I then considered the potential impact this could have for the relatively few caught by these changes. In particular, I started to consider what pension alternatives might look appealing to the “potentially pension disenchanted”.
I started, unsurprisingly, with Isas, before looking at some other obvious pension alternatives, and especially for those affected by direct or indirect tax changes proposed in the Budget, it is worth having a quick look at the changes proposed to the child trust fund.
Financially supporting one’s children or grandchildren in a world where it seems increasingly expensive to provide for education and higher education, leaving aside the difficulty in then getting a job and getting on the property ladder, will be a subject high on the list of priorities for many.
The CTF has undoubtedly slipped down the financial adviser “popularity chart” but it nevertheless remains a highly tax-effective means of providing for a child’s future.
Every eligible child born on or after September 1, 2002 has CTF account. Family and friends can contribute up to £1,200 each year.
In the 2009 Budget, the Chancellor announced that the Government will make additional payments of £100 per year into the CTF accounts of all disabled children. Severely disabled children (those who receive the high-care element of disability living allowance) will receive £200 per year. These payments will not count towards the £1,200 yearly contribution limit.
Where amounts in excess of the Government-provided CTF payments (at whatever level) are to be committed to a child’s savings, contributors requiring more control over when the funds invested are released may find a separate discretionary trust with suitable underlying investments more appropriate.
Subject to investment suitability, growth-oriented investments with gains up to the trustees’ annual capital gains tax exemption may appeal – at least on tax grounds. The child beneficiary’s annual exemption can only be used if the trust is a bare trust when effective transparency applies.
The new HMRC interpretation of how chargeable- event gains under life policies are assessed under bare trusts may make such trusts established by grandparents for grandchildren tax attractive, as the gains will be assessed on the children.
This means that gains under offshore bonds that have borne no tax at fund level could fall within the child beneficiary’s personal allowance or lower tax bands. Advice is, as ever, essential.
However, thought should also be given to appropriate tax-exempt friendly society plans.
Investments that do provide tax relief for the investor on the amount invested are the enterprise investment scheme and venture capital trust. The main Budget change relates to the EIS and relaxes the time limits concerning the employment of money invested.
In addition, the period in which a claim for carryback of relief can be made has been extended to the whole tax year and allows the full amount subscribed (subject to an annual overriding limit of £500,000) to be carried back to the previous tax year.
Of course, due care must be taken over the risk. It is rare that tax efficiency and, especially, up-front relief can be secured without some price being paid. I previously considered the pension price. In the case of the EIS, the risk is usually inherent in the investment.
Perhaps most obviously, once the Isa allowance has been used (and remember that each of a couple is entitled to their own Isa allowance) then attention will be turned to other less tax-attractive but nevertheless tax-efficient investment wrappers.
The relative tax efficiency of the wrappers can be determined for particular investors in relation to the portfolio. When considering this for the new higher-rate taxpayers next year, the margin of difference between the tax rate applied to capital gains and income will widen further to 32 per cent – the difference between 18 per cent on capital gains and the 50 per cent on income. As is the case now, UK and offshore collectives will look clear(er) favourites for holding capital-gains-producing assets.
UK and offshore insurance products will, on the other hand, look tax-preferable for holding income-producing assets. Yes, there will be a latent income tax liability on realised gains but there will also (under the current law at least) be a range of planning opportunities – including assignment to non and lower taxpayers – to help minimise this charge. As for mixed funds, well it depends.
Two things are relatively clear, however. First, we can expect HMRC to look with renewed interest at structures purporting to convert otherwise taxable income into capital gains for the investor – classic tax alchemy. Second, for the larger investments, the need for advice is even stronger.