Slim pickings for savers and older couples

The Budget was cause for only modest celebration.
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The Independent Online
Cutting the tax on bank and building society interest from 25 per cent to 20 per cent was the most eye-catching of the Chancellor's gestures in the direction of Britain's hard-pressed savers. An estimated 14 million people will benefit, although it does nothing for investors with tax-free Tessa accounts, or for investors who earn enough to reach the 40 per cent tax bracket. From next April they will have to pay an extra 20 per cent tax on net interest they receive instead of the current 15 per cent extra.

Even standard rate taxpayers should remember, before they start to celebrate, that the change represents a saving of just 5p in the pound. On a deposit of pounds 100 invested at 8 per cent gross interest the saving is just 0.4 per cent or 40p. Banks and building societies are not short of deposits to meet loan demand, and as base rates fall there will be little to stop them cutting deposit rates by more than lending rates in order to increase their profit margins, and in the process swallowing up the Chancellor's concession.

But the widening of the differential between the basic rate of tax on deposits and the higher rate liability will make it more attractive for husbands paying higher rate tax to transfer money to non-working wives, to make the most of the concession.

Tucked away in the small print of the Budget speech is the nucleus of the next tax-assisted investment opportunity. The Finance Bill will authorise the creation of special housing investment trust companies (Hits) which from April next year will be able to buy properties, either unlet or let on assured shorthold tenancies, which must be relet on assured shorthold tenancies for specific periods, usually six or 12 months. The properties must not cost more than pounds 125,000 in Greater London or pounds 85,000 elsewhere, and this includes the costs of construction, renovation and conversion.

Investors will have to buy Hit shares out of taxed income, but the trusts will pay corporation tax on their net rental income at the small companies rate of 24 per cent from next year, and any capital gains from reselling the properties will be tax-free.

Investors will not need reminding that the value of the housing could go down as well as up however. There was no direct help for the property market from the Budget and it will take strong nerves to see this as a definite buying signal.

The lack of any major changes to capital gains tax will disappoint many investors. The annual amount of gains which can be taken tax-free has been increased but only in line with inflation, up from pounds 6,000 a year to pounds 6,300. But the steep increase in the value of estates before they become liable to pay inheritance tax, from pounds 154,000 to pounds 200,000, is a real concession. Many estates in excess of the old limit had most of the assets tied up in the family home, and to get within the limit many elderly couples gave away assets. With the fall in interest rates in recent years that often left them with too little income to live on. The new limit will give much more scope to retain the family home and enough capital to live on.

It will automatically exempt about a third of the 21,000 estates which currently fall into the tax net each year. It also increases the number of well-off couples now with assets of up to pounds 400,000 who with judicious planning will be able legitimately to escape inheritance tax through simple planning. That might include the creation of a trust which will hold the assets of the first spouse to die in trust for the eventual heirs while allowing the surviving spouse to enjoy the income from the trust as well as retaining assets of up to pounds 200,000. In practical terms it would usually be enough to enable the surviving spouse to stay on in the family home and still enjoy a secure and substantial income from the trust.

Another useful device is to consider drawing up a legal document establishing husband and wife as tenants in common rather than the more normal status of joint tenants. The effect of being tenants in common is that when one spouse dies he or she can leave a half interest in the family home to the children or other eventual heirs, while the surviving spouse retains the balance, and enough income-earning liquid assets to live on.

The survivor can also continue to live in the property rent-free. Whereas this device will no longer be necessary for joint estates up to pounds 200,000, passing on half the value of the property on the first death will increase the size of estates which need not ever pay inheritance tax to well in excess of the pounds 200,000 limit.

The Chancellor has at last recognised that most people retire well before the age of 65 at which most pensions become payable. The minimum age for investing in National Savings pensioner bonds has dropped from 65 to 60. Interest is currently 7.5 per cent for five years, paid gross.

DOS AND DON'TS

do

Take advantage of the wider gap between the basic rate and the higher rate of tax on deposit account interest. Couples with a higher rate taxpayer and a non-working spouse should move money to the non-working spouse's account.

If interest rates continue to fall think about a new tax-exempt Tessa, or a Corporate Bond Pep. If you are between 60 and 65 consider a granny bond with a guaranteed rate of 7.5 per cent gross for five years.

Consider buying a good 25 year old car as the family runabout. They are now exempt from the pounds 140 a year tax disc.

don't

Forget to review your inheritance tax planning. The jump in the exempt allowance allows couples more freedom to pass on wealth without leaving themselves short of cash.

Rush to buy a long-term care insurance policy. The consultation process will lead to a plethora of new products on the market by this time next year.

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