By: Tim Bennett
23.05.2019
23.05.2019
Governments have plenty of subtle ways of separating you from your hard-earned money. This week, Tim Bennett looks at stealth taxes.
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What are “stealth taxes”?
Governments have many ways of taking money from you using the tax system. Some of these are pretty subtle – they are known as stealth taxes for that reason. Here is a short guide.
Background
The recent Autumn Statement was tame in headline terms – very little changed when it came to tax rates and there were a few things to cheer, such as the increase in the personal allowance for income tax. However, investors should be wary – behind the scenes, HMRC have ways to effectively increase their tax take without making headlines in the process.
A definition
So, what is a stealth tax? The definition varies, depending on who is using the phrase, but I think this one covers it neatly;
Examples
These sorts of hidden tax come in many different guises so here I will give just four examples to illustrate how they work.
Stamp duty land tax
This is the rather onerous tax you pay up front when buying a property. Higher rates apply if you then buy a second one, either as an investment or as a holiday home. Whilst the rates are widely known and published, even since they were tweaked by the current government, they have not moved to reflect property prices – for the rates that preceded the current ones this was true for years, meaning that the government raised ever more money as property prices rose.
Meanwhile, another way to raise more money than the headlines suggest is to introduce a new concession but then only phase it in, rather than offering it in one go. The relatively new Residence Nil Rate Band falls into this category – full implementation won’t happen for another year, which acts a form of drag on the benefit people get in terms of an inheritance tax shelter. Speaking of which…
Inheritance tax
The basic amount of a death estate that is exempt, the new RNRB notwithstanding, has been set at £325,000 for years. So, whilst the government can rightfully claim no additional levy has been made over that period, rising asset values have seen their take rise, nonetheless.
Lifetime allowance
Now we turn to pensions and a topic I cover in much more detail elsewhere, the lifetime allowance. This puts a certain value of pension rights outside of any penalty rate (which can hit 55%). Currently it is set at £1,055,000. However, it used to be as high as £1.8m when it was first introduced, meaning more and more pension pots are being caught, unless the holder has taken the right steps to protect their rights. Once again, it’s a subtle way to the government to boost the tax take.
Personal allowance tapering
My last example only affects those who earn £100,000 or more. Whilst this may not illicit much immediate sympathy from those who don’t, the resulting tax is quite nasty. In effect you lose £1 of personal allowance for every £2 you earn above that threshold. The impact is that some people earning just over £100,000 suffer an effective marginal tax rate of 60%.
What can I do about all this?
The good news is that with some planning you can mitigate the impact of stealth taxes, at least to some degree. Much depends, as ever when it comes to tax mitigation, on personal circumstances as to how much you can, or even need, to do.
To find out more
Please contact a Wealth Planner if you’d like to discuss ways to mitigate some of the taxes mentioned here or send me an email at [email protected]
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