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John Woolley: What the Autumn Statement means for your clients

Once upon a time, the Government’s Autumn Statement only dealt with the country’s economic position and strategies to improve it.

Now it has become an introduction to the Spring Budget which gives the Government a chance to unveil some of its forthcoming fiscal changes.

It was widely tracked that there would be cut backs to the pension tax reliefs.

What we got was basically a two pronged attack.

Firstly the £50,000 annual allowance will be reduced to £40,000 from 6 April 2014. the £50,000 limit will apply to the current tax year and to 2013/14, while a £50,000 limit will also apply to any unused annual allowance carried forward in respect of tax years 2010/11 to 2013/14.

The reduction in the annual allowance should act as an incentive for people to maximise their contributions now – particularly for those individuals who currently pay tax at 50 per cent in 2012/13, bearing in mind that additional rate tax will reduce to 45 per cent in 2013/14.

Although the change in the annual allowance does not take effect until 6 April 2014, clients paying contributions after 6 April 2013 need to take care in view of the complex pension input period rules.

Secondly, the lifetime allowance is to reduce from £1.5 million to £1.25 million from 6 April 2014. At that time a new form of fixed protection will be available to maintain the current £1.5 million limit if an election is made before 6 April 2014, and no further accrual occurs or contributions are paid after 5 April 2014. In this respect the Government are also considering the possibility of an additional personalised protection option. In the run up to April 2014, advisers will need to consider all of the strategies for reducing/avoiding any lifetime allowance charge, for example,

  • making an election for transitional protection
  • drawing some or all of their benefits in 2012/13 or 2013/14 and
  • considering how their benefits are drawn e.g. scheme pension or lifetime annuity

The announcement of an increase in the maximum capped drawdown income from 100 per cent to 120 per cent of GAD annuity rate is to be welcomed. Many people in drawdown have experienced hardship because of the reduced income available and this will help to alleviate problems. It is understood that HMRC will be consulting with providers as to how soon the change can be accommodated, and whether providers would require the necessary amending legislation to be passed before they allow the new rules to be adopted or whether they are happy to work with draft legislation. It seems that 6 April 2013 is a possible commencement date for this.

With the imminent cut back in pension relief – and we may not have seen the end of this – individuals will look at other tax-efficient investments such as VCTs, EISs and Isas. Nothing was mentioned about VCTs and EISs but the Chancellor announced that, with effect from 6 April 2013, the annual ISA subscription limit will increase to £11,520 (with the cash content not to exceed £5,760).

The Jisa /Child Trust Fund limit will also increase to £3,720 in 2013/14. Remember any Isa allowance not used cannot be carried forward.

Another potentially interesting development in the Isa sector is the announcement that the Government will consult on expanding the list of Qualifying Investments for stocks and shares Isas to include shares traded on small and medium enterprises equity markets such as the Alternative Investment Market and comparable markets. This could lead to Isas becoming a lot more interesting as a tax shelter for the more sophisticated investor.

One surprise was the announcement that the personal allowance will increase to £9,440 in tax year 2013/14 – an overall £1,335 more than the current amount. In terms of planning for married couples/registered civil partners, this will mean that:

– there will be scope to shelter even more income from tax if a higher/additional rate taxpayer is prepared to transfer income-generating investments (including possibly shares in a private limited company) into a non-taxpaying spouse’s name; and

– there is more incentive for lower rate taxpayers to make contributions to registered pension plans with a view to ensuring that any resulting pension income falls within their personal allowance.

The Chancellor also announced that the CGT annual exemption will increase to £11,000 in 2014/15.

This is good news for those who invest in collectives with the intention of, at a later date, encashing shares/units with a view to receiving a stream of tax free cash payments. It is important to bear in mind that the annual CGT exemption

is available to both of a married couple/registered civil partners

can be used in respect of a minor child/grandchild by use of a bare trust/designated account and

if not used in a particular tax year cannot be carried forward to a later year

As far as the inheritance tax nil rate band is concerned this hasn’t increased since 2009 and so it was perhaps surprising that the Government announced that it will increase to £329,000 in tax year 2015/16.

This will mean that, with effect from 6 April 2015, if the first of a married couple to die does not use any of his/her nil rate band, then the survivor will have a total nil rate band (including the transferable nil rate band) of £658,000.

As expected, there were a raft of provisions announced aimed at countering tax avoidance and tax evasion. Two important statutory weapons that the Government will be able to deploy against such planning both become effective from 6 April 2013, namely:-

  • The cap on personal income tax relief on investments which is set at the greater of £50,000 and 25 per cent of income. (This does not apply to investments that already have their own cap, eg registered pensions, EISs and VCTs)
  • The introduction of the General Anti-Abuse Rule (GAAR). Further details on this will be announced at the end of December.

John Woolley is joint managing director of Technical Connection

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