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Bill of fare

Digesting the contents of this year’s Finance Bill.

So the Budget has come and gone and we now have the Finance Bill. The main publicity in the Budget was given to the changes to personal and corporate tax rates and to National Insurance but all but one of these changes is deferred.

The much trumpeted reduction of the basic rate of income tax to 20 per cent from the current 22 per cent will not happen until the next tax year. The same is true for the reduction in the main corporation tax rate from 30 per cent to 28 per cent. The same tax year will also see the abolition of the 10 per cent starting rate of tax in respect of earnings and pensions income.

We will see a general alignment of the upper earnings limit and upper profits limit for NIC with the higher-rate tax threshold (taking account of the personal income tax allowance) in 2009/10. This will have the effect of subjecting more income from more people to employees’ NIC – a neat way for the Treasury to recoup some of the tax given away through the reduction of the basic rate.

An increase in the small companies’ rate from 19 per cent to 20 per cent took place in the financial year commencing April 1, 2007 and this trend will continue through 2008 (21 per cent) and 2009 (22 per cent). As a result, the effective marginal corporation tax rate is 32.5 per cent in this financial year for profits falling between £300,000 and £1.5m.

So how do these changes – such as they are – affect the big decisions? Very little, I think.

For new businesses, there is still much to be said, on pure tax and NIC grounds, for incorporating and paying available revenues and profits to owners as dividends once the personal allowance is exceeded. In respect of retained funds, however, the company structure will be a little less hospitable given the planned increases to the small companies’ rate.

There will also, of course, be non-tax considerations which will need to be considered very carefully. We see few incorporated businesses being motivated to disincorporate due to these changes.Not that disincorporation is helped by the tax system in any event.

In connection with personal tax rates, the reduction of the basic rate will reduce the HM Revenue & Customs contribution to registered pension schemes when a personal contribution has been made – another clever way to recoup some of the Treasury “expenditure” incurred through the reduction in the basic rate although reduced tax relief will only apply to basic-rate taxpayers. This must be taken into account in connection with pension funding.

The expected hard line on alternatively secured pensions and pension term assurance also needs to be considered. HMRC has made it clear that it sees the giving of tax relief on pensions as being directly associated with the provision of an income in retirement and, aside from the pension commencement lump sum, nothing else.

That is why we see the removal of tax relief on personal contributions to PTA policies and the need to draw a minimum income under Asps. We also see an effective loss of up to 82 per cent of an Asp fund that is left as alternately secured rights to other scheme members on the member’s death.

Where the investor is keen to maximise amounts passing to the family from their registered pension scheme, then taking benefits through an annuity or, after age 75, through an Asp will not prove terribly effective.

Where all the income from the Asp fund or an annuity is not required, then it may be worth looking at gifting the regular payments received as exempt transfers, potentially-exempt transfers or chargeable transfers.

For some, especially those in good health, the use of pure income that is surplus to immediate expenditure needs to fund an appropriate life policy held in trust for beneficiaries may be attractive. The premiums are likely in most cases, (depending on the facts, to qualify for the normal expenditure exemption.

While PTA policies may have been used for tax-deductible family protection, it seems there were few plans to provide for business succession, business protection and inheritance tax provision in this way.

For those who have already secured what they believe will be sufficient income through registered pensions or where no more can be contributed to an registered pension scheme due to the annual or lifetime allowance, some thought could be given to investing in alternative wrappers.

An obvious consideration would be an Isa up to the allowable limits. Whatever non-registered pension scheme wrapper is used, the fund secured at a given future date, all other things being equal, will be significantly less than would have been secured through a registered pension scheme. Nevertheless, the investment will provide the investor with continuing access to the funds invested, benefits in cash and potentially greater scope for IHT planning – say, through loan or discounted gift trusts – for those who require some continuing access to the funds.

If the investor has a strong need for access to invested funds during the investment period (pre-vesting), then a registered pension scheme investment will not deliver, despite its undoubtedly superior tax position positively affecting the bottom line. In this case, holding funds outside the registered pension scheme and possibly transferring into a registered pension scheme later may be a strategy worth considering.

So there are choices and with choices comes anxiety. The removal of anxiety is what good advice delivers.

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