What the Budget means for investors
One of the main elements of Alistair Darling's Budget was the change to the ISA allowance - but it also included several other measures that will impact investors.
For example, from 1 September 2009, investment trust companies will be able to invest more tax-efficiently in interest-bearing assets such as bonds. Experts say the change will open up new opportunities for investors.
Daniel Godfrey, director general of the Association of Investment Companies (AIC), says: "Allowing investment trusts to invest tax-efficiently in bonds will mean the industry can compete more effectively with alternative structures."
Darling also used the Budget to announce that tax relief on pension contributions for people earning more than £150,000 will be gradually tapered to 20% from April 2011 - impacting self-invested personal pensions (SIPPs).
The move prompted universal condemnation from pension providers; commentators point out that this is backtracking on the pensions simplification legislation of 2006, where limitations on higher paid earners were imposed.
Martin Tilley, business development manager at Dentons Pension Management, says: "It will have a particular impact on the higher end of the SIPP market and I dare say that for some smaller SIPP providers the potential slowing of new business, together with the inability to augment headline fees with interest rate trails could result in some firms looking for ways out of the market."
However, it is possible that the government may see this as ultimately a retrograde step as it would be extremely difficult to administer and is likely only to raise an additional £200 million in revenue in 2011-12.
Raj Mody, pensions partner and chief actuary at PricewaterhouseCoopers, explains: "The government has indicated that it will be consulting on this so there is time for different viewpoints to be analysed, and a run-up period seems likely to allow time to get the details right."
Mody adds: "This change is likely to be a distraction employers could do without, while they are still grappling with major financing challenges and risks for their defined benefit schemes. A simpler alternative change to achieve this policy objective in principle might be to reduce the annual allowance."
This is currently 100% of annual salary up to a maximum of £245,000 and the lifetime allowance is £1.75 million.
Offshore funds also feature in the Budget; from 1 December, the offshore funds regime will be reformed to provide a simple and fair approach to taxation.
However, from 22 April, the dividend tax credit will be extended to UK investors in offshore funds. This will allow for equal tax treatment between onshore and offshore equity and bond funds.
The government also confirmed that foreign dividends will generally be exempt from tax as of 1 July 2009.
Meanwhile, the time limits on the employment of capital raised for investment through enterprise investment schemes (EISs) will be relaxed and there will be an extension of the period of carry-back of income tax relief for EISs and venture capital trusts (VCTs).
From 22 April, investors will be able to carry back income tax for the entire previous year and will no longer be limited to claiming back just half of their investment.
Martin Sherwood, a director of the Enterprise Investment Scheme Association (EISA), says: "By increasing the amount of income tax relief investors can carry back to the previous year, Revenue & Customs has helped make EISs more attractive from an investors’ point of view.
"However, we are disappointed not to get any increases in the upfront income tax relief rate."
Gary Robins, chief executive of EIS specialist Hotbed, adds: "With Alternative Investment Markets on hold and interest in VCTs on the wane it seems illogical that the government is not using EIS as a tool to tackle falling investment in growing companies.
"Even though income tax relief on VCTs is 30% and just 20% on EIS, EIS is now attracting 2.5 times more investment than VCTS. EIS could be even more popular if the government had matched the 30% tax relief and may have helped them to avoid using public funds to invest in growing companies."
Finally, the Budget contained nothing on real estate investment trusts (REITs) or commercial property.
One of the reasons quoted commercial property companies that converted to a REIT structure had performed so poorly over the past year was the requirement to distribute at least 90% of their income as dividends.
Ed Stansfield, property specialist at consultants Capital Economic, says: "In the run-up to the Budget, the property industry had lobbied the chancellor to reinstate business rates relief for empty commercial property or, at the very least, to extend the one-year holiday from rates for properties with a rateable value of less than £15,000. Darling did neither.
"Nor, as many had hoped, did he loosen the REIT regime which would help REITs to conserve cash in these challenging times."
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
The practice of locating your financial affairs (banking, savings, investments) in a country other than the one you’re a citizen of, usually a low-tax jurisdiction. The appeal of offshore is it offers the potential for tax efficiency, the convenience of easy international access and a safe haven for your money. However, offshore is governed by complex, ever-changing rules (such as 2005’s European Union Savings Directive) and, as such, is the exclusive province of the wealthy and high-net-worth individuals.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Enterprise Investment Scheme
A scheme set up to encourage investment into small, unquoted trading companies and give investors tax breaks to compensate for taking risk. Because the companies in the scheme are not listed on a stock exchange they often carry a high risk, so the tax relief is intended to offer some compensation. An EIS company cannot be a subsidiary, must trade wholly in the UK, can’t employ more than 50 people and certain activities (including forestry, farming and hotels) preclude companies from offering EIS relief.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.