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Turning points

The introduction (from the next tax year) of a 50 per cent top rate of income tax (and a rate of 42.5 per cent on dividends for these taxpayers), the removal (subject to tapering) of higher-rate relief on pension contributions for those with income of £150,000 or more and an effective rate of tax of 60 per cent (as a result of the withdrawal of the personal allowance from next year) for those with an income over £100,000 will all combine to make tax planning more in demand. And not just for the relative few who will be caught by (at least the first two of) these changes.

The changes have grabbed the headlines. Some higher-rate taxpayers who have incomes of less than the levels at which the changes operate may even mistakenly believe the changes apply to them. Their advisers will, of course, reassure them that they are, at the moment, unaffected.

Regardless of this, what these changes have done is raised awareness of, and generated increasing anxiety over, taxation and its impact. This will increase the desire to do something about it, even in those who are not caught by the newly proposed changes. There’s definitely something about “50 per cent”, for example, that is more capable of causing outrage than 40 per cent – and that is also obviously true of 60 per cent.

There is also the point that there is widespread understanding of the economic fact of life that, with such a huge public sector debt, the Government, for some years, will find it necessary to spend less and gather in more. There has already been a serious breach of trust with the electorate in imposing the 50 per cent tax rate so most are contemplating even more tax rises in the future.

Many consider that the huge disparity between the top (future) income tax rate of 50 per cent and the 18 per cent rate of CGT may give rise to increased scrutiny of perceived avoidance arrangements. At the very least, official attention may be turned to schemes that purport to turn real or natural income (otherwise subject to income tax generally at between 20-50 per cent) into gains subject to 18 per cent capital gains tax. As things stand, though, from a pure tax planning standpoint, the receipt of return as a capital gain looks (and has done so for some time since the introduction of the 18 per cent flat CGT rate) like something well worth having.

The problem here though is that, aside from some of the cleverer product structures that perform the “tax alchemy” referred to above, reliance on growth-oriented assets (especially given the massive levels of volatility experienced recently) generally introduces a higher level of risk.

The Credit Suisse global investment review and the Barclays equity gilt report both point to the importance of reinvested dividends in making the case for equities over the long run.

Product wrappers that are tax-appropriate for accruing capital gains may not be so appropriate for holding and reinvesting yield.

At the most superficial level, capital growth will fare well in a collective and reinvested dividends in an insurance product – remember, dividends received by UK companies from UK companies do not suffer tax at the corporate level.

Understanding the relative merits of insurance-based investment bonds and collectives (UK and offshore), especially for the higher levels of investment, will be critically important. This will be especially so for those high- earners with potentially substantial sums to invest who may be less inclined to invest them into a registered pension if relief on input is restricted to 20 per cent while tax on a fair part of the output (the income that is) could be at 40 per cent or 50 per cent.

Of course, some relief on the way in and a tax-free fund are both attractive but less so than when relief on the way in was at the higher rate and even less so with the fear that tax on the benefits received may be even higher in the future.

If one is to choose a different wrapper for one’s retirement planning investments, then projections based on appropriate assumptions will definitely need to be made and understood before any decision is made.

But the attractions of non-pension wrappers (even though they may offer no tax relief on the investment made) may seem even greater if the cost of forgoing pension (in the shape of reduced tax relief on input) has fallen.

The attractions I refer to are ready access to cash, benefits in cash, possible greater capacity for longer-term IHT planning and, in the case of Isas, no tax on emerging benefits, however they may be taken. Even non-Isa pension wrappers offer, under the current law, capacity to plan to minimise or avoid tax on benefit removal – and without the compulsion to take a significant part of the benefits in the form of an income.

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