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Thousands of retirees living off investment income could be penalised

If a proposal drafted by the Institute for Public Policy many retirees would have their retirement income significantly reduced.

If a proposal drafted by the Institute for Public Policy to abolish certain Income Tax allowances and have a single rate for all sources of income were to come into effect, many retirees would have their retirement income significantly reduced.

George Parker, assistant manager at Blick Rothenberg said, “Currently, dividends and savings income enjoy lower rates of taxation and allowances respectively. Were the proposal to be enacted, many retirees who have made sensible investment decisions over their lifetime would have their retirement income significantly reduced. Such a proposal would also affect many small and medium sized enterprises, such as owner managed business (usually trading companies), where the shareholder’s income is often solely made up of dividends.”

He added, “A lower tax rate for dividends reflects risk – how can it be fair to have a single Income Tax rate for an employee, who is guaranteed a monthly salary along with certain employment rights, compared to an individual who starts up his own company financed by his own capital (or most of the time – debt). The risk should be reflected in the tax rate.”

“To give an idea of the risk associated with trading through a company, according to a recent report issued by The Insolvency Service stated, ‘For every 10,000 active companies in England and Wales, 42.1% were liquidated.’ This gives one an idea of the true risk associated with starting up your own limited company.”

Another proposal in the report is to align Capital Gains Tax (CGT) rates to income tax rates. At present, CGT rates range from 10% to 28%, compared to income rates ranging from 20% to 45% (ignoring National Insurance Contributions and marginal rates).

The report focuses on the asset price inflation of residential properties, which one can’t argue against

George said, “However, it shies away from assets such as shares and unit trusts, that do not always appreciate, and which many retirees rely on in retirement.”

“Capital gains on residential properties (excluding an individuals’ main residence) already attract the top rate of CGT at 28%. Many retirees invest their savings into a second property, which effectively becomes their pension pot for retirement.”

He added, “In addition to the recent mortgage interest restrictions and additional 3% Stamp Duty Land Tax charge, an Income Tax rate of say 40% on the eventual sale of a residential property would be another kick in the teeth for retirees.”

The report also argues to introduce capital gains on assets held at death. Currently, assets held on death are not subjected CGT, but are valued at market value and, depending on the size of the deceased’s estate, can be taxed at the top rate of 40% Inheritance Tax.

Parker said, “This is effectively double taxation, and in an economy where younger generations are relying on inheritance from parents and grandparents to get on the housing ladder, such a change would see the reality of owning their home greatly diminish.”

He added, “Not only do comparably lower CGT rates and dividend tax rates reflect risk taken by individuals on their own capital, but also attracts domestic and foreign investment, something the UK will need, especially over the next few years. The proposals above appear to be more regressive, rather than progressive.”

For more information, please contact George Parker.

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