Budget 2021: 5 reasons to review your clients

While the Spring Budget didn’t yield as many surprises as predicted, the freezing of all tax allowances will have an impact on clients over the next five years. In addition, ‘Tax Day’ on 23rd March could bring consultations on matters such as Capital Gains Tax changes. Here are five reasons why we think now is a good time to review client tax planning.

  1. Pension lifetime allowance frozen

With equity markets continuing to perform well, and the lifetime pension allowance frozen until 2026, reviewing your clients’ pension savings could ensure they don’t inadvertently breach the lifetime allowance over the next five years. They may need to take mitigating action, such diverting savings elsewhere, or transferring assets to a spouse or civil partner.

  1. Essential to maximise ISA allowances

With pension, capital gains tax and dividend tax allowances all frozen until 2026, there’s even more reason to ensure your clients are maximising their ISA allowance. Any dividends paid on ISA investments will not count towards the £2,000 a year annual dividend allowance. And investment returns are protected from capital gains tax and therefore don’t count towards the annual £12,300 allowance. Most importantly, unlike a pension, savings can be withdrawn from an ISA free of income tax.

  1. Help children and/or grandchildren on to the property ladder

With the stamp duty nil rate band remaining at £500,000 until 30 June 2021 and then dropping to £250,000 until 30 September 2021, now could be a good time for clients to give a child/ grandchild a helping hand onto the property ladder. It’s an especially attractive time for first time buyers since interest rates are low and the government is providing guarantees for 95% mortgages until December 2022, meaning a raft of these products should come to market.
While gifting a large lump sum (say £25,000 for a deposit on a £500,000 property) can have inheritance tax (IHT) implications, with forward planning clients can make use of Potentially Exempt Transfers. Alternatively, they could use their annual tax-free gift allowance of £3,000 to help a child or grandchild take advantage of the Lifetime ISA (LISA) allowance. They can save up to £4,000 a year of their ISA allowance into a LISA, and the government will pay a 25% bonus each year, up to a maximum of £1,000.

  1. Maximise tax free income

Since the freezing of income tax thresholds is likely to have the effect of retirees taking a pay cut over the next five years, they could look at other ways of taking an income without paying tax, such as an onshore bond. Your client can withdraw up to 5% of the amount invested each year without incurring an income tax charge at that time, and the allowance can be carried forward each year if they don’t use it.

  1. Potential changes to Capital Gains Tax

It is widely rumoured that the Chancellor could announce a further consultation on reducing capital gains tax allowances on ‘Tax Day’ on 23rd March. Either way, now is a good time to review client exposure to capital gains. You can:

  • Ensure your clients are taking advantage of all the tax allowances and exemptions they have relating to income, capital gains and inheritance tax as well as maximising contributions to tax efficient savings vehicles such as ISAs, pensions and investment bonds.

  • Consider reinvesting some of their funds, thus crystallising recent gains and effectively start from zero again.

  • Discuss transferring assets to a spouse or civil partner in a lower tax bracket or one who hasn’t used their allowances.

  • Offset some capital gains by reporting any losses they have made on a chargeable asset to HMRC. Currently, they can carry forward unused losses from previous years indefinitely, as long as this is registered with HMRC within four years of when the loss occurred.

  • Consider moving some assets into an onshore bond since they are not subject to CGT while invested or on encashment.

How Sanlam can help

Our Technical team is always on hand to support you with tax or trust related questions as required. To contact them, please email technical@sanlam.co.uk. We also offer several products that can help with tax mitigation, which we would be happy to discuss with you in more detail.

For Financial Advisers only. Not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document is based on current tax law and HMRC practice as at 8 March 2021 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should be always sought.

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