The impact of COVID-19 and Brexit forced millions of businesses and individuals to rethink their long-term financial plans, as millions dipped into savings, cut costs, or took out a loan or another mortgage to manage. The economic impact of both, particularly the pandemic, means the Government will be raising taxes in the recovery effort and savers must manage a higher tax bill while dealing with other financial concerns, which can quickly become a stressful process.
Tax expert Max Porter, Private Client Director at ATC Tax, offers advice on what to expect and how to handle your taxes in the coming year.
Year of change
The coming year will likely see current taxes reformed and new taxes introduced. Capital gains tax (CGT) is the tax most likely to be reformed, after the Chancellor ordered a review of the tax in July 2020 and the removal or reduction of the annual exemption, currently standing at £12,300, could be the recommended outcome.
Inheritance tax is also likely to be under review for reform. In 2019, the Office for Tax Simplification published plans to streamline inheritance tax rules to limit the number of exemptions. While the report hasn’t been put into practice yet, the Government could yet return to the plans to raise funds.
Alongside these potential changes, new taxes considered by the Treasury include a 2% levy on goods sold online and a mandatory charge on consumer deliveries, as well as a “Capital Values Tax”. This would replace current business rates, which is based on land value and the buildings on it, with tax paid by the property owner, rather than the business leasing it.
The Brexit deal agreed in December 2020 will have also have tax implications for British expats, through additional taxes on the Qualifying Recognised Overseas Pension Scheme. While non-UK residents were previously able to transfer their UK pensions into qualifying structures overseas tax-free if they lived in the European Economic Area, the long-term implications of Brexit could see these benefits phased out.
Making changes fast
With significant tax reformation on the horizon, individuals must consider their tax liability, not just for the current tax regime, but for when any of the expected changes come into effect this year.
Preparing effectively for unexpected events should be the priority, particularly after COVID-19 exposed the lack of financial planning for millions of Brits. For example, a fifth of UK workers had no rainy-day fund before the crisis, causing them to dip into long-term savings or cut back in their daily lives in ways that could have been avoided.
“Ensuring that you have a rainy-day fund, or are invested in liquid assets, can provide an extra income source and alleviate financial concern if the unforeseen occurs.”
To help reduce the tax bill and put in place a long-term plan, individuals should speak to a specialist tax adviser, who can help navigate through difficult and often complex taxes, as well as help you to plan in line with any new tax changes.
Advisers can also help restructure finances to maximise the benefit of any entitled tax allowances. Couples can make the most of both their allowances by splitting their assets and avoid paying unnecessary taxes. Dividends, CGT and ISAs are all tied on the individual, not a couple; through this, a tax adviser can help to structure annual income at a far more efficient tax rate.
Individuals will also be able to claim for the CGT annual exemption of £12,300, the amount of profit that can be made from an asset this tax year before any tax is payable, to further reduce costs.
With these allowances under serious threat due to the economic downturn, it is crucial savers make the most of them now.
Prepare the right way
Although not all of the discussed tax reforms will come into effect this year, 2021 will likely still be a transformative year for Britain’s tax system. It’s vital individuals adapt quickly and prepare for changes by getting to grips with their tax affairs and looking at where the bill can be reduced.
Tax advisers can help with this process and give guidance on how to navigate any unexpected future events, while helping to save thousands of pounds and free up much-needed cash to spend on necessities or allow the individual to carry on saving.
About Max Porter
Max Porter is Private Client Director at ATC Tax, a tax advisory firm specialising in delivering high-quality UK tax advice for expats living or working overseas and assisting them when returning or leaving the UK.
Max has almost a decade of experience within the personal taxation industry, joining ATC Tax from The Fry Group, where he was Assistant Manager of the UK Tax team. Prior to this, Max worked for EY, where he was again responsible for supporting UK expats on various aspects of their tax affairs.
A qualified member of the Association of Taxation Technicians, Max Porter is studying to become a Chartered Tax Adviser.
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