Fiducia Wealth Management

Pre-Budget Report

Having now had a couple of days to analyse the content of the Chancellor’s report,we think there are three areas likely to be of immediate interest to clients – inheritance tax,capital gains tax,and the taxation of foreigners living in the UK.

INHERITANCE TAX

On death,the first £300,000 of assets are free of inheritance tax (IHT).  Until the 10th October, without carefully-drafted wills, a married couple – or civil partners – often wasted one allowance. Now, widows and widowers can claim their spouses’ unused nil-rate allowances on top of their own.On current rates,the next generation can now inherit £600,000 of assets free of tax,rising to £700,000 by 2010.

This “doubling-up” has always been available to couples who carefully draw up wills to harness both allowances,and it is a procedure we have encouraged.  So if you have such an arrangement in place,should you be worried?  At this stage it appears no major re-draft is required.Mr Darling has anticipated this and has specifically confirmed that instead the will can be rearranged within two years of the first death to get back to “square one”.

One might think that a simple will leaving everything to the survivor may now be just as good an alternative. However,it may still be good advice for a couple to decide to use the nil rate allowance when one of them dies – for instance,by giving some property to a son or daughter.Apart from anything else,the likely increase in the value of the allowance in the future may not keep pace with the value of the couple’s assets,such as their property.

CAPITAL GAINS TAX

The Capital Gains Tax (CGT) rules are to be completely re-written.   Taper relief (introduced only in 1998 by Gordon Brown) is withdrawn completely. The proposal is that after 6th April next year, a flat rate of 18% on capital gains will apply – rather than the current rate which could be 10%, 22% or 40% mitigated by various reducing factors.   It is likely that those who have held assets for a long time will suffer most. Previously,indexation gave some protection against inflation on assets and this can generate quite a healthy discount on a gain for an asset held for,say,20 years or more.   That relief is also withdrawn from next April.

Who will be affected?

TheCGTchanges will affect a number of groups: people who sell investments making profits in excess of £9,200 per year,people with second properties and people who own businesses.  They should review their likely gain,and ascertain theCGTliability before and after April 2008. For those with business interests,the position after April next year seems very much worse.  Those gains would currently be taxed at a maximum rate of 10%. It appears that preferential rate will simply be abolished so that a taxpayer who sells his business on 6th April 2008 could end up paying tax of 18% even though, if he had managed to complete the transaction one day earlier, he would have paid only 10%.

Second home owners or investors may be better off in deferring sales until after April next – at which point their tax bills fall overnight from 40% (if they are a higher-rate taxpayer) to 18%.

People who have owned assets for a long time may find that the new CGT rate could exceed their current potential charge,which would have been reduced by indexation and taper relief.However,for the investor who has adopted a short-term buy-and-sell strategy,the forthcoming changes are very good news.

NON – DOMICILLIARIES

It has long been known that for the likes of international footballers,shipping magnates and Russian oligarchs,the UK is a tax haven. Our current basis of taxation allows them to pay minimal tax in the UK by retaining foreign assets abroad. Under current rules,no UK tax is payable unless income or capital gains from the offshore assets is brought into the UK. The PBR announced a new and restricted regime for non-domiciliaries with effect from 6th April 2008.

First of all,Mr Darling has stolen the Tories’ thunder (or was it the other way round?!) by imposing a £30,000 annual tax charge on those wishing to continue to use this “remittance basis” regime,and who have lived in the UK for seven years in the past decade.  This is unlikely to be of much concern to the very high net worth individuals for whom this will represent little more than small change.

Banking arrangements

Of more concern is the announcement of anti-avoidance legislation to stop people “smuggling in” income and assets from abroad but not paying tax on them.  These changes may also impact on middle-range foreigners working in theUK,who use structures to ensure that their overseas funds escape theUKtax net. They will need to review their foreign income and gains and decide whether to opt into the £30,000 “voluntary” tax or somehow re-organise matters,if that is achievable.  Until now,non-domiciliaries could set up their banking arrangements cleverly to avoidUKtax on all butUKearnings.   That door now seems to have been firmly shut. Draft legislation will not be available until the end of the year so,until the detail is scrutinised,it is impossible to work out with certainty what they should do,but inactivity is – most likely – not a viable option.

Mr Darling also announced a policy change on how UK residence is ascertained.

Previously,days of arrival and departure were not counted in reaching the magic average of 90 days,after which aUKvisitor became resident and subject to a strictUKtax regime.

Those travelling days now count, which means many regular visitors will inadvertently become UK resident unless they urgently review their visiting arrangements.

 

If you would like to know more about how we as Financial Advisers can help you set, plan and achieve your financial goals then financial planning section of  our website: Financial Planning or send us email at: email@fiduciawealth.co.uk

The information contained in website is for guidance only and does not constitute advice which should be sought before taking any action or inaction. The information is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Fiducia Wealth Management Limited, or any associated companies or persons, its officers or its employees, for any loss occasioned in connection with the content hereof and any such action or inaction. Professional financial advice is necessary for every case.

Fiducia are an award winning firm of Financial Advisers based in Dedham near Colchester situated in the heart of Constable Country on the Essex Suffolk border. www.fiduciawealth.co.uk

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