High Earners & Budget 2012
June 18th, 2012
Despite speculation that Budget 2012 may have brought some further unwelcome surprises in respect of pensions , such as the abolition of higher rate tax relief on pension contributions, these fears thankfully proved unfounded.
Indeed, the most important changes to take effect from 6 April 2012 were already known well in advance of budget day, the most notable of which as far as high earners are concerned is the reduction of the standard lifetime allowance from £1.8m to £1.5m.
The removal of child benefit for families where either parent has income in excess of £60,000 and the reduction (from 6 April 2013) of the 50% ‘additional rate’ to 45% for high earners with income above £150,000 were also big headline grabbers of course.
Two other important changes that might have an impact on many higher earners, from April 2013, are the introduction of:-
1) A cap on income tax relief of £50,000 or 25% of income (whichever is the greater) in respect of those arrangements where the tax relief is currently uncapped; and
2) A £3,600 limit on the total annual contributions that can be made to ‘qualifying’ life assurance policies – This will include Endowment policies and Maximum Investment Plans (“MIPS”) but will only be relevant for any new plans that commence on <strong>or</strong> after 21 March 2012 or any existing pre 21 March plans if the term of the plan is extended on or after this date
The ‘good news’ then is that this £3,600 limit will not apply to existing contracts that are left to mature unchanged – although there is clearly the issue of where to make new investments now.
The most obvious homes are ISAs and pensions, but the chances are these routes may have already been exhausted. If so, then the following investment planning opportunities could be considered.
<strong>Investment bonds </strong>
Investment Bonds can shelter investment returns from higher (and additional) rate tax whilst the funds are invested, although it is important to remember that additional tax may be payable on any gains on partial or full surrender and on certain other chargeable events. Because investment bonds are ‘non-qualifying’ policies they are more flexible with no fixed terms, no fixed contributions and no charges for life cover. They also offer the option of taking regular tax deferred withdrawals until final surrender, and even then effective tax planning can still help eliminate or reduce the final bill.
<strong>OEICs and Unit Trusts</strong>
Capital gains on disposal can be offset against the £10,600 annual CGT exemption by making disposals on a regular basis (for larger investments) and/or on final encashment. And, whilst any income generated within an OEIC or Unit Trust will result in additional income tax having to be paid by a high earner, this liability can be reduced by investing in low (or even zero) income yielding funds which are geared towards capital growth. On disposal, although any gains in excess of the available CGT exemption are likely to suffer capital gains tax at 28% this is considerably lower than the 40% or 50% income tax rates.
<strong>Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT)</strong>
For the more adventurous investor, consideration could also be given to the merits of investing in an EIS or VCT. Whilst these are high risk and complex investments and are not suitable for everyone, both give the investor 30% income tax relief on a qualifying investment.
The subscription limit for a VCT remains at £200,000 but for an EIS investment this has now been increased from £500,000 to a maximum subscription of £1 million.
Unlike a VCT, an EIS investment is also Inheritance Tax exempt after just 2 years of ownership although one advantage a VCT has over an EIS is the fact that higher and additional rate taxpayers will not be subject to any extra income tax on dividends received.
Whilst most of the changes announced in the budget are not good news for high earners, with the Government ultimately wishing to increase its tax take to chip away at the nation’s deficit, this article hopefully helps highlight some of the planning opportunities available that we would be more than happy to discuss with you.
<em>The tax treatment depends on the individual circumstances of the investor and may be subject to change in the future. </em>
<em>The availability of tax reliefs depends on the companies invested in maintaining their qualifying status.</em>
<em>The value of your investment can go down as well as up and you may not get back the full amount invested</em>