A maximum investment plan can be well suited to a high-tax environment
According to figures from the National Office of Statistics, there are three million people in the UK who pay income tax at 40 per cent or above. Although the Chan-cellor announced in the Budget that the 50p top-rate income tax will be reviewed, the number estimated to fall into the 50 per cent tax band remains about 270,000.*
It is interesting to note that the income tax expected to be generated from these individuals is greater than that from basic-rate taxpayers who total 26.5 million. Income tax will hit 31 million people but, with a reported population of over 60 million, it is easy to see why there is so much pressure on the state funding of services.*
In addition to increases in income tax rates for some taxpayers, we have also seen significant changes in other areas that affect the amount of tax paid by these people. These major impacts include the loss of personal allowance on income over £100,000, restricted pension funding where incomes exceed £130,000, the lowering and freezing of the lifetime allowance and realised capital gains now taxable at 28 per cent.
If advising these individuals, what planning options are available to them?
Consider an individual who has maximised their Isa contributions, built up an investment portfolio which enables them to realise capital gains tax-efficiently through the use of their annual CGT exemption (£10,600 a year for 2011/12) and funded their pension to either or both limits of contribution and LTA. Where can they invest and still meet their objectives? Enter-prise investment schemes and venture capital trusts may offer valuable CGT and income tax reliefs but they come with increased investment risk. For some, this may be acceptable, for others, possibly not.
Given the above assumptions, a maximum investment plan may be an ideal investment vehicle to meet a funding opp-ortunity or shortfall in the planning process. Head to head, a pension will offer better returns as relief will be available at least at 40 per cent. An investment portfolio will also have an element of tax-free gains as well as then being taxed at a maxi-mum of 28 per cent (today).
But, as already stated, further funding may not be an option or be attractive. Although the Mip suffers life company tax on an ongoing basis at a rate of around 20 per cent, it looks very attractive in such a highly taxed environ-ment because of its potential benefits available to certain individuals once the policy becomes qualifying.
A brief summary of the qualifying rules helps identify where the product fits in the planning process. The mini-mum term of 10 years makes the Mip ideal where access might be required before age 55 or if a regular withdrawal is needed to supplement income before other pensions become payable without adding to the individual’s income tax bill.
The ability to extend the term will mean the benefits can be protected and remain in the “qualifying environ-ment” but can be accessed any time after year 10. If the Mip is also wrapped in a suitable trust, IHT can be avoided on the policy but access still retained at the 10-year point.
Whether the 50 per cent tax rate is temporary or not, a Mip could still be a highly suitable option for tax planning. Mip sales have risen significantly over the last two years and are set to continue as those individuals identified above look for a home for existing contributions which can no longer fund pensions and where other exemptions and allowances have been fully utilised. It will not fit all individuals but for those it does, it is certainly worth consideration.
Phil Carroll is head of financial planning at Skandia
*Source: National Statistics - income tax liabilities by income range 2010/11