So, it’s going to cost me more to drink, smoke and drive (not that I’ll be doing all three at the same time), but there’s no surprise here as increases in these areas have become a common feature of Budget Day. Did anything else catch my eye? Well, on the whole this was a fairly bland budget, with many of the more significant announcements having been released many months before. But, from amongst the plethora of facts & figures here are some of the more relevant from a savings and investment perspective:
- A raising of the ISA cash limit by £600 making a new total of £3,600 and an increase to the overall limit by £200 meaning a total of £7,200 from 6th April ‘08.
- For disposals on or after 6th April ‘08 the capital gains tax rate will be set at 18%. Alongside this change, both taper relief and indexation allowance will be withdrawn.
- A new entrepreneurs’ relief will be available in respect of certain disposals on or after 6th April ‘08. This will reduce the effective tax rate to 10% for up to the first £1 million of qualifying gains made over a lifetime.
- From 6th April ‘08 the capital gains tax annual exempt amount will be increased to £9,600.
- The Government does not see the need for any change to the taxation of life insurance bonds as a result of CGT reform.
- Savers who withdrew ISA funds from Northern Rock between 13th – 19th September ‘07 will be allowed to return their funds to an ISA to restore their tax advantage.
- As announced in the 2007 Pre-Budget Report, with effect from 9th October ‘07, if an individual’s inheritance tax nil-rate band is not used up on their death, the unused proportion can be transferred to their surviving spouse or civil partner. The measure also applies to all widows, widowers and bereaved civil partners alive on 9th October ‘07. This means that for those who qualify the additional allowance can be back-dated indefinitely, subject to a claim on second death.
- Changes to the personal tax system from April’08 bring a removal of the 10 pence starting rate and a cut to the basic rate of income tax from 22 pence to 20 pence. The starting rate of tax for savings income will, however, remain at the existing 10 pence and there are no changes to the main rates for taxing dividends.
- With effect from 6 April 2008, charities will be able to claim Gift Aid at a transitional rate, consistent with a basic rate of income tax of 22%, for three years. (Donors who are liable at the higher rate of income tax can claim via self-assessment the difference between the higher rate, 40%, and the basic rate of 22% on the grossed up donation.)
- An increase in the investor limit of the Enterprise Investment Scheme (EIS) from £400,000 to £500,000.
What action should you take? Clearly, this depends on your personal circumstances, but three points stand out for consideration:
- If you currently qualify for a rate of capital gains tax below 18%, by virtue of indexation relief and taper relief on your investments, you should think about crystallising the gain in this tax year.
- After 5th April, pension contributions made from taxed-earnings will qualify for up to 20% income tax relief, whereas payments made into a pension before this date can still get 22% relief into the pension.
- If you own an investment bond the new CGT rules may well leave you at a disadvantage from 6th April. As a result, it’s advisable for anyone holding one of these investments to carefully consider whether it would be suitable to surrender the policy and reinvest in an alternative product, such as an ISA or unit trust.