If you’re a beer-drinking motorist planning to buy a newly-built home, you’re quids in as a result of the changes announced by the Chancellor in his Budget. But what about the rest of us? How can we turn the tax changes revealed on Wednesday to our advantage?
It’s the end of the tax year on 5 April. That gives you two weeks to ensure you’ll have used up the current 2012-13 tax allowances. By doing so you’ll be saving yourself handing extra cash to the Government – and what better way is there to stick one to George Osborne than to keep your money out of his claws?
But that means finding out and making the most of the opportunities offered through the likes of Isas, pensions, family investments, capital gains tax and estate planning. If you’re a high-earner, for instance, and pay tax on some of your income at 50 per cent, then you should consider contributing as much as you can to your pension now. That’s because the additional rate tax will fall by 5 percentage points to 45 per cent from 6 April. By making pension contributions now, you’ll effectively get extra tax relief on them. In short, every £50 you put in your pension pot will be worth £100. To have £100 added to your retirement fund after 6 April, you’ll have to contribute £55, a fiver more.
There are many tax allowances that expire at the end of the financial year in April, so if you don’t make use of them, you never will be able to. Savers, for instance, can put up to £11,520 into an Individual Savings Account (Isa) and never pay tax on gains.
(By the way, check out our feature on page 64 for some ideas about “exciting” stocks and share Isa ideas.)
Capital gains tax (CGT) falls due on the profits you make when selling assets. The Government allows you to make a little bit and pay no tax, but you can’t carry over the allowance from year to year. In the current 2012-13 tax year, you can make up to £10,600 and pay no tax on the proceeds, so if you have something valuable you’re thinking of selling, now could be a wise time to do so, if there are buyers around.
Also bear in mind that each person has a CGT allowance, so partners may also want to bring forward the sale of an asset to make use of their allowance.
There are various other tactics to be adopted, but to ensure you’re not breaking any tax laws but using some of the more complicated wrinkles, it would be wise to seek specialist advice.
Inheritance tax change could hit families
For instance, changes introduced in the Budget to crack down on inheritance tax avoidance schemes could hit individuals who borrow against their homes to fund business investments.
Under the current rules, individuals can secure loans to buy shares in a business against large assets not linked to the business, such as their family home. This significantly reduces the potential inheritance tax liability on the home and therefore their estate. But under the proposed new rules, for inheritance tax purposes, the value of a loan can only be set against the value of shares purchased.
Since shares in a trading company are likely to qualify for 100 per cent business property relief, there will be no reduction in the overall inheritance tax liability, according to Mark Giddens, head of private client services at UHY Hacker Young. “These new proposals are very surprising, and will come as a shock to ordinary families,” he said. “HMRC says the principal target is inheritance tax avoidance schemes, but it is ordinary families not involved in any avoidance schemes that will bear the brunt of the changes.”
Accountants at Baker Tilley agreed. “Inheritance tax changes which were not forewarned or consulted on are likely to catch a wide range of innocent situations. After recent years of sensibly consulting on a variety of tax changes, it is a disappointing return to old way of hurriedly introducing badly-thought-out legislation.”
Inheritance tax is set to hit many more families in the future as the Government confirmed this week that it will freeze the inheritance tax threshold at £325,000 until 2017-18.
Peter Goodman, partner at Wilkins Kennedy, said the confirmation of the freeze meant more people should look to use the inheritance tax reliefs that are available to them. “Reliefs like potentially exempt transfers or gifts out of income are unaffected by inflation,” he pointed out.
Potentially exempt transfers are transfers of assets by an individual to another individual that are exempt from inheritance tax so long as the giver lives for at least seven years after making the gift.
Meanwhile gifts out of income are regular gifts that can be made from after-tax income and which leave the giver with sufficient income to maintain their standard of living after making their gift. These are exempt from inheritance tax and do not affect the separate annual gift exemption.
Homebuyers shouldn’t rush into new scheme
The Government has announced a plan in the Budget to inject life into the home-buying market with a new Help to Buy scheme. It offers a 20 per cent equity loan towards the purchase of a new home for those who can raise a 5 per cent deposit. While that sounds good news for anyone who has struggled to raise a big enough deposits for a mortgage, there are drawbacks.
First is the fact that to be eligible you’ll have to be prepared to buy a brand new home. Housebuilders will be pleased by that proviso, but it may not suit all homebuyers.
Also shared equity deals, which is effectively what the new scheme is, may not be the best option for all. Some will still be better off saving for a bigger deposit and not signing up for such a scheme.
By the way, if you do fancy a shared mortgage but not a new home, you can get a similar deal through a company called Castle Trust, which offers Partnership Mortgages which provide a 20 per cent shared equity loan for those looking to buy an existing home.
One other warning: don’t presume that just because the Government is promoting the scheme you’ll be granted a shared equity loan even if you can raise a 5 per cent deposit. In the Budget, George Osborne reminded lenders that they should ensure that people only take on affordable levels of debt. That means they will scrutinise your credit record to ensure you are a decent bet.
There are two things you should do to increase your chances of getting a loan. First, check your credit record and correct any mistakes. Second, take steps to improve your credit record. The simplest thing to do, contrarily, is to take out a credit card and use it while repaying the debt in full every month. That will show you can be trusted to meet repayments.
Osborne’s key changes: A penny here, a few billion pounds there …
The planned September rise in fuel duty was scrapped.
Meanwhile a penny was cut off the price of a pint of beer and the annual above-inflation rise in beer duty was cancelled.
Stamp duty on shares traded on growth markets such as London Stock Exchange’s AIM was ended.
The limit at which people start paying tax will be raised to £10,000 in 2014 – a year earlier than originally planned.
A new flat rate pension worth £144 a week will be introduced in 2016, a year earlier than planned.
Shared equity schemes were extended, with interest-free loans for homebuyers up to 20 per cent of the value of new-build properties under a new Help to Buy scheme.
Meanwhile bank guarantees have been put in place to underpin £130bn of new mortgage lending for three years from 2014.
Under a new employment allowance, companies will get up to £2,000 off an employee’s national insurance bill, described by George Osborne as “the largest tax cut in the Budget”.
Corporation tax will be reduced to 20 per cent from April 2015.
Restrictions on public sector pay increases will be extended for a further year, with a limit of 1 per cent in 2015-16.