Summer Budget special: A private client focus

8 Jul 2015News

Public would have been better served with a radical change to a flat rate of tax relief, says private wealth partner

George Osborne has delivered a wide-ranging emergency summer budget to the House of Commons which covers restrictions on tax relief to high earners and the inheritance tax allowance (IHT).

Commenting on the Chancellor's announcement on the much anticipated restriction in tax relief for those earning above £150,000, David Dale, head of private wealth at Bond Dickinson, said higher earners will want to review the structure of their remuneration and relative attractiveness of pension contributions from a tax perspective compared with other options.

'Combined with the recent reduction of both the lifetime allowance and annual allowance, this forms part of a wider trend towards the restriction of the benefits of pensions for higher earners. Higher earners who are affected will likely want to review the structure of their remuneration and the relative attractiveness of pension contributions from a tax perspective compared with other options.

Similarly, they may wish to look at alternative structures and forms of tax relief when constructing a tax-efficient investment portfolio. In the short term, affected individuals are likely to want to look into planning opportunities in the 2015/16 tax year before the change takes effect.'

He continued: 'Similarly, they may wish to look at alternative structures and forms of tax relief when constructing a tax-efficient investment portfolio. Regarding the actual mechanism for the restriction of tax relief, the "sliding scale" reduction in annual allowance above an earnings threshold appears to be complicated in execution.'

Dale added that the public would potentially have been better served by a more radical change to a flat rate of relief.

'This would be more widely understood and would likely be more effective in encouraging pension take up by those on modest incomes, to help address the gap between retirement and savings need versus provision. This may be ultimately superseded by more drastic changes to tax relief, as detailed within the new green paper on pension tax relief,' he remarked.

Inheritance tax changes

The Chancellor also announced that an extra £175,000 IHT allowance on the family home will be phased in from April 2017, which will combine with the current £325,000 to give individuals a £500,000 allowance on their family home.

'The tax has traditionally applied to a relatively small number of estates but a combination of rising asset values (particularly house prices) and a static allowance would have brought increasing numbers of people with relatively modest wealth into the regime,' said Dale.

'Although this increase is encouraging, a more straightforward increase without direct link to "family homes" would have been preferred as the current circumstance will suit some people more than others, even though they may have comparable levels of overall wealth.'

Dale added that the incorporation of the 'inheritance tax credit' mechanism was a positive development as it should help to avoid housing market distortion by allowing people to retain their tax position should they wish to downsize in later life.

For more analysis of the budget read SJ's sister publication, Private Client Adviser.