• The inheritance tax threshold has been raised by 3% to £263,000 from £255,000. The rate of inheritance tax has been frozen at 40%.
• The Proposed income tax charge on pre-owned assets will take effect from April 2005 as outlined in lat year’s pre-Budget report. The Government says it will not affect ‘legitimate’ transactions between family members such as parents wanting to help family members get a foot on the property ladder. Although the change does not come in until 2005, it has been criticised by the industry because it retrospectively affects all arrangements put in place since 1986.
• Stamp duty on property purchases has been frozen. The Government says recent trends in the housing market have persuaded it to retain stamp duty at 1% for properties up to £60,000. 3% up to £250,000 and 4% up to £500,000. However, the Council of Mortgage Lenders believes the failure to index stamp duty thresholds remains a form of stealth tax.
• The Sandler suite of stakeholder products will be on the market from April 2005. The Treasury says the FSA will finish its research by the end of May, with an announcement of the charge cap expected shortly afterwards.
• Chancellor Gordon Brown has refused to back down over the abolition of tax credits on equity ISA dividends despite intense pressure from the industry. Plans to cut the annual maxi ISA allowance to £5,000 from £7,000 will also go ahead.

PENSION DETAILS NEEDED TO MAXIMISE EXTRA TIME

The headline news out of the Budget will be that the Government has listened to the industry and realises that time will be required if we are to implement retrospective pension changes properly.
It is particularly important that people affected adversely by the changes are able to receive appropriate advice and that pension providers and employers also have sufficient time to implement these changes before A-Day.
Setting the implementation date at April 6 2006 instead of 2005 should allow enough time but only if all of the details of the changes are published soon. Many Budget commentators often fall back on the phrase ‘the devil is in the detail’ when asked for their initial reactions to the Chancellor’s speech but for pension in this Budget, the opposite is true – the devil is in the lack of detail.
It is important that Government departments do not sit back and relax now in the belief they have more time on their hands with the drafting of the pension legislation. They don’t.
For the last year, we have experienced what amount to a pension blight.
To use the extra time gained by postponing A-Day until 2006, we need to have our legislation straight away, all the i’s dotted and all the t’s crossed. Then we can all get on with it.
The lifetime allowance of £1.4m that was proposed when A-Day was going to be in 2005 is being increased to £1.5m to ‘reflect an April 2006 implementation date’. The Government has also announced all the limits that will apply up to 2010, when the lifetime allowance will be £1.8m.
That seems to be well above what would have been expected in terms of the rate of increase in the allowance and seems to indicate that Government agrees the £1.4m was a bit on the low side.
The Lifetime allowance itself will be subject to a five-yearly check, with the first review being in 2010. That is good too and shows that the industry’s views have been taken on board.

PROPERTY FUNDS COULD BE ALTERNATIVE TO BTL

The Treasury is set to introduce a UK version of US real estate investment trusts to improve the market’s efficiency while encouraging expansion of the private rented sector.
The Government has issued a consultation paper entitled, Promoting More Flexible Investment In Property, alongside the Budget seeking industry views on property investment funds, which it believes could provide an alternative to the buy-to-let market.
Pifs potentially allow investors to put their money into both commercial and residential property at little cost and with similar ease to investment in ISA’s.
The consultation is aimed at pinning down a structure for Pifs, particularly in terms of how they could expand the opportunities for small investors to invest in a wider range of property. But, as with Reits in other countries, they could also offer tax advantages for property companies which arte currently subject to double taxation on rent and profits.
The industry says Pifs would curb investors’ tendency to put most of their money in the highly geared BTL market. As they are likely to have a closed-end structure, Pifs will also be transparent as they would be subject to the strict rules of the Stock Exchange.

BARKER GETS CENTRE STAGE BUT MILES IS IN SHADOWS

With two key reports on housing and mortgages leading into the Budget, the difference in Gordon Brown’s adoption of their proposals is startling.
The Miles report has effectively been sidelined, as many in the industry expected, with a minimal mention by Brown that it will be considered by the FSA and The Treasury.
Read this as meaning that there will be no artificial structures to ease the funding of long-term fixes or legislation forcing lenders to offer their new business rates automatically to al customers.
Barker, by contrast, was everywhere in the detail. Key note points are a definite adoption of property investment funds and a liberalising of the planning regime. The Pifs consultation paper reveals that residential is a prime target both for expanding institutional investment and increasing the social housing stock.
This looks like the Government’s main platform for residential investment as the Budget was silent on previous Treasury statements that direct investment in residential property by Sipps would be allowed.
The bombshell was in the clear intention that a planning gain supplement is to be introduced to tax the development gain on land once planning is granted. It is unclear at present whether this will be levied on grant of planning at the outline stage or on the gain crystallising on a sale to a developer.
To the surprise of many, stamp duty was untouched so another opportunity to help the first-time buyers was lost. Brown again revealed his fundamental lack of understanding of this end of the market.
Pifs will produce more demand, thereby fuelling inflation, and Barker’s recommendation on new build volumes undershoots Shelter’s views on new starts by around 70% so supply is unlikely to catch up.

SMALL FIRMS HIT BY END TO DIVIDENDS

Gordon Brown has closed the loophole that allowed owner-managers of small business to avoid income tax by paying themselves dividends instead of salary.
Many IFA’s see this as a ‘punitive measure’ from the Chancellor, with many arguing that the move could see many firms return to sole trader status, with widespread job losses.
But IFA’s believe the purpose of using a limited company will cease to be primarily about tax. Advisers think the change will remove the incentive for individuals to establish their own companies and see a shift towards self-employed status and partnerships. Whfis limited director Mike sTannard says the move is not good for small businesses and that it makes pension planning look like a more attractive option as there is no requirement to pay National Insurance.
He believes that as the new rules affect small businesses with a turnover of up to £300,000, the changes will not have as deep an impact as was initially thought when the move was proposed by the Treasury in February. He continues “By virtue of removing the ability of drawing income via dividends, the Chancellor is selecting against small companies. This is a crass piece of interference from the Treasury that is probably unworkable. The cost of trying to police this will be huge.”
“This is by no means a friendly gesture towards small businesses who will need to take a good look at how they pay themselves.

TINKERING WILL BOOST THE NEED FOR ADVICE

The continual increase in tax complexity by a Chancellor who is an inveterate tinkerer will continue to drive demand by clients for tax and financial planning advice from IFA’s.
The Chancellor has confirmed his intention to introduce a new retrospective income tax charge on the benefit that people get by having free enjoyment of assets they previously owned.
This is aimed principally at residential property schemes promoted by many solicitors but it was feared that it might apply to lump-sum insurance based planning arrangements. However, the Budget press notice confirms this fear is unfounded, “where the client’s continuing claims are limited to particular retained benefits”, the structure used by many life office schemes.
The proposals for change to taxation of the income and gains of trusts move on to the next stage. The rate applicable to trusts will increase from 34% to 40% from 2004/05. The likely outcome of the consultation continues to be the introduction in 2005/06 of a basic rate band of £500 – an amount that some believe may create more compliance costs than benefits – and an increase in the number of trusts where the settlor will be taxed on the income and gains of the trust.
These changes are likely to increase significantly the demand from trustees for insurance wrappers, issued by onshore and offshore life offices, given the tax-deferral opportunities inherent in these structures.

INVESTMENT BONDS GAIN IN TRUST RETHINK

The Government’s move to modernise the tax system for trusts has increased the attractiveness of offshore and onshore bonds.
Measures to simplify the trust tax system were announced in the Budget, with most changes set to come into effect on April 6 2005.
As announced in the pre-Budget report, the trust tax rate is to rise from 34% to 40% and the dividend rate will rise from 25% to 32.5%.
This modernisation increases the appeal of investment bonds as they are now put on an even better footing compared with mutual funds. Under the previous regime, bonds could be taxed at up to 40% if the settlor paid the higher tax rate while mutual funds were at 34%.
By making the rates the same, it makes bonds look a lot more attractive. If you compare bonds with mutual funds, every time you switch in a mutual fund, you pay capital gains tax. If you were to have put this money in offshore bonds, you can switch without incurring a tax liability and any income that arises can roll up inside the fund and the tax liability is deferred.

VENTURE CAPITAL TRUSTS ARE THE SOLE ENCOURAGEMENT FOR INVESTORS

Spending appears high on the agenda for the chancellor but encouraging savers and retail investors has been avoided, other than the pension announcements.
Many of the measures that should be put in place to encourage the retail investor were announced before the Budget. By doing this, the Chancellor avoided bringing negative news into a very political Budget speech.
The only positive was concentrated on what is traditionally and will continue to be a special market – VCT’s.
The markets have been hazardous, to say the least, discouraging investors from making decisions while the bear market has compounded the difficulties that those raising capital for new VCT’s have faced. We are well into the first year of the recovery and seeing muted signs of positive investor sentiment so the changes to the VCT tax incentives should kick-start a lacklustre sector.
There is disappointment in the lack of incentives and encouragement for retail investment and the removal of the tax credit and reducing the ISA allowance, indirectly increasing revenue for the Government.
The Government’s mantra is to place responsibility on the individual to make provision for their future but they are not only discouraging this, they are also essentially putting off what will be a huge issue in future years.