We’ve looked at how the Chancellor’s 2012 Budget might effect four specific client situations. Of course some of our clients may fall into more than one category, but hope this style of Budget summary is useful. Like all generic information please do not expect it to apply perfectly to your situation without Financial Advice, and many of the areas below are not yet the final legislation, or may not be implemented for some time. We have considered:
- Those still accumulating retirement funds
- Pensioners and those dependent on savings and investments for financial independence
- Owner Managed Businesses, Entrepreneurs and the Self-Employed
- Trustees, and those with philanthropic interests or inheritance tax concerns
- Other important considerations
Those still accumulating retirement funds
- Those working will find that the personal allowance continues to increase, and will be £8,105 from the 6th April. However, the band at which 40% tax paid will be correspondingly reduced to make this change neutral for those paying more than 20% tax on income
- Child Benefit will be lost gradually, for those earning more than £50,000, or who have partners earning this sum. The effect of this charge would mean that in some cases, those earning £50-60,000 income would pay more tax, as a percentage, on this band of income than any other class of individual in the UK
- No new changes were introduced on pensions or pension tax relief. Pensions continue to be one of the most tax efficient methods of building retirement funds
Pensioners and those dependent on savings and investments for financial independence
- From 6th April 2013 the higher age related personal allowances will not be increased, and will only apply to those born before 5th April 1948 (£10,500 allowance) or 5th April 1938 (£10,660). This relief is gradually reduce for those with income over a certain limit (from £25,400 in the 2012/13 tax year) many of our clients do not benefit from this enhanced allowance. At worst, it is proposed the age related allowance will be gradually eroded in future year, until it is consistent with the basic personal allowance (£8,105 from 2012/13)
- Further detail is shortly expected on a move to a flat rate pension of £140 per week
- This budget did not introduce any change to pension drawdown, for better or worse. There had been some demand to remove some of the restrictions on withdrawals, which have fallen due to low gilt yields (which in turn effect annuity rates)
Owner Managed Businesses, Entrepreneurs and the Self-Employed
- The Chancellor has accelerated the speed with which Corporation Tax falls on larger companies (those with profits over £1.5m). It is our opinion that ultimately there will be a single rate of 20% on corporate profits, which would be a large simplification to our corporate tax system, whilst no announcement has been made on this, there does seem a clear intention to simplify.
- Steps will be taken to prevent the payment of tax efficient benefits to spouse’s and other family members. This will be particularly relevant where pension contributions are made for those remotely connected to the business.
- A cap on reliefs which had previously been unrestricted is proposed. This limit would be £50,000 or 25% of income, if greater. It would not be relevant for pensions and other investments where a monetary limit already exists.
- There were no changes to Capital Gains Tax, and Entrepreneur’s relief, with a lifetime limit of £10m continues to be an attractive relief
- IR35, which is the rule that prevents the use of a company to avoid National Insurance and some income tax is proposed to be clarified and tightened
Trustees, and those with philanthropic interests or inheritance tax concerns
- Consultation will be undertaken to simplify the calculations of Inheritance Tax periodic charges (ten year) and also the tax paid on exiting certain types of Trust
- One of the significant downsides of the cap on historically unrestricted reliefs (detailed in the prior section) could be that philanthropic donations would be restricted. The Budget does refer to a wish to avoid this situation
- From 6th April 2012 it will be possible to reduce inheritance tax on death to 36%, where a gift of 10% of an individual’s net estate is made. We see this as a significant opportunity, and in some cases increasing gifts to charity may result in a larger legacy for the residual beneficiaries of an individual’s estate.
- An increase to the legacy that can be left to a non-domiciled spouse with Inheritance Tax will follow.
Other important considerations
- It has been confirmed that the Chancellor aims to reduce tax on income that is currently taxed at the 50% rate to 45% from 6th April 2013
- An anti-abuse rule is to be introduced, and it is notable that the wording is different than the proposed “anti-avoidance”, we believe that the Chancellor aims to clamp down on abusive and aggressive schemes, of which this firm has always been sceptical. Cautious and conservative (small “c”) planning should remain unchallenged.
- Pensions tax-reliefs, tax-free lump sums and retirements and annual allowable contributions all remain untouched
- The appeal of Venture Capital Trusts, Enterprise Investment Schemes and the new Seed Enterprise Investment Schemes has increased, however these remain very high risk (but tax efficient) investments, unlikely to be appropriate for the majority of investors
As always we are willing and able to discuss any of the above, though as detailed in the introduction we await the final detail of the Finance Act 2012 to see how the above proposals will be implemented.