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Budget bark still worse than bite

With few surprises arising in the Budget, I am going to take a more oblique view of what some of the changes might mean and what action might be profitable for UK taxpayers in a few selected areas.

In last week&#39s Money Marketing, I began my Budget coverage by looking at children&#39s tax credit. I will now turn to the areas of inheritance tax, capital gains tax and life insurance policy taxation.

Inheritance tax

Unlike in earlier years, the widely held view ahead of the Budget was that, with a general election pending, few if any changes would be made to inheritance tax. This proved to be correct.

But while no major changes to IHT have yet been made by this Government, complacency must be avoided. It would therefore be prudent (to use the “in” Budget word) to continue planning for possible changes should the Government be re-elected.

Do not forget that, some five years ago, Labour publicly criticised the lack of bite in

the IHT regime.

In very brief terms, the main features of the IHT regime are as follows:

An increased nil-rate band of £242,000, with a 40 per cent flat rate of tax on estates over that amount.

The potentially-exempt transfer rules.

A 100 per cent maximum level of business property relief and agricultural property relief.

Planning using deeds of variation.

Lump-sum inheritance tax schemes that avoid the gift-with-reservation rules.

Advantageous rules for excluded property trusts.

All these are areas that may well be targeted for harsher treatment under a Labour Government in the future.

Capital gains tax

The main change announced was an increase in the annual capital gains tax exemption from £7,200 in 2000/01 to £7,500 in 2001/02 for individuals and personal representatives and, in most cases, from £3,600 to £3,750 for trustees.

The exemption remains as one of the most important but woefully underused weapons in an individual&#39s CGT planning armoury. Each individ- ual in a family – including each spouse and each child – can realise tax-free gains each tax year within his or her

CGT allowance.

A simple way for parents and grandparents to facilitate use of the exemption by children is for investments, such as unit trusts, to be held for the designated benefit of the child. All capital gains would then be assessed on the child, not the nominee.

Transfers between spouses remain on a “no gain/no loss” basis. Therefore, as long as any transfer is outright and unconditional, a prior transfer to a spouse could effectively double the use of the family&#39s annual exemption.

However, following the changes in 1998, it is much harder to use up the annual exemption through bed and breakfast transactions without the required 30-day break period between disposal and reacquisition.

The annual exemption is applied after taper relief. This can have the effect of stretching the annual exemption. For example, if gains on an investment were, say, £7,500 and

the investment had been held or treated as held for 10 years of ownership qualifying for taper relief, then taper relief at 40 per cent would reduce the gain to £12,500, which would be wholly exempt within the annual exemption at its new level. It may well be higher in 10 years time.

Life policy taxation

Life policy taxation is perhaps one of the most enigmatic areas of taxation. Fortunately, most investors do not have to worry because personal tax only becomes relevant when the policy is encashed or a withdrawal is made.

For policies issued by UK insurers, only the difference between the higher rate and basic rate of tax, that is, 18 per cent, is payable and even then only by higher-rate taxpayers. For couples and families where the policy owner is a higher-rate taxpayer and there are others over 18 years who are non- or basic-rate taxpayers, an unconditional assignment of the policy for no consideration from the higher-rate taxpayer to the non- or lower-rate taxpayer would not of itself give rise to a chargeable gain. However, the policy could then, in most cases, be encashed with no tax liability for the non-taxpayer.

This strategy is most effective and beneficial for investments in single-premium bonds where the gains tend to be biggest.

However, complications and tax liabilities can arise where the policy is jointly owned by other than a married couple and an assignment for no consideration is made of a part interest, for example, from a higher-rate taxpaying joint owner to a non- or lower-rate taxpaying joint owner.

In the Budget notes, it is made clear that, like assignments of a whole policy, there will now be no income tax charge on part assignments. This will be a relief for those otherwise affected and prevented from benefiting from what could be a very effective and simple piece of tax planning.


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