Out of boom
The baby boomers have been sidelined by a government keen to prioritise the young and penalize the older generation
What does the 2016 budget mean for wealthy older clients? Those coming to the end of their working lives or those who have already retired may have worked for one or only a handful of employers, building up pension pots that the younger generation can only dream of. We're all told that 'the devil is in the detail' and talking to older clients reveals many concerns about the UK tax regime.
The post-war generation has a savings ethic that job security and fully-funded pension schemes allowed them to take full advantage of. Many are ISA millionaires and have a fair chunk of their cash in a relatively liquid form. The last ten years has been very uncomfortable for them, with many spreading their assets in so many bank accounts that they have difficulty in keeping track of them.
The new annual ISA subscription of £20,000 is very welcome, but other budget measures are aimed at those under 40 and those looking to buy their first home, so will not be available to older clients.
Generally, the increase in personal allowances to £11,500 and the higher rate tax threshold increasing to £45,000 in April 2017 is good news. However, for those relying on investments to support their retirement, there is a sting in the tail from the 2015 budget that has just begun to bite.
The new savings allowance of £1,000 per taxpayer, and the dividend tax allowance of £5,000 per taxpayer came into effect in April 2016. Many wealthy older clients have investment portfolios and these new measures will see their tax exposure increase as interest is paid gross, and dividends will not have tax credits attached to them.
The first inkling of the significance of the change is detailed in notices of coding currently being received for 2016/17, detailing increased tax charges over the coming tax year. Even basic rate taxpayers will see an increase in their tax exposure where they enjoy a significant level of investment income.
A surprise move was to decrease the rate of capital gains tax applicable on transactions from 6 April 2016. The reduction in rates from 28 per cent and 18 per cent, down to 10 per cent and 20 per cent excludes residential property and carried interest, targeting those
with second homes who will not be
able to claim main residence relief,
and buy-to-let landlords.
With poor returns on savings and disappointing annuity rates for many, there has been a surge of interest by many retirees who have become landlords. This alternative method of generating income is now being targeted by the government with borrowing to fund acquisition made more difficult by a lack of tax relief on borrowings for smaller landlords, and changes to wear and tear allowances resulting in some deciding to dispose of these assets.
For those still keen on this type of investment, usually where they do not need to rely on gearing, they have to face an additional 3 per cent stamp duty above normal rates.
As professional advisers, we are all aware of the difficulty faced by the government in balancing a deficit and reducing austerity.
The tax code is complex and the introduction of general anti avoidance measures (along with rafts of new legislation at least twice a year) makes it difficult for professionals to keep up to date, let alone the layman.
The government's solution is to legislate to give HMRC a new power to make direct assessments of a person's income without a tax return being submitted, and to increase the use of technology.
We may be creating a tax authority and methods of communication that will suit the older generation of tomorrow, but we also need to support the pensioners and older generation of today. Increased digitalisation is not
the answer, and the thought of filing their personal tax affairs online,
or asking a question to a virtual assistant is simply alien.
Many consider the current tax rules bewildering, with draconian measures for getting it wrong, along with a lack of clarity in policies to ensure that taxpayers can easily get it right. The older generation feel exposed, confused and hard done by, with their previous fiscal contributions ignored. An alternative view is that they are a generation that has had it all, and they should not be immune from the pain of post-recession housekeeping.
Lynne Rowland is a private client tax partner at Kingston Smith