The lengthening list of government travails have become depressingly familiar of late as our political leaders wrestle with one hugely important economic fact: money is so tight, the electorate must expect taxes to rise later this year, even while government borrowing reaches record levels. Moreover, because there are no credible plans to repay this burgeoning debt, the impact of further borrowing could add more inflationary pressure.
Meanwhile, as conflict, and the threat of conflict, becomes increasingly ferocious (as well as evident) across the globe, the drums of full-scale war beat ever louder, a situation that has forced several European nations, including the UK, to accept that they must increase defence spending by a significant amount.
History tells us that military conflict has a massive negative impact upon the economy, a fact of life apparent for centuries.
During the Civil War, for example, “Vastly increased taxation demands were one obvious offshoot of the war which hit everyone, [and] parliamentary war taxation represented a far heavier financial burden for all classes than any other previous taxation,” writes Barry Coward in The Stuart Age.
In The First Industrial Nation, Peter Mathias notes: “One of the few constancies in history is that the scale of commitment on military spending has always risen.” He quotes figures from the early eighteenth century which show Britain spent around £5 million per year of war. Within 50 years, that figure had risen to £40 million. The Napoleonic Wars, fought between 1803-15 cost Britain £1,000 million.
Fast-forward a century to the eve of World War I and Britain’s national debt in 1914 was just over £700 million. By 1920, it had grown to £8,000 million.
Matters got so bad that during the Suez Crisis of autumn 1956 Britain’s financial reserves plummeted, forcing the government, led by Prime Minister Sir Anthony Eden, to appeal to the IMF for a $560 million loan; it came, but with a number of stringent conditions attached.
There’s little doubt that a serious strengthening of our military capability is urgently needed, but it will be expensive; nor can we expect any form of financial aid from either the IMF or the USA.
Instead, a Sunday Times headline on 28th June gave a fair indication of where much of this money is likely to come from: “Boomers are facing the biggest tax grab of all time” it thundered.
Some rather blinkered commentators regularly scream that baby Boomers are responsible for the nation’s abundance of woes, blaming our collective ambition to own our own home, conveniently forgetting that while house prices were indeed relatively inexpensive for much of the 1970s and 1980s, mortgage costs were disproportionately high. Between June 1978 and March 1987, Bank of England base rates rarely fell below 10%. I vividly recall when, in 1982, my wife and I bought our first property, a two-bed flat in Bristol, base interest rates were 14%; once the building society’s margin was added, we were paying over 15% on our mortgage. I don’t recall it being a cakewalk.
Despite being blamed for the nation’s long list of calamities and misfortunes, boomers are in the taxation firing line: an easy target for politicians (of every hue) wishing to take advantage of retirees’ obvious lack of organisation, irrespective of the fact that the forthcoming tax grab will have serious consequences for many boomers’ income.
Nor will a single form of taxation be increased; instead, we can expect a combination of frozen tax thresholds, such as the personal allowance, frozen since 2021, to be extended beyond 2028, effectively increasing income tax. The ‘Triple Lock’, which cushions the impact of the escalating cost of living for millions of pensioners, is ‘under review’; whether it will be extended in its current form beyond next year is debateable. And just last week, Lord Neil Kinnock emerged to advocate ‘exploring’ the feasibility of a ‘Wealth Tax’.
Private pensions have already been targeted. From April 2027, any ‘unused’ money in a defined contribution (DC) pension, such as a SIPP, will be included in your estate for Inheritance Tax (IHT) purposes. This will mean that upon death, the estate of DC pension holders could have their DC pension taxed to the tune of 40%. The Office for Budget Responsibility calculates that around 10% of deaths will trigger an IHT liability by 2029-30, double the rate registered in 2023-24.
Indeed, because IHT has been frozen since 2009, a greater number of estates have breached the tax threshold during that period, making them liable to pay the ‘death tax’; the levels of tax generated is eye-watering. In the year it was initially frozen, IHT payments reached £2.3 billion. By last year, that figure had risen to £8.2 billion; it’s expected to reap £14 billion by the end of the decade.
At this juncture, millions of Boomers are enjoying the sunshine, seemingly without a care in the world, perhaps because there is no single aspect of the tax system about to knock many of them sideways. However, the cumulative impact of the taxes listed above, coupled with the regular flow of expensive and onerous conditions imposed upon private investors in the buy-to-let market, most of whom are aged over 55, ensures that millions of Boomers face an almighty increase in tax liabilities.
Given this scenario, it’s worth noting that homeowners aged 55 and over are permitted to withdraw a lump sum from their homes, in the form of equity release, without the funds being taxed. No restrictions apply to how the money may be spent.
Releasing equity from your home is a not a decision to be taken lightly, or quickly. Yet the process, once completed, could simultaneously affect the value of your estate and provide you with a significant tax-free lump sum. For many, such an outcome may look particularly attractive. Based on your tax position and the value of your estate, homeowners have been considering how to maximise the equity within their property for distribution now, before the government gets their hands on it later.
As government spending is forecast to continue its inexorable rise and the dark clouds of prospective conflict move worryingly closer, consider the examples of government expenditure from the seventeenth century through to the twentieth century summarised above. Conflict always adds to state expenditure and the tried and tested route whereby the government of the day endeavours to recoup at least a proportion of that expenditure is to raise taxes. At the moment, the cohort most likely to see their taxes rise significantly, are those aged over 55.
If you’d like to learn more about how equity release could help you, speak to your local adviser or contact Equity Release Supermarket on 0800 088 5937.
