June 28th, 2011
The second Con-Lib Budget was delivered on 23 March 2011 and was predictably a very different affair from the emergency Budget delivered shortly after last year’s general election. The new Government has introduced a very different style where most of the content was largely known due to key changes being pre-announced in December.
The aim of this article is to outline some of the potential financial planning opportunities:-
Income Tax & Personal Allowance
Although the personal allowance, which is the amount of income you can earn before you start to pay tax, has increased by £1000 for those under 65 the point at which individuals now pay tax at the higher rate (40%) has reduced to £35,000 from £37,400. This means that when taking into account the personal allowance, individuals under 65 will be subject to higher rate tax on income exceeding £42,475, compared to £43,875 in the 2010/11 tax year.
The institute of Fiscal Studies have estimated that up to 750,000 people will be brought into higher rate tax in 2011/12 as a result of the reduction in the higher rate threshold.
The Budget also confirmed the following rises in the personal allowance for those aged 65 or over:-
• An increase from £9,490 to £9,940 for those aged 65-74; and
• An increase from £9,640 to £10,090 for those aged 75 or over
One noticeable point for those over 65 is that the age-related allowances have only increased by £450 compared to the £1000 increase for those under this age.
The age related allowance is also reduced back towards the standard (£7,475) personal allowance by £1 for every £2 your income exceeds £24,000, meaning that the additional allowance is lost by the time income reaches either £28,930 (if aged 65-74) or £29,230 (if aged 75 or over). These ‘tipping points’ are the same as last tax year due to the threshold at which age allowance starts to reduce being increased from £22,900.
For those earning over £100,000 the basic personal allowance of £7,475 is also reduced by £1 for every £2 that income exceeds this level. This therefore means those earning £114,950 or more will see their allowance reduced to nil.
Those dragged into higher rate tax this year or whose level of income will affect their personal allowance could consider:
• Reducing taxable income by making additional pension contributions
• Using ISAs to shelter interest & investment income from tax
• Transferring investments to a spouse if they are subject to a lower rate of tax – Such transfers should have no immediate Capital Gains Tax or Inheritance Tax implications.
• Using non-income producing investment ‘wrappers’ such as investment bonds
Inheritance Tax (IHT)
Although there were few changes in this area, the important point is that the ‘nil rate band’ (the threshold above which IHT becomes payable on your estate on death) remains frozen at £325,000 until at least 2014/15. This means that for most married couples with assets of more than £650,000 they will need to consider some form of IHT planning
There are a variety of ways of tackling the IHT problem: For example, it is possible to take out a life assurance policy in trust to provide funds for your beneficiaries to pay the bill. Other solutions could be to gift away some of your assets – either directly or to be held in trust. Where gifts do not exceed £3,000 in total they will be immediately exempt from IHT and larger amounts will become exempt provided you survive the gift by 7 years.
Although, since 9 October 2007, it is now possible for married couples to transfer any unused ‘nil rate band’ on first death to the surviving spouse on second death, the freezing of the nil rate band may mean that this is no longer the best option, and it is possible to instead make use of the nil rate band on first death by directing assets to a trust via your will. This is a complex area, however, and you would need to seek further advice in the context of your own circumstances.
There have been a number of important changes to pensions from this tax year, most notably a reduction in the ‘annual allowance’ (which is the total amount that can be contributed to pensions each tax year without incurring a tax charge) from £255,000 to £50,000.
Fortunately though, the rules allow for individuals to ‘mop up’ any unused annual allowance from the previous three tax years (2008/9, 2009/10 and 2010/11) subject to a maximum of £50,000 per year. This may be good news for high earners in particular who in the last two tax years have often been restricted to maximum contributions of up to £20,000.
If you have significant pension funds it is also worth remembering that the lifetime allowance reduces from £1.8m to £1.5 from 6 April 2012. You may therefore need to consider how to plan for this reduction and whether to apply for ‘fixed protection’ to keep a lifetime allowance of £1.8m. The downside of this protection though is that you cannot accrue any further pension benefits on or after 6 April 2012.
Capital Gains Tax
Since 23 June 2010 there have been two rates of capital gains tax (CGT) – 18% and 28% – whereas previously there had been a flat rate of 18%. The 28% rate will apply to those individuals whose capital gains, when added to their income, takes them above the higher rate tax threshold for income tax,
That said, the 28% rate is still less than the 40% rate for income so from a tax perspective it still makes sense for higher rate taxpayers to invest for capital growth and perhaps consider a ‘capital as income’ strategy. This can be achieved by making regular encashments, particularly as gains need to exceed the annual CGT exemption before any tax becomes payable (currently £10,600 in 2011/12)
Such a strategy could make even more sense for individuals who earn over £150,000 who would otherwise be subject to 50% tax on income above this level.
The above are just some of the things you could consider depending on your circumstances, however, it is essential that you seek guidance from your Financial Adviser. Much of the above focuses on tax planning opportunities but this is not the only consideration as there other important variables to consider, such as investment risk.
Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.
The value of your investment can go down as well as up and you may not get back the full amount invested.