Dominated by coronavirus and a ‘get it done’ mantra, Rishi Sunak delivered his first Budget on Wednesday. We delve into the detail behind the headlines to provide further insight on key points that could impact you and your clients.

 

Entrepreneurs’ Relief

 

Few will be surprised by the changes in Entrepreneurs' Relief (ER), as well as being heavily trailed in both the Conservative manifesto and the press, it was clear the primary beneficiaries of ER were not those intended. Added to this, just 5,000 individuals enjoyed 75% of the benefit with an average tax break of £350,000.

 

Having seen the failure of previous attempts to remedy abuse with smart tweaks to legislation, the Chancellor elected to make a simple, single change that, on the face of it, is impossible to avoid. This amendment resets Entrepreneurs' Relief to its original 2008 level of £1 million. While making life difficult for those who would abuse the relief, this remedy will cost legitimate claimants an additional £900,000 in tax.

 

Planning scenario

What could you do with clients who are affected?

 

AN INVESTMENT WITH 50% TAX RELIEF

 

Where investors are willing to treat all tax the same (making no distinction between income tax and Capital Gains Tax (CGT)) and have paid sufficient income tax in the year they sell their business, an opportunity presents itself.

 

Meet Mr Smith. Mr Smith has sold his business for £2 million and is now faced with an additional CGT bill of £100,000.

 

If Mr Smith were to reinvest £200,000 into an Enterprise Investment Scheme (EIS), he would receive income tax relief of £60,000 and CGT deferral of £40,000, enough to offset the additional CGT charge*.

 

*Mr Smith can only claim income tax relief to the extent he has paid/is due to pay this level of income tax in the relevant years.

 

Inheritance Tax

There has been speculation for several years regarding changes to Inheritance Tax (IHT) and the associated reliefs. The Patient Capital Review (2017), Office for Tax Simplification Review (2018) and recent All-Party Parliamentary Group all intensified speculation concerning the future of IHT, Business Relief (BR) and Agricultural Property Relief (APR) in particular.

Thoughts on what a combination of extensive reviews coupled with an absence of material change tell us will vary. One interpretation is that maintaining the status quo reflects the sense that BR and APR, unlike Entrepreneurs' Relief (ER), are delivering the benefits intended for those for whom they were intended. And, in addition, that these reliefs offer a benefit to the UK economy not obvious in ER. While this continues to be the case, it would seem these reliefs will sustain.

 

Planning Scenario

What could you continue to do with clients to mitigate IHT?

Though the absence of any change to these reliefs is welcome, the fact remains that more and more estates are caught by inheritance tax.  Indeed, the number of estates liable to IHT has doubled since 2009/10.  One of the reasons for this is investors' concern over access and control of the assets committed to IHT planning and the propensity to defer planning to a point where mainstream options are no longer viable.

MITIGATE IHT FOR CLIENTS UNDER POWER OF ATTORNEY (POA)

Attorneys handling the affairs of those with substantial IHT liabilities are faced with a significant issue: the court of protection tends to take a dim view of any action that would deprive the donor of assets.  This would include the use of gifts or trusts for IHT planning.

This issue can be navigated with an investment into a Business Relief (BR) qualifying asset.  Because the investment is made in the name of the donor, who maintains full access and control over their asset, the solution is regularly accessed by investors under PoA.

Pension Reforms

Among the hardiest of budget perennials has been speculation regarding the removal of higher rate tax relief for pensions. No wonder, given income tax relief on pensions costs the exchequer £35 billion every year and cannot be defended as a progressive form of taxation.  But rather than satisfy the anticipated change, the Chancellor has increased the availability of this relief for high earners.

Previously, those earning over £150,000 p.a. would have seen their annual allowance taper from £40,000 to £10,000 on a 2:1 basis.  Tapering will now begin at £200,000 meaning those earning £210,000, who previously had their allowance tapered to £10,000, find themselves with an annual allowance of £35,000. This offers these lucky few an additional £11,250 of income tax relief each year.

The reduction in allowance for the highest earners (those with annual earnings of £300,000+) sends the message that pensions will not form a meaningful part of one’s retirement plan unless already well-funded. At just £4,000 p.a., or £333 p.m., the allowance is sufficient to build a fund of around £100,000 over 20 years, providing a retirement income of just £3,400 p.a. There seems no doubt, if you are a super-high earner in the UK, pensions are no longer for you.

 

Planning scenario

What could you do for clients who are affected?

BOOST THE TAX EFFICIENCY OF YOUR PORTFOLIO BY COMBINING THE BENEFITS OF A VCT AND PENSION

 

Meet Mrs Bazzaz. Mrs Bazzaz’s pension contributions are capped at £10,000 p.a. although she has £33,334 to invest. Mrs Bazzaz wishes to maximise the tax-efficiency of her retirement planning.

 

If Mrs Bazzaz were to invest the £33,334 into a Venture Capital Trust (VCT), she would gain £10,000 tax relief. This £10,000 tax relief could be reinvested into her pension which would then save her an additional £4,500 in tax.

 

For further information or if you would like to discuss an investment opportunity, please contact us on 020 3667 8199 or email sales@foresightgroup.eu.