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Budget tax planning analysis

I have always maintained (even more forcefully of late) that the value of relevant and timely information, understanding and advice cannot be underestimated. This is particularly so in knowledge based industries (such as ours) where what you know and how you can use it is the basis of your competitive advantage. So when it comes to the Budget what better time to
 understand the changes proposed
 communicate what the changes are and what they mean to those for whom the changes are relevant and who will value the information you give.

What follows is a synopsis of what I consider to be the main financial services related proposals and changes – apart, that is, from the NI changes that we already know about and which I will not cover here.

Investors will welcome the increase in the Capital Gains Tax exemption to £7,700 – but of course they will correctly argue that you have to make gains before you can use it! Remember though, that for long term investments taper relief applies first, which can have the effect of &#39stretching&#39 the annual exemption.

The maintenance of the tax deferment qualities of insurance based investments (but see my later comments for &#39Professionals&#39) – is especially important in respect of reinvested income – and the preservation of the 5 per cent withdrawal rule means that a wide choice of potentially tax effective investment wrappers remains available. Its worth reminding you also that the Revenue have confirmed their announcement of October 2, 2002 removing barriers to the sale of UK authorised investment funds abroad. Interest distributions can be more easily received gross by foreign investors and the funds (despite being UK based) will be free of IHT. And whenever there is choice there is the need for advice.

Non domicilliaries and non residents will also keep a careful watch on the emerging consultation on residence and domicile status. For the time being the planning opportunities for these investors still exist.

Parents and grandparents will be interested in the proposals which provide for the establishment of child trust funds for all born from September 2002. An initial endowment at birth of £250 (£500 for poorer families) is made by the Government. Of possibly greater interest though, is that others (eg. parents, grandparents) can contribute up to £1,000 (between them) every year and it is expected that returns from the fund will be tax free avoiding the usual parental anti-avoidance rules.

It is expected that, by 2005, a wide range of providers will be available. There will be no restriction on the use of assets in the fund at age 18. Shares in pubs, clubs and off-licences have surged as a result!

IHT has remained relatively untouched with the nil band going up to £255,000.

For the life assurance professional the retention of the qualifying policy, regime and 5% withdrawals will be good news. There have been some technical changes though that are worth knowing about. And they are largely good news too. The first is the ending of the &#39double death&#39 problem on group death benefit only life policies which could throw up some unwanted chargeable event problems on deaths after the first. The second is the removal of the tax ineffectiveness of life assurance as a charitable investment. Non UK policy gains will only be subject to tax at basic rate.

The third and fourth proposals are not so good. The third prevents tax free access to the funds by policy loans when a policy is in trust and the trustees are assessable on gains. The fourth prevents the deferral of a gain when the policy proceeds are reinvested into a new policy under an option in the policy. This effectively prevents the policyholder using the 5% tax deferral rules to withdraw more than the original premium under the policy.


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