close enough attention to is the amount of tax you pay.

In his 2021 spring statement, former chancellor Rishi Sunak froze a number of key tax allowances until 2026, including the Capital Gains Tax (CGT) allowance and Inheritance Tax (IHT) band too.

As a result, some tax charges have increased in recent years – and it could be that, as your wealth accumulates over time, you could be one of those caught out by Sunak’s allowance freezes. In addition, key savings and investment accounts, like a Lifetime ISA (LISA), can increase your tax bill if you withdraw funds inefficiently.

So, here are three tax charges that have risen in recent years, and how you can avoid increasing your liability.

 

1. Lifetime ISA charges breached £33 million last year

As you may already know, a Lifetime ISA (LISA) is an ISA designed with two purposes in mind: buying your first home or saving for retirement. You must be under 40 to open a LISA.

As of the 2022/23 tax year, you can contribute up to £4,000 a year into a LISA, which forms part of your total ISA allowance for that tax year. When you pay into your LISA, the government tops up the amount by 25%.

If you use your LISA funds to purchase your first home or draw the sum after the age of 60, you are not usually subject to a tax charge. What’s more, any profits your LISA savings earn over the years are not subject to CGT or Income Tax.

However, if you draw your LISA savings for any other purpose than its two designated functions, the funds will be subject to a 25% tax charge.

Evidently, LISA withdrawal charges are on the rise. In the 2021/22 tax year, LISA tax charges surpassed £33 million.

Indeed, MoneyAge reports that in the last two years, LISA tax charges have tripled compared to the 2019/20 receipts. It could be that the cost of living crisis has prompted LISA subscribers to draw their funds early, resulting in a hefty charge.

So, if you have a LISA or plan to open one soon, it is crucial that you only contribute an amount that you can live without until you buy your first home or retire. Otherwise, you could increase your tax liability by drawing money from your LISA too soon.

 

2. Capital Gains Tax charges increased by 42% in 2021/22

According to a government report, CGT charges increased by 42% in 2021/22, compared with the previous year.

CGT is applied to profits you earn on certain assets when you sell them on, including:

• Chattels you hold that are valued above £6,000, excluding your car
• Any property that is not your main home
• A percentage of your home if you have used it for business, rented it out, or it is very large
• Any shares that aren’t in an ISA or PEP or pension
• Business assets.

In last year’s spring statement, former chancellor Rishi Sunak froze the CGT allowance at £12,300 a year until 2026. So, profits above £12,300 a year that you earn on taxable assets will be subject to CGT.

In order to mitigate your CGT liability, your financial adviser can help you strategically sell off assets in the coming years. For example, if you plan to sell your second home this year, other assets such as shares could be sold in the next tax year.

That way, you can maximise your CGT allowance while evening out your tax burden in the years to come.

 

3. Inheritance Tax receipts saw a 14% hike last year

As you age, you might think more and more about how you can support your family even after you’re gone.

Indeed, if you were to pass away in the years to come, you could already be putting plans in place for lowering your IHT bill. IHT stands at 40% as of the 2022/23 tax year and is applied to most assets you hold when you pass away.

Only assets valued below the nil-rate band of £325,000, plus properties worth less than the residence nil-rate band of £175,000, can potentially be passed down tax-efficiently.

The nil-rate band has not been raised since 2009, while the residence nil-rate band was raised to its current rate in 2020/21.

So, while your assets continue to appreciate in value, they are more likely to cross the IHT thresholds and incur a higher tax bill.

Recently, we have seen this theory in action: FTAdviser reports that IHT receipts increased by 14%, or £729 million, in 2021/22 – the greatest single-year increase in five years.

To help your beneficiaries avoid paying an unnecessarily high IHT bill when you pass away, it may be beneficial to review your estate plans with your financial adviser.

We can help you gift money tax-efficiently while you’re alive, reduce your taxable estate, and review your will if necessary.

 

Get in touch

Paying increased tax in this day and age might cause further financial stress. To discuss reducing your tax bill in the coming years, email info@chancellorfinancial.co.uk, or call 01204 526 846 to speak to an adviser.

 

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.