View more on these topics

John Woolley: Budget changes and opportunities

So what Budget changes and opportunities can advisers contemplate as they sip their slightly cheaper pint of ale?

Well, these days many of the Budget changes are announced in advance and so we have fewer surprises. But I would suggest that, given the new world of adviser charging, the overall changes give plenty of scope to give clients valuable financial advice. As to what advice, this will depend on the type of client you have.

Here I look at the various categories of typical “client type” and the advice areas that may be relevant to each of them following the Budget.

Investors

The Isa subscription will increase to £11,520 from 6 April 2013. Higher rate and additional (45 per cent) rate taxpayers should regard these as a priority investment. The returns on cash Isas look poor at the moment but don’t forget interest rates can change – even though such an increase looks unlikely at the moment.

Also, stocks and shares Isas look like they may become ever more exciting in the future if Aim shares can be held and 100 per cent IHT business property relief retained. We await the outcome of the consultation.

A reasonable increase in the annual CGT exemption to £10,900 in 2013/14 means that, if growth collectives are chosen, more scope exists for people to drawdown tax free funds in the future or just more scope to ensure that ordinary portfolio management and rebalancing occurs tax-free.

Do not forget that with the personal allowance increasing to £9,440 (£10,000 in 2014/15), couples can save even more income tax through asset and income transfer strategies where one is a non or lower taxpayer.

No change has been made to the EIS and VCT and so, for the investor who wants up-front tax relief and can accept more risk, these remain attractive investments.

In particular, the scope to receive tax free dividends from a VCT is beneficial for the higher/additional rate taxpayer. The Government has announced that it will keep one eye on the enhanced buy-back facilities available with some VCTs.

Pension accumulators

For those wishing to maximise their funds within a pension wrapper care will need to be exercised with regard to the pre-announced changes to the annual allowance and the lifetime allowance.

With effect from 6 April 2014, the AA reduces to £40,000. It remains at £50,000 for 2013/14, this year and the previous year. There is therefore scope for people to make maximum use of any unused allowance for these years, having fully contributed for the year in question.

For those who are currently 50 per cent taxpayers action should, if possible, be taken before 6 April 2013 when the top rate tax reduces to 45 per cent.

Also, when calculating how much can be paid, bear in mind that the £40,000 AA will apply to pension input periods that end after 5 April 2014.

The LA reduces from £1.5m to £1.25m from 6 April 2014.

People likely to be affected should be given advice on whether to opt for fixed protection or the new personal protection (once details are announced). Remember that if fixed protection is chosen, whilst the LA will be kept at £1.5m, no further contributions can be paid after 5 April 2014.

Also, in the run up to April 2014 people likely to be affected may, if their circumstances are right, like to consider benefit withdrawal on the basis that they will be using a lower percentage of the current £1.5m LA.

People approaching retirement

This category of client will now be able to draw 120 per cent of GAD as an income through capped drawdown, rather than the 100 per cent that existed previously.

This apart, there is lots of scope for advisers to discuss annuity choice and the tax-efficient encashment of investments as a way of providing retirement income.

Estate planners

Recent Government statistics demonstrate that more inheritance tax is being paid and more estates are suffering it. This increase is set to continue.

As confirmed in the Budget, the nil rate band is set to be frozen at £325,000 until 2017/18 in order to help finance the cost of the personal care cost cap of £72,000. So more will fall into the IHT net, meaning more will need advice. A perfect storm for fee charging advisers.

There were two relevant Budget changes in this area. The Government is taking action to prevent deliberate avoidance where people borrow money (and create a debt on the estate) with a view to investing in excluded property or property qualifying for 100 per cent relief, such as business property.

In future, in such circumstances the debt will reduce the value of the business property for IHT purposes. The provision will also, in a number of cases, attack arrangements where the debt is not repaid – regardless of what the borrowed funds are spent on or invested in.

In another, the Government has confirmed that the spouse exemption that applies on transfers from UK domiciles spouses to non-UK domiciled spouses will increase to £325,000. Indeed, a non-dom spouse can now elect to be treated as UK domiciled for IHT purposes meaning that no IHT will apply on spousal transfers – irrespective of size. As ever advice is essential.

(878)

Business owners

The good news for people who run their own business is that they will be given an annual £2,000 helping hand towards their National Insurance costs. The rate of corporation tax will be fixed at 20 per cent for all companies from April 2015 which means the higher main and marginal rates will no longer apply.

Given the differential between the top rate of income tax and corporation tax, more people will run their businesses via a corporate shelter. They will need financial advice on:

  • whether to draw remuneration from the company by salary or dividend (no National Insurance)

  • whether to employ a non-taxpaying spouse (or perhaps give them shares in the business)

  • how to maximise the use of CGT entrepreneurs’ relief on a share sale

  • how to establish business/survivorship plans for shareholders using policies, trusts and option agreements and

  • how a Relevant Life Policy can be effective and very tax efficient as a means of family protection for a key employee

(1048)

Parents

Clients with younger children will have been interested in the Government’s new childcare initiative delivering tax free savings of up to 20 per cent of £6,000 of qualifying childcare cost expenditure (ie. £1,200 per annum) per qualifying child from 2015.

Clients with older children will be interested in the Government’s initiatives to get the house purchase market moving at the bottom end. However, this in itself may not be enough for many 20 something year olds who want to get on the housing ladder. And then there are those children who need help with the costs of a university education.

Here the bank of mum and dad can help – particularly if they are prepared to advance fund. Junior Isas give tax freedom on children’s accounts and the maximum permitted investment will increase to £3,720 in 2013/14. More good news in this area is that the Government is to consult on the possibility of there being a transfer facility from a child trust fund to a Jisa.

Trustees

There is a vast amount of wealth held in existing trust funds frequently under the control of solicitors and other professionals as trustees.

The headline here is that the rate of income tax paid by trustees is reducing from 6 April 2013 to 45 per cent (37.5 per cent on dividend income). This is equivalent to the top rate of income tax applicable to individuals.

The annual CGT exemption for most trusts is increasing to £5,450.

With such high rates of income tax, trustees need to take account of taxation when investing.

John Woolley is joint managing director of Technical Connection

Recommended

23

HMRC rules rebates to investors are taxable

HM Revenue & Customs has ruled all rebates from asset managers to investors will be subject to income tax from April. Money Marketing reported in December that HMRC was looking at the tax treatment of rebates, causing delays to the FSA’s forthcoming platform paper. There was an expectation within the industry that these payments would […]

FCA concern about lender withdrawals from interest-only

The Financial Conduct Authority is concerned about the availability of interest-only mortgages after a lender exodus from the sector over the last year. In its first annual risk outlook, the FCA says a combination of uncertainty and increased changes means firms may not be making the right strategic choices and may be misinterpreting regulatory guidance. […]

3

FCA plans further crackdown on bank sales incentives

The Financial Conduct Authority is planning a further crackdown on banks’ sales incentive schemes to stop consumers being “exploited”. In its first annual risk outlook, published today, the FCA says it will follow its guidance on sales incentives in 2012 by considering whether more intrusive supervision is needed. It states: “Some firms’ cultures, processes and […]

Standard Life and Skandia consider changes after HMRC rebate news

Standard Life Wrap and Skandia are considering changing their rebate model following HM Revenue and Customs’ announcement that platform rebates will be taxed. The firms are exploring two options; either asking fund managers for preferential share classes, possibly 10 basis points lower than the market average, or using clean share classes and asking managers for […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com