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Pensions

Income Drawdown maximum income levels increased back up to 120% of GAD

The maximum income a client in pension drawdown is based upon the 15 year UK Gilt Yield (rounded down to the nearest ¼ %); the 15 year gilt yield at the end of February was 2.52% meaning the maximum income that could be taken (before this increase) would have been:

2.5% x 100% x Pension Fund Value e.g: for £100k pension; max income=£2,500 p.a.

This now becomes:

2.5% x 120% x Pension Fund Value e.g: for £100k pension; max income=£3,000 p.a.

This is important while gilt yields are as low as they are at the moment as income levels have been so low that many people saw significant drops in their allowed income at their last review point; this move will go some way to helping this situation but so long as gilt yields remain so low both annuity rates (which are also based to a large degree on long dated gilt yields) and income from drawdown will remain well below the amounts that could be supported by asset growth and many people will continue to find it hard going.

This return to 120% of GAD also opens the door to transfer some protected rights pensions that previously were stuck in the scheme they were in due to the income guarantees they enjoyed that could not be matched while income rates were lower.

Personal Allowances (Pensions)

Pension allowances have been cut further to £40,000 annual allowance and £1.25m lifetime allowance. If close to the lifetime allowance you need to check whether it is worth applying for protection against the reduced lifetime allowance.

Tax Avoidance

The exchequer is also clamping down on Tax avoidance schemes and is not limiting this to big companies avoiding corporation tax but is also targeting other forms of taxation. The General Anti-Avoidance Rule (GAAR) will be introduced in Finance Bill 2013. It will cover a wide range of taxes, such as income tax, capital gains tax, inheritance tax (IHT) and corporation tax. It will add to existing measures against tax avoidance and focuses on marketed tax avoidance schemes.

Specific legislation will be brought in to counter some specialist IHT avoidance schemes.

Only a debt that's repaid out of the estate by the executors will be allowed as a deduction from the estate.If assets that attract IHT reliefs such as Business Property Relief or Woodlands Relief are bought with the borrowed money, any relief will be only be given on the repaid amount of the debt.

The good news as far as we are concerned is that the budget saw no significant changes announced in relation to VCT, EIS, SEIS or BPR schemes which are the main forms of tax mitigation we use with our clients. These schemes provide an extremely useful function within the economy providing finance for smaller companies, especially in times when bank finance is increasingly difficult to access.

VCT

There is no change to the 30% income tax relief available for individuals on investments of up to £200,000 per annumVCTs can continue to invest up to £5m per company per annum and there are no changes to the company-specific metrics (maximum of 250 employees and £15m gross assets before investment)

EIS

There is no change to the 30% income tax relief available on EIS investments of up to £1m per annumEIS companies can continue to receive up to £5m in any one year. As with VCTs, the company metrics remain unchanged (250 employees; £15m gross assets before investment)The Government confirmed that capped income tax reliefs (currently the greater of £50,000 per annum or 25% of an individual's income) do not apply to EIS share loss relief

SEIS

Rather surprisingly, in this budget report the extremely generous tax benefits associated with SEIE schemes were re-iterated, given further support and extended for at least another year. This means that investors who are writing off a CGT liability by investing in an SEIS scheme will still be able to claim loss relief on 50% of their investment costs (total cost minus the 50% income tax relief already awarded). This means that for additional rate tax payers (who are re-investing capital gains) net capital at risk is NIL and for High Rate Tax Payers capital at risk works out at 2p in the pound! [these figures ignore the possible effect of charges]

IHT/BPR

No significant changes were announced and the nil rate band remains frozen at £325,000 until April 2017

Although there are no material changes in legislation, there is a “catch all” test that can be applied to any of these schemes which is essentially a check to make sure they are operating within the spirit of the law. This means any schemes that are set up specifically to take advantage of these generous tax breaks without making genuine investments into smaller companies could find themselves adjudged to be non-qualifying in future.

For us at FMB, this will not affect our advice at all as only schemes and products that stand up in their own right as decent investment opportunities are allowed to be recommended to clients in the first place; in effect we have been performing our own “spirit of the law” test for a number of years now. We consider this as a way of mitigating against the risk of changes to the tax rules as should tax rules change and all of a sudden you can no longer get these tax breaks, at least you still have an investment capable of producing a good return even without the added tax incentives, these are the icing on the cake, the risk mitigation that allows us to recommend these products, the buffer to protect investors against losses (net losses) but not the sole reason for investing. In fact, private equity has historically produced very good returns for investors and an allocation to this area makes a lot of sense for a great number of clients especially given the reduction in risk afforded them through tax breaks.

If you have any questions about how the budget affects you, please do not hesitate to call us. As usual we must point out that although investment advice is regulated by the FSA, Tax and Trust advice is not.

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