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Budget: All bark and no bite

Last Wednesday’s Budget was billed by many in the industry as headline grabbing spin rather than sensible proposals which could help the UK out of a recession.

The long-awaited increase in annual limits on Isas to £10,200 for savers over 50 from October was welcomed but suggestions that the benefits were largely cancelled out by the reduction in higher rate tax relief created a cooler Budget reception from business groups than Darling had presumably hoped for.

BNY Mellon Asset Management head of international distribution Paul Feeney says the tax relief cuts are particularly onerous as they represent a 25 per cent increase in marginal tax rate and 50 per cent reduction in tax relief on pension contributions.

He says: “For higher rate tax payers the message is very clear, you have got until April 2011 to sort out your pension, after that you won’t have the money to do it with nor the tax incentive to try.”

What’s more, providers and advisers alike claim the phased introduction for older savers on Isas will create an unnecessary burden for the industry for the sake of a few extra votes.

Technology and Technical founder and director Kim North says: “Will providers be fined if they give someone uneligble the full allowance and the whole Isa rendered as not valid? Does the responsibility lie on the product provider or on the client and do the administrators chase this information on date on birth?”

Whitechurch Securities managing director Gavin Haynes says: “The whole age call on Isas just seems completely unnecessary. We welcome the increase, although it is overdue, but it seems to be something of a spin to attract the elders voters.”

Lowes Financial Management managing director Ian Lowes says Wednesday’s Budget was “pathetic” given the current climate.

He says: “This was the time to take things by the scruff of the neck, to take medicine and to accept the fact there are problems that need to be resolved and it’ll take some hard and fast action.

“But as far as Isas is concerned there was no consideration for the industry. It’s going to cause a load of work and aggravation for a lot of people for no benefit apart from getting a few votes. And in reality the phased introduction is going to be pretty much impossible to police.”

The Budget also saw discretionary trusts targeted in a similar fashion to high earners with a 10 per cent increase in higher tax rates. However this is even more penal for trusts as there is no £150,000 threshold before the 50 per cent tax rate kicks-in.

For discretionary trusts, the dividend trust rate will increase from April 6, 2010 from 32.5 per cent to 42.5 per cent.

Standard Life head of estate planning Julie Hutchison says the acceleration and increase in these trust tax rates is not good news for discretionary trusts.

She says the changes are likely to throw the spotlight on investment bonds as trustee investments as trustees will be able to enjoy a larger tax deferral.

She says: “With an investment bond, if you’re taking withdrawals within the 5 per cent you’re not triggering any income tax charge on an ongoing basis and there are opportunities to put segments into the hands of beneficiaries who may not be 50 per cent tax payers. So I think you’ll see investment bonds and potentially international bonds becoming more relevant trust investments than perhaps they were before.”

Meanwhile the Budget gave the offshore fund industry a much needed boost with the introduction of a new tax elected funds regime from December 1, 2009.

The changes are designed to remove tax barriers impacting the development of offshore funds and legislate for a new definition of an offshore fund. They will allow certain funds to invest in instruments without being deemed as “trading”, something which previously would have left them vulnerable to a capital gains tax liability.

The Government has also extended the 10 per cent dividend tax credit to investors in offshore funds, except those with more than 60 per cent of their investments in interest bearing assets.

Chartwell Finance Management IFA director John Boyle says: “The offshore fund industry will be delighted with these changes and will be happy to help the Government with its stated objective of ensuring that these new arrangements are not misused to the extent that excessive tax avoidance results.”

Do you think the Budget package will help public finances or was it too politically driven?

Let me know what you think by clicking in the comments box below.

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