The bad news
Isas: From 2006-7, the maximum investment in an Isa will be cut from £7,000 to £5,000 (and the maximum in a cash Isa from £3,000 to 1,000). Higher-rate taxpayers “will be better off if they put savings in the name of a spouse who pays either the basic rate or no tax”, says Budworth.
Trusts: Home loan trust schemes – which allow you to pass on the family home free of inheritance tax and still live in the property – have come under fire (see box below). But the most basic change is a hike in income and capital gains tax (CGT) payable on all assets held in family trusts from 34% to 40%, says Kate Burgess in the FT. When the rules come into effect, you will be able to reduce your tax bill by giving the income and gains each year to someone who is not a higher-rate taxpayer, says Budworth. Basic-rate payers can reclaim 18% of the tax paid; non-taxpayers can get back the lot.
Employee share schemes: As a result of changes on taxing trusts, many employees who own shares in their own company face higher CGT bills, since they will no longer be able to claim business-asset taper relief through a trust. This is “a serious blow” to thousands of entrepreneurs and workers, says KPMG tax accountant Cormac Marum. It is to be hoped that this was an oversight, and one which will be put right quickly.
Self-employed: Brown announced a clampdown on the hundreds of thousands of self-employed people who turn themselves into a company to save tax. By paying yourself (and/or your spouse) in dividends rather than a salary, you are liable for corporation tax but not national insurance. This slashes your tax bill. Details of how Brown intends to close this loophole have not yet emerged, but it’s unlikely you’ll be able to pay dividends to your spouse in future, says Mike Warburton of Grant Thornton.
Pensions: Brown reiterated his plan to slap a £1.4m lifetime limit on personal pension funds – due to take effect in April 2005 – but delayed a final decision by asking the National Audit Office to make its own assessment. However, high earners with funds worth more than that should act now, says Michael Pomery of pensions consultancy Hewitt Bacon & Woodrow, quoted in the FT. Under an “enhanced protection” scheme announced last week, investors with funds over £1.4m can “ensure that pension benefits they receive after 2005 escape the 55% proposed tax”, provided they stop further pension contributions now.
The better news
VCTs: Brown “handed a fillip to Britain’s wealthiest individuals” by increasing the tax breaks available to investors through venture capital trusts (VCTs) and enterprise investment schemes, says The Times. The rate of income-tax relief will double to 40% for two years from April 2004 to a new maximum of £200,000 in any one year. There is a catch, however, as investors will no longer be able to defer liability for capital gains through such schemes.
Property: Under new proposals, investors will be allowed to buy residential property with their pension funds. This means that you could, for example, purchase a buy-to-let property within a self-invested personal pension and take both income and any capital gain free of tax. The Chancellor also announced plans to investigate a new type of tax-efficient fund (known as real estate investment trusts) that allows for flexible and easy investment in both residential and commercial property.
Allowances: At least Brown had the generosity to raise tax-free personal allowances in line with inflation, says the FT. And fears that he would raise VAT, stamp duty on homes, and the upper earnings limit on national insurance contributions proved unfounded.