What does the 2021 Budget mean for HNW Individual’s: The Five Year Freeze
What Does the 2021 Budget Mean for High Net Worth Individual's: The 5 Year Freeze
This article will cover some of the main areas of the 2021 Budget that may affect High-Net-Worth individuals, resident in the UK.
Other areas we are covering:
What Self-Employed Professionals Need to Know About the BudgetProspective Buyers Guide to the 2021 Budget
What the 2021 Budget means for Corporates
Areas of the 2021 Budget that are aimed at supporting minorities
How the Budget will affect mutual funds and the stock market
What the 2021 Budget means for the creative industry
In the Chancellor’s speech, Sunak confirmed that there will be freezes in income tax thresholds, as well as freezes in the pension lifetime allowance, capital gains tax (CGT) and inheritance tax (IHT), utilising the ‘fiscal drag’ method. This is a deflationary effect; as wages rise, a higher proportion of income is paid in tax.
While the majority of HNW individuals have a gross income in excess of £125,000, therefore unaffected by the five-year freeze in the personal allowance, the freeze in tax thresholds will see their income tax liability rise over the period. As HNW individual’s income rise with inflation, a higher proportion of their income will be taxed at the upper and additional rate band, increasing their tax burden on the 31st of January.
A simple way for HNW individuals to reduce their tax is through pension contributions (extending basic rate and upper rate tax thresholds). However, on Wednesday the Chancellor confirmed that the lifetime allowance for pensions would be frozen at £1,073,100 until April 2026 (reversing the original plan to increase the allowance with inflation). Where HNW’s have to pension savings above this, extra tax penalties are incurred, either 55% or 25%.
Although the majority of HNW individuals have their personal allowance reduced to zero, the freeze in the CGT allowance will have an impact on High-Net-Worth investors. As individuals are limited to £20,000 annual Individual Savings Account (ISA) allowance per year, many HNW’s have investments outside of tax shelters. As share and property prices rise in the next five years (with inflation), High-Net-Worth’s will therefore be exposed to a further 20% / 28% tax on their gains, increasing their tax liability in ‘real terms’.
Finally, the Inheritance tax threshold will also stay frozen at £325,000 per person. This has not changed since 2009. Each individual has a tax-free allowance – ‘nil-rate band’ – of £325,000. If they are giving away their private residence to a direct descendant, there is an additional allowance for ‘the residence nil-rate band’ of £175,000. However, for HNW individuals with an estate over £2m, this is tapered by £1 for every £2 over. With yet another 5-year freeze (taking us to 2026), HNW individuals estate’s will be subject to a further 40% tax, as house prices and wealth levels rise. Legal inheritance rax planning is one of the easiest and most beneficial ways to lessen the tax bill caused by the new stealth tax (taxation levied in a covert or indirect manner) which has been introduced.
