Follow UsInvestment Portfolio LOG IN

Pre-Budget Briefing

Income Tax and National Insurance
We already know the personal allowance for income tax will rise from April 2011, with the aim of easing the burden on lower and middle-income earners and encouraging people into work. It is anticipated that the allowance will increase for all taxpayers, but will take a few years to get there. It is also widely anticipated that the threshold for receiving this allowance will be tapered down from £100,000 to a lower earnings limit so that the benefit of the full allowance only goes to the lower paid.

So how does the Government aim to fund this increase? The National Insurance (NI) rate for higher earners is predicted to rise by 1%. Although it seems the Conservatives have abandoned plans to increase employers’ NI from 12.8% to 13.8%, (you may remember the ‘Tax on jobs’ comment and predictions of increased unemployment made during the election campaign).

Capital Gains Tax
This is an easy target for the Government and plans to charge CGT on non-business assets to rates similar or close to those applied to income have already been widely muted. This could see CGT rates rising from 18% to 25% or 30%. Any more than that i.e. 40% or 50% risks upsetting traditional Tory voters. An increase to 30% would take the CGT rate back to where it was prior to taper relief and may be more acceptable. There is a possibility that CGT exemption could be reduced from £10,100 to £2,000 (as proposed by the Lib Dems).  Exactly when a new rate would be introduced is not clear, but the new tax year, 6 April 2011, is likely.

Corporation Tax
In order to improve the international competitiveness of the UK, the Chancellor aspires to reduce the main headline rate from its current 28% to 25%. The aim is to reverse the trend of multinational companies relocating headquarters to more tax sympathetic areas, and encourage retention of jobs in the UK.  Any such benefits would inevitably be partnered with tax restrictions which might be reductions in reliefs and allowances – making the change attractive, but revenue neutral. The small companies CT rate is widely anticipated to remain at 21%.

With other EU partners announcing VAT increases, it would not come as too much of a surprise if the UK VAT increased from 17.5%, but to what level?  20% is widely muted but this might not be introduced immediately, and there is ‘historical precedence’ for this. They could impose a 5% VAT rate on currently zero-rated items like books and food, but this could be a step too far. Pre election, the Lib Dems were keen on imposing a 5% rate for certain domestic property that is currently zero-rated, but having wiped out HIPS to help kick start the housing market, it would seem to be unlikely in this Budget.

Inheritance Tax
The Conservatives had planned to increase the IHT threshold from £325,000 to £1,000,000 but this was shelved during the coalition negotiation agreements. Apparently the Lib Dems’ promise to increase the personal allowance was to blame.

A raft of tax avoidance measures against which the last government failed to legislate for, is expected to be scooped up in the emergency Budget. Tax avoidance, in any form, is expected to rank highly on the agenda and companies that promote any tax-avoidance schemes are required to disclose them to HMRC. A general anti-avoidance provision for companies, a crackdown on perceived NI avoidance on benefits-in-kind and a change to the SDLT( Stamp Duty Land Tax) rules where shares in a company owning a property are sold instead of the property itself, were all part of the Lib Dem’s ‘Programme for Government’ document and may well form part of the Emergency Budget. This promotes the premise that ‘any planning which HMRC views as having a tax avoidance motive’ would fail. If the uncertainty of the UK Tax system is a reason for companies leaving the UK at the moment, will this premise speed their flight?

RDR - What is it and what does it mean to you?

What is it?
The forthcoming Retail Distribution Review (RDR). The name doesn’t really give much of a clue as to the consequences of RDR to the financial services sector, but it is a significant and serious development for the entire FS market.

What does it mean?
The introduction of fee based remuneration to replace the historic commission payment, together with a requirement for advisers to have obtained a higher standard of qualifications to continue to practice, is at the heart of RDR.

When will it be implemented? Dec 2012

What is Ovations view?
Ovation welcomes such a shake up in the way the industry operates. One of our core arguments against commission based advice has been the potential for adviser remuneration to distort advice given. “In the past we have heard of people being moved from product to product, just to boost an advisor’s commission, or sold a policy that pays high commission, when there are comparable products that pay lower commissions. This way of working will disappear under RDR”, said Chris Budd. 

Advisor competence is an issue of central importance to RDR and advisors will have to have appropriate qualifications in order to practise. As far as Ovation is concerned, it is definitely the right approach. The Advisor Charging model, or fee based advice as we’ve called it far the past ten years, provides clients with the security of knowing that the advice they receive is based on best advice rather than highest commissions.

On a final note, you will be delighted to know that Ovation is comfortably in excess of the ‘Capital Adequacy’ required by RDR. 

Ovation Finance Ltd is authorised and regulated by the Financial Conduct Authority. FCA Number 190914. This web site is for the use of UK investors only.