With a General Election only days away, the Chancellor Alistair Darling has delivered his final Budget of the current Parliament. And while the majority of the changes announced had already been flagged in his autumn Pre-Budget Report, there remain issues which people who have accumulated wealth over the years will need to address.
Firstly, by freezing the Inheritance Tax (IHT) threshold at £325,000 between now and 5 April 2015, hundreds of thousands more Britons will be caught up in becoming liable to a tax that is no longer the sole concern of the very wealthy.
With tax at 40% over the threshold, it is vital for people to make sure that as much of their estate as possible stays out of the taxman’s grasp and goes to their chosen beneficiaries. And there are perfectly legal ways of doing this through careful planning.
Three important arrangements need to be made. A Will must be drawn up, written and planned correctly to save the maximum amount of tax. Assets need to be transferred through the prudent use of gifts. And an IHT-efficient fund needs to be set up to enable beneficiaries of an estate to meet the tax liability without disturbing family wealth.
Another part of the Chancellor’s Budget to hit the wealthy is Stamp Duty. From next April, Stamp Duty will be raised to 5% on properties over £1m. This will particularly hit people in London and the South East, where 83% of homes selling for more than £1m were located last year (Source: Land Registry data, Daily Telegraph 25 March).
One area of investment where people can escape the Chancellor’s grasp is the tax-efficient haven of the ever popular ISA (Individual Savings Account). Apart from pensions, ISAs represent the most tax-efficient way to save and invest for the future, and in his Budget the Chancellor confirmed the increase in the ISA limit from £7,200 to £10,200 from April 2010. He also confirmed this limit would rise in line with inflation in the future.
It is important that people maximise the opportunity this presents. The tax efficiency and flexibility of ISAs assume greater value as taxes rise across the board. They are easily accessible and withdrawals are paid with no tax liability. Furthermore, they are a useful short or medium term account for cash, and offer an easy route to the equity markets. However, it should be remembered that the favourable tax treatment of ISAs may not be maintained and may be subject to future changes in legislation.
While there were no increases to Capital Gains Tax (CGT) announced in the Budget, there was an increase to Entrepreneurs Relief for those selling businesses, from £1 million to £2 million. This means people selling their businesses will now only pay 10% CGT on the first £2 million of gain, not only leaving more money available for investment but avoiding the need to engage in sometimes aggressive CGT planning exercises.
No further changes in income tax were announced, so people with taxable income over £100,000 p.a. should look to reduce their overall tax burden wherever they can, and areas for consideration should include Enterprise Investment Schemes (EISs), Venture Capital Trusts (VCTs), capital growth unit trusts, investment bonds and, of course, pensions.
While no new measures affecting pensions were announced, other than confirming those introduced in last year’s Budget, nothing changes the need for people to continue to save hard for their retirement.
With people living longer and the reduction in support from the State, it remains critical for people to plan effectively for their retirement and set aside sufficient funds to avoid the risk of outliving their savings.
It remains paramount, therefore, that people determine how much they will need to save, understand the consequences and costs of delaying, commit to a plan and take action as soon as possible. To this end, professional advice should be sought in what can be a complex area. Indeed, in what remains a high taxation environment, people will continue to need to seek specialist wealth management advice in all areas in order to find tailor-made solutions to their particular financial planning needs.
You can contact Richard at Thompson Wealth Management on 01623 88 3884