How freezing allowances may help the NHS and pay for Social Care
On the 7th September 2021 the Government announced proposals to help to pay for the effects of the COVID 19 pandemic and to address the long-standing issues in the adult social care system. The concept of a potential Wealth Tax had been suggested for several months, but there was some surprise and consternation to find that the major method of funding the COVID costs for the NHS and Social Care was going to be a rise in National Insurance Contributions. The consternation came about as this would affect working people – including the younger ones – and increase the burden on employers. In another move, for the very first time those working on past State Retirement Age will be paying a level of NI Contributions.
Pensioners were also affected by an amendment to the Triple Lock guarantee by removing the link to wage inflation for the 2022/23 tax year, as this would have potentially meant that State Pension would have risen by up to 8%.
As we covered in the August edition of our eNews, the amount that an individual can build up in a pension fund in the most tax efficient way has been restricted, following changes in the 2021 Budget, so many of us are or will be feeling the squeeze, so to speak.
Chancellor’s Chartered Financial Planners are often consulted by their clients on mitigating the effects of Inheritance Tax, although it should be stressed that advice in this area is not regulated by the Financial Conduct Authority.
Whilst a major allowance was fully implemented in the 2020/21 tax year ie the concept of the Main Residence Nil Rate Band (RNRB), the main tax free threshold of £325,000 per person had not increased since 6th April 2009. It was due to rise by the Consumer Prices Index from the 2020/21 tax year, but even this rise was cancelled and it has been announced that no increase to the Inheritance Tax Allowances will be implemented for at least a further 5 years.
Against this background there is an expectation that real assets will grow in value, both in nominal and real terms, and even during the pandemic many assets owned by individuals have continued to rise, although please bear in mind that past performance is not necessarily a guide to the future. House prices in most areas and many stock market related portfolios have certainly shown strong gains of late.
So where does this leave families whose estates may have a liability to Inheritance Tax on death? Chancellor’s advisers are skilled in assessing the situation and providing a set of recommendations, which if implemented, could substantially mitigate the effects of any tax payable. Whilst all advice given is specific to any one situation, we often look at the use of Trusts, making gifts during someone’s lifetime, investing in assets that benefit from Inheritance Tax Reliefs and sometimes putting in a life insurance policy to cover any potential tax. Often clients are wary of buying a life policy later in life, but they can be supremely effective in some cases as dependent upon circumstances the costs are relatively modest and the policy can cover the tax liability immediately the cover commences – without needing to wait for the seven years that applies to some gifts. In addition, providing the policy is placed in a suitable trust, the proceeds will be outside the estate for IHT purposes and will be available to the executors prior to the application for the Grant of Probate, which often will not be available until any tax liability is settled, something that can be very important where an estate mainly consists of illiquid assets, although payment of the tax in instalments may be possible (requiring only the first instalment to be paid prior to probate). A life policy can be used as a quick fix and once any longer-term planning becomes effective then it may no longer be needed.
A great starting point, as always, is ensuring that a valid Last Will and Testament is in place as the structure of this can ensure that all the available allowances are included in the arrangements thereby ensuring it is as tax efficient as possible, but perhaps more importantly it also ensures that the assets will be distributed on death in the way which was desired by the deceased.
As no two situations are alike, we recommend having a no obligation initial chat with one of our Directors and Chartered Financial Planners – Grant Farnell or David Torkington to see if we can help.