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2023 NOVEMBER – UK BUDGET – MORE IMPACT TO YOU THAN THE FUND PERFORMANCE?
Yes, I know, it is budget time again. The older I get, the more I notice that my friends and I seem to take more notice of the full range of topics covered in the Chancellor’s announcements, not just the price of alcohol, petrol, and diesel, but of course energy bills have been, and remain a concern, as does the cost of living generally.
Whilst these aspects are the ones that perhaps draw our attention initially, there are an increasing number of changes to tax allowances, rates and thresholds which are affecting most people, including those who may have not had to pay much attention to them in the past.
As ever there will be many guides and summaries aiming to make sense of the statement, and how it impacts the people of the UK.
From our perspective, the biggest impact in the world of investments and financial planning relates to these tax allowances and shelters which are legally and ethically available from the Government. These deserve focus because many of us naturally tend to look at whether our investments are doing well – we look at investment performance, as well as what our cost of living is doing.
What is the reason for the fixation on performance? A 1well-researched and documented human bias is known as loss aversion. Daniel Kahneman and Amos Tversky won a Nobel prize in economics by establishing that we humans feel the loss of something twice as much as we feel about receiving the item in the first place. Loss aversion, also known as ‘loss motivation’ drives us to fear losses over gains. As a result, we look at the performance of our investments, arguably to ensure we are not losing our hard-earned money by investing in a poor performing investment.
The travesty is that, if the investment is not ‘held’ correctly from a tax perspective, it can mean losing money unnecessarily to HMRC and reducing returns. Single digit investment returns per annum are 2expected now by many. But get the tax status wrong by accident and the tax charges can be DOUBLE digit (10%, 20%, 40%, or even 352%!) – and this impacts not just the super wealthy but increasingly the ‘average’ person in the street too. The ‘plan’ you have put in place, using tax shelters whose tax status, benefit(s) and suitability for that purpose could potentially require updating due to the changes announced in the Budget statement.
Arguably, the starting point is to ask the question – because of any budget changes, are your hard-earned savings, investments and assets ‘held’ in the right name, ownership and / or tax shelter? What effect do any changes have on you or your partner’s:
- Welfare benefits
- Who benefits from your or your partner’s savings, investments, and assets, and
- The tax treatment on any gains your personal or jointly held savings, investments and assets you and your partner may enjoy?
Right name
In this context, ‘right name’ means, is the asset held in the right name at the time the asset is to be needed and distributed? This could be as simple as ensuring:
- You and your partner’s tax codes are correct and are being applied accurately,
- Your cash / money on deposit in bank accounts is spilt between you and your partner to ensure you are allocating the interest received by making the most suitable use of your personal allowances, and
- You and your partner are making pension contributions to the right person’s pension fund to claim the tax relief now, but not lose money by paying too much tax when either of you take your pension.
Ownership
Have you placed you and your partner’s savings, investments, and assets under an appropriate trust to:
- Pay the right money to the right person or charity at the right time,
- Avoiding time consuming wait for probate, and
- Not lose money by paying too much inheritance tax, legally and ethically?
Are you and your partner’s savings, investments and assets held in single names, jointly owned or (and please forgive the jargon), cross proposed? You and your partner could be missing out on making use of your joint allowances, where they are applicable.
Inheritance tax and estate planning are not regulated by the financial conduct authority.
Tax Shelter
Are you and your partner’s savings, investments and assets in the right tax shelter allowing you to:
- Reclaim tax back that you are owed – for example on pension contributions,
- Save tax on the future growth of your asset – for example an ISA, and
- Defer tax until you want to access or spend the asset when your tax position and the taxation on the asset may be less than it is today?
For Isa’s Investors do not pay any personal tax on income or gains, but ISAs may pay unrecoverable tax on income from stocks and shares received by the ISA managers.
Tax treatment varies according to individual circumstances and is subject to change.
Stocks and Shares ISAs invest in Corporate bonds; stocks and shares and other assets that fluctuate in value.
The above might seem complicated and often people only get the full job, half done. This is where a professionally qualified adviser can help make sure you do not miss out on the financial planning opportunities which exist.
What may have been right last year may not be now, due to the Budget Statement, so don’t let a lack of knowledge, apathy and inertia lose you money!
References
1Daniel Kahneman 2011 ‘Thinking Fast and Slow’ p284 line 12
2Blackrock capital market assumptions
www.blackrock.com/institutions/en-us/insights/charts/capital-market-assumptions#assumptions
3 Buzzacott Exposing the 60% income tax rate
Exposing the 60% income tax rate (buzzacott.co.uk)
Approver Quilter Wealth Limited, Quilter Financial Limited, Quilter Financial Services Limited & Quilter Mortgage Planning Limited. October 2023