UK Budget Prompts Mixed Reaction From Wealth Management Industry

by Phillip Morton, Investors Offshore.com

27 April 2009

Several measures were announced in the 2009 UK government budget to support the country's wealth management industry and encourage saving, but it is feared that these positive steps will be negated by the decision to create a new 50% top rate of tax and limit pension tax relief.

According to the Investment Management Association (IMA), the launch of a Tax Elected Funds regime will allow UK authorised investment funds to be marketed competitively to UK investors and worldwide, while legislative changes will clarify that transactions by UK authorised investment funds and equivalent offshore funds will be taxed as 'investing not trading'.

Other measures announced by the Treasury include a reformed Offshore Funds Regime from December 2009, which aims to provide a simple and fair approach to the taxation of UK investors in offshore funds, and the extension of the dividend tax credit to investors in offshore funds with effect from April 22, 2009, to ensure equal treatment between onshore and offshore equity and bond funds.

These measures were welcomed by the IMA, which believes that the UK's competitiveness as a domicile for authorised investment funds will be given a considerable fillip as a result.

"IMA has long been campaigning on issues impacting the competitiveness of the UK funds industry and the need for fair, non-discriminatory treatment of offshore investments. Today's announcements are a reflection of our constructive dialogue with the authorities, which has allowed us to develop a programme of measures to enhance the competitiveness of the UK funds industry," commented Julie Patterson, Director of Taxation and Authorised Funds at the IMA, on budget day.

There was also some good news for savers with the government's decision to increase the amount which can be contributed to tax-free Individual Savings Accounts (ISAs) to GBP10,200 - although the proposal to initially limit the increase to those over the age of 50 has been criticised by tax experts.

Stephen Herring, Senior Tax Partner at BDO Stoy Hayward, said: “One wonders why the Chancellor felt it necessary to postpone the increase for those under 50 until April 6, 2010 which will, inevitably, cause some confusion amongst savers. In my view, the Chancellor should have adopted a limit of GBP10,000 with immediate effect for all investors. This would have simplified the rules and removed a temporary and arbitrary age limit.”

However, in a now familiar pattern, what the Chancellor gives with one hand, he frequently takes away with the other, and the creation of a new top rate of tax of 50% spells bad news not only for high-income taxpayers, but also for investors in trusts.

“Discretionary trusts will be particularly hard hit by the rate increases, as they will be liable to the new 50% on all trust income above the standard rate band (currently GBP1,000)," observed Louise Somerset, Tax Director at RBC Wealth Management. "This will include Will trusts and both onshore and offshore trusts (UK source only). Beneficiaries of life interest trusts are liable to tax on their income entitlement at their personal rates.”

Furthermore, changes to the way in which tax relief will be given on pension contributions by the higher paid will mean that tax relief will effectively be halved for those who make contributions greater than GBP20,000 per annum, says Somerset, who warns that the changes could bite sooner than the budget announcement leads us to believe.

“The Chancellor indicated that the restrictions would be introduced from 2009/10 onwards. However the background documents reveal that they effectively bite from today (April 22) in an unusual procedure called 'anti-forestalling'," she explained.

As from April 22, higher rate tax relief will be restricted on pension contributions made by those: whose income is GBP150,000 or higher, who change their normal ongoing regular pensions savings, and who have total pension savings exceed GBP20,000.

“There are extensive detailed provisions defining what qualify as 'normal ongoing regular pensions savings'," Somerset continued. "Significantly, savings cannot be regular unless they have been made on at least a quarterly basis. This will hit the self-employed who typically contribute on an annual basis when they have determined their profits and also those who make contributions out of their annual bonus."

In a minor concession granted by Darling, the maximum amount on which tax relief can be claimed will be increased to GBP245,000 for 2009/10 and GBP255,000 for 2010/11. However, it is expected that the new restrictions on tax relief will likely discourage the higher paid from contributing to their pensions.

"Not only will they have to use (partially) tax paid income to contribute to a pension scheme, but they will also be taxed when they receive their pensions. In the short term this move may increase tax revenues and boost spending, but in the longer term it is likely to increase reliance on the state pension, which is already under considerable pressure," said Somerset.

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