Yes, I know, it is budget time again. Yippee! 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 now electricity and gas is front and centre!).

There will be many guides and summaries aiming to make sense of the statement, and how it impacts the people of the UK.

From my perspective, the biggest impact in the world of investments and financial planning relates to the tax allowances and shelters which are legally and ethically available from the Government. This is because, while most of us focus on whether our investments are doing well, we look at investment performance above all else.

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, it can mean losing money unnecessarily to the taxman 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 are DOUBLE digit (10%, 20%, 40%, or even 360%!) – and this impacts not just for the super wealthy but the ‘average’ person in the street too.  The ‘plan’ you have put in place, using tax shelters whose tax status, and therefore benefit(s) and suitability for purpose may now be changed because of 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 your 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 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:

• Your and your partner’s tax codes are correct and are being applied accurately,
• Your cash / money on deposit in bank accounts is spilt between your and your partner to ensure you are allocating the interest received by making best use of your personal allowances, and
• Your 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 your 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 your 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.

Tax Shelter

Are your 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?

Investors do not pay any personal tax on income or gains within an ISA.

Tax treatment varies according to individual circumstances and is subject to change.

Trusts and taxation advice is not regulated by the Financial Conduct Authority.

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
³Buzzacott Exposing the 60% income tax rate
Exposing the 60% income tax rate (buzzacott.co.uk)