Technical Connection Budget Commentary

By John Woolley, director, Technical Connection

With a general election round the corner, it was clear that this Budget would be used primarily for election sweeteners, with some of the proposed more technical measures reserved for the Budget that inevitably follows a general election.

The increase in personal allowances means more income tax can be saved by simple unconditional transfers of investments from a taxpaying spouse to a non-taxpaying spouse. IFA Promotion estimates that more than £57bn will be paid in unnecessary tax in 2004/05 and the inability of non-taxpaying spouses to use their personal allowance is a clear area where tax is overpaid.

Where the taxpaying spouse is a business owner, income can effectively be transferred by employing the spouse in the business and paying them a salary. In order for the payment to be deductible for the payer, the payment must be appropriate for the amount of work carried out by the payee.

If any dividends or shares of partnership profits are paid to the spouse, care should be taken to avoid the settlement provisions that the Inland Revenue is applying to income redistribution arrangements in family businesses carried out for tax-avoidance purposes. The result of the application of these provisions is that the income will be assessed on the deemed settlor spouse – the main contributor to the business.

Welcome news comes in the form of the decision to keep the maximum Isa investment limit at £7,000 until 2010. Those who have more to invest should ensure they can fully utilise the annual capital gains tax exemption, which was raised from £8,200 to £8,500.

It should not be forgotten that taper relief on investment assets, which is applied before the annual exemption, can effectively stretch the exemption by up to £14,166, based on the new CGT exemption, meaning gains of this amount will be tax-free on investments held for 10 years or more. All family members are entitled to an annual exemption.

Although holding an appropriate collective investment subject to a bare trust is a good way of using a child’s annual CGT exemption, it must not be forgotten that the effect of the continuing consultation on trust tax reform may mean that capital gains of a bare trust will only be taxed on the child of the settlor after he is 18. However, even if this change is introduced, it will not diminish this as a tax-attractive way of funding for the costs of higher education.

The inheritance tax nil-rate band has increased to £275,000, with a phased increase to £300,000 planned over the next two years. This will help a lot of people with houses valued at around this amount. But IHT remains a major problem for many people. The pre-owned assets rules, in conjunction with the gift with reservation rules, make lifetime IHT planning difficult for people who require ongoing access to lifetime gifts via income or capital.

The good news is that these rules do not apply to single-premium inheritance tax plans such as discounted gift schemes, loan trusts and retained interest trusts. The position on business trusts still awaits clarification.


Skandia widening platform range

I would like to refute strongly the allegation by an IFA in last week’s Money Marketing that Skandia is not adding other multi-manager funds to our platforms.

Farrow’s view

Imagine if Madam Tussauds had a gallery dedicated to fund management. Which canny investors would make the podium?


Natixis Global Asset Management’s quarterly Portfolio Barometer offers insights into UK financial advisers’ model portfolios and the allocation decisions they are making. Natixis’s Portfolio Research & Consulting Group works with financial advisers and other intermediaries to analyse and enhance their model portfolios and help them develop investor portfolios suited to today’s complex markets. The Portfolio […]


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