The Chancellor’s 2013 Budget proposals are to be announced on 20 March – two weeks before the end of the tax year.
Clients wishing to review their finances before 6 April in the light of Budget proposals will have a limited window of opportunity to do so, because Easter is early this year, with Good Friday falling on 29 March and Easter day on 31st March; and the ability of financial institutions to process business will be stretched.
However, there are a number of financial planning issues which investors should now be considering regardless of the Budget.
Capital gains tax
Up to £10,600 of capital gains can be realised in the 2012/13 tax year without attracting tax. So now may be the time to review portfolios and to capture some of the gains made in the new year market rally. Equally, any ‘dogs’ could be sold to off-set against higher gains.
ISAs
ISAs are exempt from capital gains tax and income paid to investors is free from income tax. The maximum contribution in 2012/13 is £11,280, rising to £11,520 in 2013/14. Up to half these sums can be invested in cash ISAs, but equity investors will be conscious that the CGT exemption is wasted on cash ISAs and they might have more flexibility is using other forms of cash deposit.
VCT and EIS
Also vying for attention as the end of the tax year approaches are Venture Capital Trusts and Enterprise Investment Schemes. Both are designed to encourage investment in small businesses and both do so by providing 30% income tax relief on contributions. In addition, eventual gains are exempt from capital gains tax, and EISs are also eligible for business property relief for inheritance tax purposes.
A greater than usual number of new VCTs and EISs are currently being launched, prompted by the reduced availability of bank funding and the apparently improved prospects for an upturn in the economy.
VCTs are listed companies, run by fund managers, which invest in small businesses, whereas EISs allow direct investment in such businesses. EISs allow investors to invest more; they confer more tax benefits; and allow more carry-back of prior years’ reliefs. However, they are dependent on capital growth – there are no dividends – and the investor has to invest for the full term. VCTs pay dividends, but the holding period for tax relief is longer.
In both cases, the investment risks are higher than would be the case with investment in mature companies. And even though VCTs are listed on the London Stock Exchange, the volume of shares traded is low and shares may be difficult to sell at their true value, because shares bought on the secondary market do not attract income tax relief.
Pensions
The maximum pension contribution eligible for tax relief will reduce from the current level of £50,000 per annum to £40,000 per annum in 2014/15. However, whereas tax relief is based on contributions made in each tax year, contribution limits are determined by reference to ‘pension input periods’, which may well not coincide with tax years.
Consequently the new reduced maximum contribution limit of £40,000 will affect any pension plans whose pension input period ends after 5 April 2014, even though the payment may be made in the 2013/14 tax year. Your financial adviser will be able to find out when your own pension input period falls and whether this might be used to advantage.
Also with effect from 2014/15, the maximum value of pension plans eligible for preferential tax treatment will fall from £1.5 million to £1.25 million, though an option can be exercised by no later than 5 April 2014 to lock in values of up to £1.5 million on condition that no future contributions will be made.
Some clients approaching retirement may need to juggle their contributions and their fund value in 2013/14, keeping a watchful eye on the effect of the currently buoyant stock market on the value of their pension pot.
Funding for care
Average life expectancy continues to rise inexorably; and the longer people live, the greater is the likelihood that ill-health will strike.
This is the background to the Coalition’s agonising over the cost of long term care, with its starting point being that people should not have to sell their homes to pay for care.
The decision which has been reached is that, as from April 2017, the maximum that anyone will have to pay for care during their lifetime will be £75,000. Anyone whose assets, including their home, exceed £123,000 in value, will have to pay for the first £75,000 of care costs and up to £1,000 per month of the cost of nursing home ‘bed and board’. Any excess cost will be borne by the Government.
The minority of people whose assets are worth less than £123,000 will receive some means-tested help with fees below the £75,000 cap.
It is estimated that one person in five will benefit from these changes, and that the £75,000 ceiling will typically be reached after seven years in a residential care home or four years in a more expensive nursing home.
The Government hopes that people will want to provide for the charges for which they may be personally responsible by taking out insurance or devoting part of their pension savings to this end.
Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.
