The wealth management industry will be a big beneficiary of the Summer Budget, due to changes to the tax rules on dividends, inheritance tax and pension allowances, experts said.
Neil Jones, technical manager at Canada Life, commented that while the Budget was ostensibly aimed at middle Britain, a big beneficiary will be the wealth management industry.
“There are lots of surprising changes that will impact the wealthy and keep their advisers busy, particularly those that advise high net worth individuals,” he added.
Earlier this week, chancellor George Osborne announced that from next year the dividend tax credit was to be replaced with a “tax-free allowance of £5,000” for all taxpayers on dividend income.
Dividends received above that amount will be taxed at 7.5 per cent, 32.5 per cent or 38.1 per cent, depending on the individual’s tax band.
Mr Osborne also confirmed the end of inheritance tax on family homes worth up to £1m.
The exchequer is set to bank a £1.5bn profit via the £4.1bn coming in from cutting pension tax relief, while the IHT giveaway should only cost around £2.6bn.
Those earning more than £150,000 will be seeking advice on tax efficient capital growth options, with Mr Jones expecting offshore bonds to become distinctly more popular.
He also pointed out that there is an IHT “stealth tax” hidden away in the small print, with the nil rate band frozen for another three years to 2021.
“For those without access to the new main residence allowance – because they don’t have children or grandchildren, their assets aren’t in property or their estate is worth over £2.35m – their IHT bill will rise in line with their asset growth.
“The fact is that the new IHT changes mean 6 per cent of estates are liable, down just 2 percentage points from 8 per cent,” added Mr Jones, concluding that the rise in estates with an IHT liability and in the value of tax receipts mean more people than ever will need advice to protect their wealth.
Graeme Mitchell, managing director at Lowland Financial, said that the inheritance tax changes are broadly good news, noting the government has frozen the limit for another two years.
As for pensions, he bemoaned the fact that more uncertainty has been added just when people were beginning to save more long term.
Alan Solomons, director of Alpha Investments and Financial Planning, said that the extra 7.5 per cent tax on dividends over the first £5,000 of dividend income will have a big impact on many small limited company businesses, which take most of their remuneration as dividends.
He explained that calculations will have to be done to see if they would be better off as sole traders or partnerships. “If they are 55 or over they could put money into a pension scheme instead, then take the 25 per cent tax free cash and the rest taxed at their marginal rate, having obtained corporation tax relief on the pension premium.
Angela Murfitt, a chartered financial planner at Fairstone Financial Management, agreed that the changes to the dividend tax system will create more complexity and therefore conversations with advisers will be required.
“As a result of today’s announcement, high earning buy-to-let investors will be hit by the tax changes to the interest rate offset. This will make property investment much more complex than it appears on paper, and it certainly isn’t going to be as lucrative from a financial point of view in the future.”
She added that those with property investments may want to unravel what they have started in light of this and will find that one of the pitfalls of property investing is liquidity.
Meanwhile, John Charcol’s senior technical manager Ray Boulger has also warned brokers to expect buy-to-let lenders to change their affordability calculations.
peter.walker@ft.com
