IT WASN’T such a long time ago in a galaxy far, far away that the planet Earth endured such an economic crisis that austerity was brought upon us. In the same week as the trailer for the new Star Wars film was released, Chancellor George Osborne said in his Autumn Statement that Britain has higher growth, lower unemployment, falling inflation and a reducing deficit.
Does this mean recovery is complete? Well, no. Whilst what he has said is all true, many targets have been missed – the biggest being the deficit, that was supposed to have been eradicated. Suffice to say prosperity is not yet here, but we are on our way.
The government’s new hope is that gross domestic product has grown 25 per cent more than was estimated last year. Closer to home, it was mentioned that jobs are being created fastest in Scotland and income tax powers will be devolved very soon. Moreover, investment in manufacturing in the UK is growing faster than any other major advanced economy.
Otherwise, the content of the Autumn Statement was as advertised. Osborne confirmed the new death benefits around pensions that were announced a couple of months ago. The new rules will allow members of defined contribution schemes to nominate an individual to inherit their remaining pension fund as a “nominee’s flexi-access drawdown account”.
This can be anyone at any age and is no longer restricted to dependants. Adult children who have long since flown the nest can now benefit and don’t have to wait until age 55 to access the remaining pension pot.
If the scheme member dies after age 75, any withdrawals will be taxed at the beneficiary’s marginal rate, but if death occurs before age 75, the nominated beneficiary has a pot of money he or she can access at any time completely tax free.
In either case, the funds are outside the beneficiary’s estate for inheritance tax (IHT) while they remain within the drawdown account and will continue to enjoy tax-free growth.
This could see a U-turn in strategy for those individuals whose primary concern is maximising what can be passed on. The previous wisdom of stripping out funds and gifting the surplus income to minimise the impact of the 55 per cent tax charge on residual pension funds has given way to retaining funds within the pension as a more tax-efficient solution.
The Phantom Menace that is the Chancellor did surprise us, however, with an announcement that we can now equivalently inherit deceased spouses’ individual savings accounts (ISAs).
The menacing aspect of this is that it is not quite as simple as changing the owner of the ISA. In reality, the surviving spouse will have an additional ISA allowance, equal to the amount the deceased spouse had in their ISA, which can be used from 6 April, 2015.
The ISA wrapper and tax efficient status are still lost at the date of death with the cash or investments being passed on to the spouse or other beneficiaries as part of the estate and still subject to IHT (although there is no IHT on inter-spouse transfers). The way the ISA status is being retained is by providing an additional one-off allowance to the surviving spouse.
Probably the most reported announcement is the change to stamp duty. It could be claimed that this is an Attack of the Clones as Scotland had already reviewed stamp duty.
As a generalisation Scotland’s stamp duty rates that will take effect in April will mean that for the average house purchase in Edinburgh, and for the rest of Scotland for that matter, we are better off than under the new rules announced by the Chancellor.
The average house purchase price in Edinburgh is £230,000. Current rules entail stamp duty of 1 per cent, so £2,300, on such a purchase, whereas the new rules announced by Osborne will lead to a payment of only £2,100. If this transaction takes place in Scotland after April next year the stamp duty will only be £1,900 (0 per cent on the first £135,000 and 2 per cent on £135,000 to £250,000).
The dark side, however, means that for properties over £500,000 Scottish buyers will pay at least £8,000 more in stamp duty than their English counterparts.
Moreover, properties valued just under £1 million will see no change in stamp duty in England, but from April next year Scottish property buyers will pay an extra £33,500.
A couple of honourable mentions should go to increases in the personal allowance (from £10,000 to £10,600), ISA allowance (from £15,000 to £15,240) and higher rate tax threshold (from £41,865 to £42,385). The longer-term aim of the personal allowance of £12,500 is also a good idea. The empire has struck back, though, in that the government may remove tax relief on travel and subsistence.
In 2010, a budget was held within 90 days of the general election. In the general election next year, likely to be held in the first week of May, it is possible that history repeats itself with spending cuts a real possibility to ensure continued progress towards prosperity.
Hopefully, you will still be prosperous in the future and although the election is unlikely to be held on a Monday, if it is, then May the Fourth be with you.
David Gow is a chartered and certified financial planner at Acumen Financial Planning in Edinburgh (firstname.lastname@example.org)
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