Skandia International’s Rachael Griffin and Royal London 360°’s Neil Chadwick look at the changes made to pension allowances and suggest alternatives for your clients. Prudential’s Gerry Brown explores Osborne’s plans for tackling tax evasion – and how he is also trying to attract wealth into the UK. Standard Life International’s Julie Hutchison meanwhile, looks at the creation of a CGT, IHT and income tax free investment….
Gerry Brown, technical manager, Prudential – GAAR, the Swiss agreement and attracting wealth to the UK
One of the main themes of the Autumn Statement was an increase in the government’s efforts to combat both tax evasion and “unacceptable tax avoidance”. Cynics will say that this is an oft played tune but perhaps there really will be a sea change in the approach to this problem.
Earlier this week, HM Revenue & Customs issued a 12 page document called “Closing in on tax evasion” which suggested that nearly £15bn tax was evaded in 2011. The document outlined the HMRC approach to tackling evasion over the coming years. There will be additional resources and investigators will be able to take advantage of technology and data from other countries. With an emphasis on exchange of information, the European Union is also getting in on the act.
The Chancellor needs this strategy to work. His income forecast for the next six years assumes receipts of £5.3bn from tax investigations involving Swiss assets and nearly £1.4bn from various anti-avoidance measures. UK taxpayers must hope that these projections are correct – if they prove to be overly ambitious, how will the “hole” be filled?
|
|
Tax Repatriation (Switzerland) |
Anti-avoidance Measures |
|
2012-13 |
£330m |
£15m |
|
2013-14 |
£3,120m |
£200m |
|
2014-15 |
£610m |
£95m |
|
2015-16 |
£920m |
£330m |
|
2016-17 |
£180m |
£385m |
|
2017-18 |
£150m |
£355m |
Four artificial avoidance schemes – three involving the use of financial derivatives – have been “stopped” with immediate effect. In addition, no tax relief will be available for payments of bank levy – whether in the UK or elsewhere.
The UK is to have a General Anti Abuse Rule (GAAR), details of which will be announced later this month. This is sorely needed if reports about the number of notified avoidance schemes awaiting HMRC review are to be believed.
The Chancellor has a second string to his bow; dissuading the emigration of wealth by making the UK a “good place to do business”.
To assist in reaching this objective he announced a reduction in the main corporation tax rate to 21% for the financial year starting 1 April 2014. (The rate for the financial year starting 1 April 2013 will be 23%).
There are two resulting impacts:
- The new rate – the lowest of any major Western economy – will give the UK an edge in attracting new investment;
- The potential rewards for implementing tax avoidance schemes will have been reduced by approximately 10%
Despite this activity, we must remember that the Autumn Statement is simply that – an assessment of where we are in economic and financial terms. It is not a mini-Budget. The many changes to the UK tax code flowing from this year’s consultations will only reach the statute book after the March 2013 Budget. For tax anoraks, the best is yet to come.
Julie Hutchison, head of international technical insight, Standard Life International – Tackling avoidance? – meet the IHT free, CGT free, and Income tax free investment
A new investment opportunity which is free of inheritance tax, capital gains tax and income tax could be on its way.
In an Autumn Statement which was accented on tackling tax avoidance it was interesting to see plans to consult on changes allowing stocks and shares ISAs to hold AIM-listed shares.
Currently ISAs cannot hold unlisted shares. But that may change, resulting in stocks and shares ISAs that consist solely of AIM shares protected from IHT. Business Property Relief (BPR) provides 100% IHT relief for unlisted shares, and this would include AIM shares held in an ISA.
The relief would apply once the shares had been held for two years.
Despite the obvious tax attractions, some concerns remain. AIM shares carry a much greater degree of risk than other listed shares. And this will not appeal to risk-averse clients, who are concerned with preserving their capital for future generations.
Of course, contributions would be capped, with the subscription limits for 2013/14 set at £11,520. But it may still be possible to switch existing ISA holdings to benefit from any future IHT advantages.
Another consideration is that there is always a chance that Business Property Relief tax on AIM shares could be changed in the future. There have been calls for the relief to be significantly tightened.
The Mirrlees report recommended that relief should only apply to genuine sole and majority business owners and active farmers. BPR together with agricultural property relief (APR) are estimated to have reduced IHT liabilities by £375m in 2010/11.
The original intention of the legislation was to provide relief for business owners, but it has also, unintentionally, provided tax breaks for investors. Extending this to already tax-privileged investments should make for an interesting consultation.
Rachael Griffin, head of product law and financial planning, Skandia International – pension changes may make QROPS and QNUPS more attractive
With winter upon us and snow covering much of the UK, the Autumn Statement also gave the Chancellor the opportunity to make some adjustments to the UK finances. Some changes were welcome – such as the modest increases in allowances, whilst others, such as the lowered allowances in the UK pension space, were anticipated by most.
Many of the proposals do not taken effect until April 2013 and are well reported. However, some of the changes provide advisers with opportunities to talk to their international-based clients regarding changes afoot and discuss the financial planning opportunities available to them before the changes take effect.
In particular, for the international client who is still UK domicile, with the minimal increase in IHT nil rate band (1% in 2015-16 to £329,000) it is continually important to ensure that annual gifting is utilised. Moreover, they can further freeze any inheritance tax liability by gifting into trust now rather than the future, as this will ensure all growth on the gift is outside the settlor’s estate (assuming they cannot benefit).
With the annual allowance (reduced from £50,000 to £40,000 in 2014/15) and lifetime allowance reducing from £1.5million to £1.25million, effective in 2014/15 international clients may wish to consider utilising a QNUPS for funds that would not get UK tax relief. This allows clients to supplement their retirement provision and potentially benefit from preferred tax treatment when a lump sum and income is taken. Many QNUPS trustees utilise offshore bonds as the underlying investment vehicles due to the gross roll up and wide investment options.
And with the lifetime allowance due to reduce from £1.5m to £1.25m from 2014/15, clients who are already resident outside the UK and whose pension pots are close to the £1.5m or likely to exceed that threshold imminently, should consider crystallising benefits now and transferring to a QROPS.
This will ensure no additional tax charge will apply.
The draft Finance Bill is due on the 11 December with further tax announcements expected on the same day. With economic growth remaining weak and austerity plans firmly in place for years to come, it is important that international advisers use the financial planning opportunities available to their clients today in order to maximise their benefits for the future.
Neil Chadwick, technical manager, Royal London 360° – pension changes send the wrong message and are counter intuitive
Chancellor George Osborne’s most recent ‘shooting fish in a barrel’ exercise has further reduced the amount that can be paid into pensions each year with tax relief. It will reduce from £50,000 to £40,000, from 2014-2015 and in addition to this; the lifetime allowance will also reduce from £1.5m to £1.25m. We are told that these cuts will save an estimated £1bn per year but will they?
In justifying the reduction Mr Osborne said: “The average contribution is just £6,000 – I know these tax measures will not be welcome by all, ways to reduce the deficit never are – but we must demonstrate we are all in this together.”
Now such bold claims are all well and good however, the reality is that those who can afford to pay more than £40,000 a year into their pension probably won’t going forward. Hitting the more affluent members of society is always popular with the majority of the electorate however, it’s not just those losing the tax breaks that are going to suffer here.
Last time I looked, you didn’t get tax relief for keeping your money under the floorboards; it has to be invested in a ‘bone fide’ pension scheme. These schemes employ lots of people in the UK all paying ‘their fair share’ under PAYE. Furthermore, pension schemes are some of the largest investors in the UK therefore, direct employee’s aside, the fund management industry could also feel the pinch. After all, fewer contributions mean fewer funds under management and ultimately less investment, all of which has a knock on effect on the economy in general.
The UK needs significant inward and external investment from wealthy individuals to get out of its current flat-lined condition. You have to ask yourself whether repeatedly taking away and or reducing non-offensive tax breaks is going to do anything to attract and more importantly retain such people.
The big question of course is what are these individuals now going to do with their surplus cash? Clearly investments that offer some kind of tax benefit will be high on the agenda and for that reason offshore bonds could be a consideration. Despite all the changes to personal taxation over the year’s offshore bonds can still offer non-contentious tax benefits to the right client.
