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Budget: Allowances

How tax changes affect investments

Craig Hendry 2Pre-Budget speculation had widely expected Wednesday’s statement to be a tax raiser in an effort to prepare the UK for the effects of Brexit, ensuring that there is “gas in the tank” in case the economy falters in the future.

It was also widely predicted that the Chancellor would again go the pensions’ “well” as tax relief on contributions reportedly costs the Treasury £35 billion per annum.

In the end there were few surprises and many of the announcements simply restated what had been proposed in the Autumn Statement. This included an increase of £500 in the personal allowance to £11,500 for 2017/18 and a commitment that the allowance will rise to £12,500 by the end of the parliament.

Although the higher rate tax threshold will rise to £45,000 in England it will not rise for Scottish taxpayers, remaining at £43,000.

The forecast for future inflation is certainly providing us with some guidance and assists with clients looking to make decisions on maturing index linked savings certificates and future lifetime allowance thresholds for pensions planning.

The Government announced it will target UK pensions being transferred to Qualifying Recognised Overseas Pension Schemes (QROPS) by applying a 25% charge on the value transferred. This is not an area that is widely used but will provide a degree of regulation on this type of transaction.

If there was one thing that most financial planners will focus on, it is the reduction in dividend allowance which some regard as a U- turn. The annual allowance currently set at £5,000 is set to reduce to £2,000 from April 2018 which will certainly have an impact on those taking income from investments.

In addition, with the increase to the Capital Gains Tax allowance, this adds strength to the argument that diversification is key.

It has long been an agreed investment philosophy that you should hold a diversified portfolio of assets. However, this should be complemented by a diversified range of products with different tax regimes.

The increase to the ISA limit to £20,000 from April will enable clients to build up a sizeable portfolio within an efficient environment and enjoy tax free income when appropriate.

When you add to this products that allow annual usage of Capital Gains Tax thresholds, tax deferred strategies and utilising income tax thresholds, then the tax saving could outweigh the investment performance.

This adds further fuel to the discussion that pensions should be your last place from which to seek income, particularly if you consider the inheritance tax benefits enjoyed by their regime.

At JC Wealth we believe fundamentally in the importance of tax planning alongside investment strategies and, as highlighted above, things change. This leads to my final thought: make sure that your strategies are sufficiently nimble to accommodate change.

Craig Hendry is Managing Director of Johnston Carmichael Wealth Ltd

Disclaimer: The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change. Johnston Carmichael Wealth Limited is authorised and regulated by the Financial Conduct Authority.


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