Fiducia Wealth Management


While the 2011 Budget revealed few surprises, there are certainly planning opportunities to consider in the new 2011/12 tax year. In this article Sarah Travers looks at some of the main provisions of the Budget and resulting planning ideas in greater detail.


Despite the increase to Capital Gains Tax (CGT) for higher rate taxpayers (as announced last June) investment returns in the form of capital gains are usually taxed at a lower rate than income. 18% is better than 20% for basic rate taxpayers and 28% is better than 40% or 50% for higher and additional rate taxpayers. There is also a £10,600 annual capital gains exemption, which is not tapered away. While the tax tail should never wag the investment dog, the case for favouring growth over income when setting your investment goals is a strong one.

The annual CGT exemption cannot be carried forward; an important planning consideration is therefore to use the allowance where possible. If you do not systematically use your annual exemption, you are more likely to reach a point where some of your gains are subject to tax. Unfortunately, you cannot simply crystallise a gain by selling and then repurchasing an investment – what used to be called bed-and-breakfasting. However, there are other ways of achieving similar results:

  •  Bed-and-ISA You can sell an investment, eg shares in an open-ended investment company, and buy it back immediately within an ISA. For 2011/12 the maximum ISA investment is £10,680.
  • Bed-and-SIPP This is a similar process to bed-and-ISA, but the cash realised is used to make a contribution to a self-invested personal pension (SIPP). The reinvestment is then made within the SIPP.

This approach has the added benefit of income tax relief on the contribution and may also offer a higher reinvestment ceiling than an ISA, depending on your earned income and other pension contributions. However, the new lower annual allowance from 2011/12 and the April 2012 reduction in the lifetime allowance need to be borne in mind.

  •  Bed-and spouse You can sell an investment and your spouse can buy the same investment without falling foul of the rules against bed-and-breakfasting. However, you cannot sell your investment to your spouse – the two transactions must be separate.

At Fiducia our investment process includes an annual review at which portfolios are rebalanced in line with the agreed investment risk profile. This rebalancing process in itself will usually realise investment gains, although we always review the CGT position to ensure the annual allowance is not exceeded unless that is the intended outcome. We also use annual ISA allowances where available to Bed and ISA monies as detailed above. An actively managed investment portfolio therefore can and should provide maximum tax efficiency.

Keeping down your CGT bill

Apart from the regular use of the annual CGT allowance and ISAs, there are other tactics that can be used to limit your exposure to capital gains tax, including:

  • Sharing your gains. Transfers between spouses living together are on a no gain/no loss basis, so if your spouse has not fully used their annual capital gains tax exemption and you have, together you could save tax.
  • Use pension contributions to bring your marginal rate of income tax down to basic rate. Pension contributions cannot be offset directly against capital gains, but to the extent that they remove income from higher rate tax, they can cut your capital gains tax bill.
  • Take advantage of venture capital trusts (VCTs) and enterprise investment schemes (EISs). These are high risk investments, but they are generally free of capital gains tax. While they offer income tax relief at 30% (see below), they do not reduce your income for tax purposes, so they cannot cut your capital gains tax bill in the same way that a pension contribution can.

Mind your losses

The FTSE 100 index today is around the level it was five years ago, before the financial crisis hit, and about 1,000 points below its end 1999 peak. Many long-term holdings could thus still be standing at a loss, despite the strong rally in the market since March 2009. This means that you cannot afford to ignore the rules on the tax treatment of capital losses as well as the (hopefully) more familiar rules about capital gains. The combined rules contain a trap for the unwary – see the box below.

Beware the Wasted Loss

If you realise a gain and a loss in the same tax year:

  •  The loss will be set off against the gain made during the year.
  • If you made gains after 22 June 2010 and face 28% CGT for 2010/11, you can choose to offset the loss first against this gain, regardless of when the loss occurred in the tax year.
  • The mandatory offset means you could end up wasting the loss if your gain would have been covered by your available annual exemption.

However, if you carry forward a loss from a previous tax year:

  • The carried forward loss is only used up to the extent that it reduces your overall gains to the level of your annual exemption.
  • You can still choose which gains to offset (for 2010/11).
  • The loss is therefore only used when necessary.

The lesson is that you should always take care before realising gains and losses together in the same tax year.

 Identification matters

When the flat rate of CGT was introduced from 2008/09, taper relief was scrapped and with it most of the complex identification rules for share/fund transactions. If you sell a holding in a single company or investment fund, for CGT purposes the disposal is matched:

  1. First to acquisitions made on the same day;
  2. Second to acquisitions made in the next thirty days (the rule which blocks bed-and breakfasting); and
  3. Thirdly all other acquisitions, taken together as one pool.

The pooling provision means that you no longer identify a sale with a recent purchase – the so-called last in-first out (LIFO) rule has disappeared. This can make quite a difference to the calculation, as the example below shows.

An Oily Pool

Harry bought 6,000 BP shares in summer 2006 for £39,000 – equivalent to 650p a share. In early June 2010, as BP was rocked by the Gulf Coast oil spill, Harry summoned up the courage to buy 5,000 more shares at a cost of £17,500 – 350p each. The shares kept falling, hitting a low just above 300p a few weeks later.

From that low the share price jumped to a little over 400p and then steadily rose to around 500p. Harry is thinking of taking some profits on the shares he bought last year. He reckons that if he sells the 5,000 shares, he will make a gain of £7,500, ie:

5,000 x (500p – 350p) = £7,500

His calculation ignores the changes introduced from April 2008. The correct calculation pools together his two share purchases:

Total number of shares = 6,000 + 5,000 = 11,000

Total cost = £39,000 + £17,500 = £56,500

Average cost = £56,500 = 513.64p


So the reality is that any sale at 500p will be at a loss of 13.64p a share.


The inheritance tax nil rate band has now been at £325,000 since 6 April 2009. If it had been indexed-linked, as it used to be, the band would now be £340,000. However, there will be no increases for some while. In his final Budget, Mr Darling announced that the nil rate band would remain frozen at £325,000 until 5 April 2015. As part of the Coalition Agreement, this promised freeze has been carried over by the new government. From 2015/16 it will rise in line with the CPI.

With inflation now running at over 5%, the standstill in the nil rate band will potentially bring more people into the IHT net and increase the amount that they have to pay.

The one easement the Chancellor offered IHT payers was that a reduced rate of 36% (instead of 40%) will apply on estates where:

  • death occurs after 5 April 2012; and
  • at least 10% of the net taxable estate is left to charity.

Further details are awaited, but initial calculations show that this option will save less in tax than it will cost the beneficiaries in terms of lost inheritance. Ironically, it may result in a short-term loss of income to charities, as the change creates an incentive to defer charitable gifting until death. The Chancellor said nothing about reform of IHT, even though his Office of Tax Simplification had called for radical review of the tax. Mr Osborne’s silence may have been designed to discourage preventive action. It is hard to see that any restructuring of IHT would make the treatment of lifetime gifts more favourable than it is at present.

Time to review your estate planning

The introduction of the transferable nil rate band in October 2007 made inheritance tax planning considerably simpler for many married couples. It is no longer necessary to ensure that your nil rate band is used on first death to minimise IHT liabilities. As some families are now discovering, the reform can result in significantly reduced IHT bills for widows (and widowers), even if their spouse died many years ago.

Not everybody benefited from the change. If you had already planned (and had the resources) to use the nil rate band on first death, you were no better off as the result of the introduction of transferability and if you are not married, you cannot benefit from the change.

If you have not reviewed your estate planning and Wills since October 2007, you should do so now. It may be that no change needs to be made to your existing arrangements but, as ever with estate planning, it is better to be safe than sorry. Even though a revised plan may not reduce your IHT bill, it could simplify estate administration by, for example, removing the need to include a complex trust in your Will. At Fiducia we offer a complete estate planning service with a range of solutions to reduce the Inheritance Tax burden. Please do get in touch if you would like further details.


A range of investment tax changes has taken place over the last year. Some have been the result of much consultation and have received little attention.

Individual Savings Accounts (ISAs)

From 6 April 2011 the annual limit rose to £10,680 (of which up to £5,340 may be in cash). The number may look odd, but it is a reflection of the new rules for annual ISA increases:

The increase is in line with annual inflation to the September of the previous tax year. This is currently on an RPI basis, but the Budget revealed that from April 2012 CPI will be used instead.

  • The resultant figure is rounded to the nearer £120, to make the corresponding monthly limits divisible by £10.

The original ISA investment ceiling, set in April 1999, was £7,000 and it remained at that level until 2008/09, when it increased by £200. Anyone who was able to contribute to the maximum each year, up to and including 2010/11, would by now have placed £83,400 into their ISAs and largely out of the taxman’s reach.

The reduction in the pension annual allowance to £50,000 and, in 2012/13, the cut in the lifetime allowance to £1.5m both mean the importance of ISAs as a tax-efficient investment wrapper has increased.

Since 6 April 2008 it has been possible to transfer the cash component of an ISA, including anything from a former TESSA, into the stocks and shares component. When this option was first announced, it was generally viewed as a somewhat pointless facility, as for most investors the value of the income tax saving from the cash component was greater than any tax savings offered by the stocks and shares component.

Wind forward three years plus one financial crisis and the switch facility looks rather more useful. We have now had a base rate of just 0.5% for over two years. There are now strong hints from the Bank of England that rates will start increasing gradually, with the money markets projecting a 3% base rate by 2014. Meanwhile, many existing cash ISAs are offering rates of below 1%, with some paying just 0.1%. If you invested in a cash ISA a year ago at a rate of around 3%, do check what interest you are now receiving. Most of the headline-catching rates incorporated a substantial 12 month bonus, which will have now ended.

Junior ISA

The Chancellor confirmed in his Budget that all children under 18 who do not already have a Child Trust Fund (CTF) will be able to invest in a Junior ISA. The exclusion of CTF holders means Junior ISA eligibility will be limited to any child born before 1 September 2002 or after 2 January 2011.

Venture Capital Trusts and Enterprise Investment Schemes

A number of changes were announced to the rules for Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs), all of which will require EU State aid approval before taking effect:

  •  From 6 April 2011, the rate of tax relief for EIS investment rises from 20% to 30%, bringing it into line with the relief given for VCTs
  • From April 2012, for single EIS companies and for companies which are invested in by VCTs and EIS funds:
    • The maximum number of full-time employees will increase from 49 to 249;
    • The maximum amount of gross assets held by the company before investment will rise from £7m to £15m; and
    • The maximum a company can raise from all VCTs and EISs will increase from £2m to £10m.

These changes will allow new VCTs and EISs to invest in larger companies rather than, as now, confine themselves to the smallest enterprises. A further amendment was aimed at ‘solar’ VCTs and EISs, which exploit the generous Feed-in Tariffs (FITs) for green energy generation. VCT/EIS reliefs will only be given for companies whose trade consists wholly or substantially in the receipt of FITs if commercial electricity generation starts before 6 April 2012. VCTs and EISs which issued shares before 23 March 2011 are unaffected.

The past few Budgets have placed a range of constraints on pension planning for high earners. Firstly there was the special annual allowance, which thankfully disappeared on 5 April 2011. However, in its place there is a drastically lowered annual allowance and, from next tax year, a cut in the lifetime allowance. Two favoured escape routes, the employer-financed retirement benefits scheme (EFRBS) and the employee benefit trust (EBT) were effectively killed off last December when the Treasury announced legislation on ‘disguised remuneration’.

These measures have increased the relative attraction of the tax breaks still available for investments totalling up to £200,000 per tax year in Venture Capital Trusts:

  •  30% income tax relief on subscription to new VCT shares. This relief is clawed back on disposals within the following five years.
  • Dividends are free of income tax, although the 10% tax credit cannot be reclaimed.
  • Any gains made on disposal of shares are free of capital gains tax.
  • Within the VCT there is no tax on gains.

At Fiducia we provide a VCT portfolio service which may be of particular interest to higher earners or those seeking to maximise retirement funding. Please contact us for further details.


As we have documented in previous articles, the last year has seen a raft of announcements about major changes in pension tax law, only some of which have yet reached the statute book. The pace of change has caught all sides by surprise – even HMRC has been forced to introduce some temporary measures. Many pension providers are struggling to cope with the reforms. It is symptomatic of the situation that most of the major players had not completed the system amendments to handle new rules that took effect on 6 April 2011. One good reason is that the final rules will not be legislated for until the Finance Act receives Royal Assent, probably in July.

As a refresher, the main tax changes are:

  • The special annual allowance (SAA) was abolished with effect from 6 April 2011. The SAA was a temporary measure, designed to restrict higher rate tax relief on some pension contributions. The legislation due to replace the SAA was contained in the first Finance Act of 2010, but subsequently repealed.
  • The revenue that was to be raised by the SAA’s abandoned replacement will not be lost. To achieve the same effective tax take, from 6 April 2011 the annual allowance was cut from £255,000 to £50,000. It is likely to remain at that level for at least the next five tax years. A revised annual allowance charge will mean that all tax relief on personal contributions above the available annual allowance will effectively be lost and all excess employer contributions will be taxed on the employee.
  • You can now carry forward any unused annual allowance for up to three tax years. This concession is backdated to tax years since 2008/09, but based on a deemed annual allowance of £50,000, not the actual amounts for the previous tax years (see example in planning points below).
  • There is now no requirement to start drawing income by no later than age 77 (previously 75): you can hold on to your uncrystallised pension fund for as long as you live. However, once you reach age 75 there is a 55% flat tax charge on any lump sum death benefits. The quid pro quo is that there will generally be no IHT.
  • Since 6 April 2011, there has been a new set of rules for income withdrawals now described as drawdown:
    • There is now no upper age limit for income withdrawals.
    • The upper income levels have changed, with the ceiling now 100% of a revised HMRC/GAD rate table (previously 120%) for ‘capped’ drawdown. Until 5 June 2011 the old table can still be used, but the 100% limit will generally still apply. If drawdown started before 6 April 2011, normally the new limits will take effect from the next review date, which could be as much as nearly five years away. – Reviews move to a three yearly cycle up to age 75 and yearly thereafter.
    • If your total annual secured income (basically scheme and state pensions plus pension annuities) is at least £20,000, you can opt for ‘flexible drawdown’ instead of the capped version. This removes the ceiling on what you can withdraw – in theory; you could withdraw your entire pension fund in one (taxable) payment.
    • The flat rate tax charge on lump sum death benefits has risen to 55% from 35%.
  • The new drawdown rules mean that alternatively secured pensions (ASPs) have been abolished. Any pre-6 April 2011 ASP has become a drawdown pension.
  • From 6 April 2012, the standard lifetime allowance will be reduced from £1.8m to £1.5m and frozen at that level for an indeterminate period. A new ‘fixed protection’ option will be available to allow you to secure the £1.8m level, but the downside is that this protection will be lost if any further benefits accrue or contributions are made after 2011/12. Fixed protection is not available if you have primary or enhanced protection. If you already have enhanced protection, you will be unaffected by the lower allowance. If you have primary protection, this will continue, based on a £1.8m standard lifetime allowance.


There was one surprise change to corporation tax announced in the Budget. The mainstream rate of corporation tax falls by 2% to 26% for the 2011 financial year, 1% more than the Chancellor had promised last June. The small profits rate drops by 1% to 20%, so that it now matches the basic rate of tax.

Capital allowances

The Annual Investment Allowance (AIA), which gives 100% initial relief for investment in plant and machinery, was doubled to £100,000 from April 2010, but will drop to £25,000 from April 2012. The main writing-down allowances will drop by 2% for periods of account ending on or after 1 April 2012 (companies), and on or after 6 April 2012 (other businesses).

Small business taxation

Before the Budget, the Office of Tax Simplification had published a small business tax review. This had suggested the abolition of IR35, the controversial legislation aimed at personal service companies. Unfortunately, the Budget contained a statement that IR35 would not be abolished, although the Government committed to making ‘clear improvements’ in the way it is administered. There was better news for small businesses with a one year extension to the small business rate relief (SBRR) holiday to 1 October 2012 and confirmation that HMRC will continue to offer ‘time to pay’ agreements. However, the latter news has been greeted with some scepticism as there is much anecdotal evidence that HMRC is now taking a tougher line in such cases.

Dividends or Salary … or Pension Contribution?

Higher national insurance contributions and lower corporation tax rates have altered the mathematics of the choice between dividends and salary. If you are in a position to choose between the two, and not caught by the IR35 personal company rules, a dividend remains the more efficient choice. However, a pension contribution could avoid all immediate tax and NIC costs, provided the reduced annual allowance is not an issue.


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 protected]

The information contained in our website is for guidance only and does not constitute advice which should be sought before taking any action. 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 occurred in connection with the content hereof and any such action. Professional financial advice is recommended for every case.

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