Some confusion had arisen in the days following the Budget announcement as the Direct Gov website suggested the top rate of CGT would only apply to discretionary trusts that are taxed at the higher rate.

Estates have never previously paid the higher rate of CGT. But Treasury documents made public along with the Emergency Budget statement, makes clear that the 28% rate applies to all trusts irrespective of the beneficiaries’ income tax bracket:

“For individuals, the rate of CGT remains 18 per cent where total taxable gains and income are less than the upper limit of the income tax basic rate band … For trustees and personal representatives of deceased persons, the rate is increased to 28 per cent (previously 18 per cent).”

The tax applies to any gains made while an estate is being administered and for the duration of a trust.

There is only an exception where the trust or estate is eligible for entrepreneurs’ relief, in which case the CGT rate will be 10% up to a maximum capital gain of £5 million.

Many protests have been made as this latest tax hike move may penalise will trusts created by parents for their children if they are orphaned while still minors; a direct hit to some of the most vulnerable in society.

It is thought some 200,000 family trusts could be affected by the new tax, which was introduced quite unexpectedly.

This is another example of the perishability of financial advice and highlights the need to engage with advisers to benefit from a committed review process of regular financial check ups.

Trustees and personal representatives are urged to take advice as quickly as possible to ensure that their trust investments are being held and managed in the most tax efficient manner in the light of these changes.

The income tax personal allowance will rise to £7,475 in 2011/12 and the basic rate limit (£37,400 for 2010/11) will be reduced so that higher rate taxpayers do not benefit from this £1,000 increase.

The retention of the annual exemption for CGT at £10,100 is significant.

An individual’s total income in 2010/11 can be up to £43,875 (£6,475 + £37,400) and not pay higher rate tax. An individual’s annual capital gains can be up to £10,100 and not pay any capital gains tax.

The change will re-invigorate the single premium Investment Bond versus collective investment funds debate.

Investment Bonds are written under life assurance legislation and onshore Investment Bonds pay special life company rates of corporation tax (assumed to be 20%) on income and gains inside the Investment Bond.

Any gain on encashment is divided by the number of relevant years to produce an average yearly gain, which is treated as the top slice of income in the tax year in which the gain falls. It remains important to ensure this gain does not take an individual from a lower rate tax payer to a higher rate payer, otherwise tax in addition to the 20% already paid, inside the bond is payable by the individual.

In our opinion, the retention of the CGT annual exemption, coupled with the greater choice and lower costs of a portfolio of collective investments on a wrap platform will often be the better option for clients.

A major advantage of single premium Investment Bond is the simplicity of receiving up to 5% withdrawals each year for twenty years as a return of capital.

As always, individual circumstances need to be assessed before making final recommendations.

Any gift into the trust is classed as a Potentially Exempt Transfer (PET) and therefore there is no immediate tax to pay. Provided you survive seven years, the whole gift will be outside of your estate.

Investment Bonds are often considered to be a good vehicle for investments within a trust as they are non-income producing.

When making the investments into a Bare Trust you need to consider the fact that the beneficiary will be subject to tax on any income and capital gains. The beneficiaries are unlikely to be utilising their personal allowance or capital gains tax allowance, which therefore makes collective investments attractive as capital gains tax in excessive of the annual exemption (currently £10,100) will be suffered at 18% as opposed to 20% within an investment bond.

However, if your grandchild is a non UK resident an Offshore Investment Bond may be appropriate. This is because the Investment Bond would not be subject to UK corporation tax on either income or gains and the fund benefits from gross roll-up.

Time apportionment relief may be available to proportionately reduce any chargeable gain where the beneficiary has been non-UK resident for any period during the term of the investment.

Nick spoke about the main highlights from the Budget and our analysis. In particular, Nick described changes to income tax and capital gains tax, and what the Budget means for your retirement planning.

The live webcast has been recorded and you can watch it below.

This is the first in a new series of monthly webcasts from Informed Choice. We look forward to bringing you details of our July webcast soon.

This report describes the main Budget measures, as they relate to personal financial planning, and provides our commentary in each area.

The free 10-page report is available to download for free from http://www.box.net/shared/vm5ia35a11.

You can also sign up for the Informed Choice Budget Webcast at 11am on Thursday 24th June 2010.

Informed Choice chartered financial planner Nick Bamford will describe the highlights of the emergency Budget and what it means for your personal financial planning.

There will also be an opportunity to pose any questions you have about the Budget and your personal finances.

You can register to attend here.

We will be updating this blog throughout the day with live coverage and analysis as it happens.

10:52 – The BBC is speculating that the income tax threshold will be increased by £1,000. This means that the first £7,475 of income will be free of income tax. However, this is likely to be clawed back for higher earners.

As things stand, for every £2 over £100,000 of earnings, your personal allowance is reduced by £1. This threshold could be lowered to £80,000 or even lower to compensate for the higher personal allowance for lower earners.

12:41 – George Osborne (GO) sets the scene for the Budget, calling it ‘the unavoidable budget’. He explains that the Office for Budget Responsibility has been established to remove politics from setting growth forecasts.

The structural deficit will be in balance one year earlier than planned, which makes this a five year Budget.

12:44 – GO restates the 80/20 principle, saying that 80% of deficit reduction should come from spending cuts with only 20% from higher taxes. He says that in reality it will be 77% from spending cuts and 23% from tax increases.

12:54 – A public sector pay freeze for the next two years, although lowest paid public servants protected with a £250 flat rate pay rise in each of the next two years. Dealing with the cost of public service pensions is met by appointing John Hutton to carry out an investigation. He will provide an interim report in September this year to inform decisions made in spending review.

12:57 – Coalition Government will accelerate increase of State Pension Age from 65 to 66 and consult on abolishing the default retirement age.

Benefits, apart from State Pension, will be uprated in future by Consumer Prices Index (CPI) rather than Retail Prices Index (RPI).

13:00 – Big decision on Child Benefit, after considering various options, freezing level of Child Benefit for the next three years.

Introducing a medical assessment for Disability Living Allowance from 2013, for existing and new claimants.

13:04 – Making it cheaper for companies to employ people, from April 2011 employer NI threshold will rise by £21 a week over indexation. This lifts 650,000 employees out of this tax altogether.

Corporation tax – cut by 1% to 27p in the pound, followed by 1% cuts taking it down to 24% in subsequent years, making UK economy more competitive and attractive to businesses. Also reducing the small companies corporation tax rate to 20% from April 2011.

13:09 – Banking tax – banks to make a more appropriate contribution to reflect risks they represent to economy and taxpayer. Taking the initiative by introducing a bank levy from January 2011 applied to balance sheets. This will not apply to smaller banks. Expect this levy to generate over £2bn a year in annual revenues.

13:12 – GO abolishes ‘broadband tax’ on landline telephones before it is established.

13:14 – Some incentives for new businesses set up from today outside of London and the South East, with up to £5,000 of relief on employer NI payments for the first ten employees.

13:16 – VAT goes up, as widely predicted, from 17.5% to 20% from 4th January 2011. All zero-rated items remain exempt from VAT for the course of this parliament. Insurance premium tax standard rate goes up from 5% to 6%.

No new increases on duties for alcohol, tobacco or fuel.

13:18 – Council tax will be frozen for one year from next April, to drive in value for money within all areas of government.

13:19 – Capital gains tax remains at 18% for basic rate taxpayers and goes up to 28% for higher rate taxpayers, with annual exemption remaining at £10,100. Entrepreneurs relief extended from £1m to £5m of qualifying gains. No taper relief or indexation allowance introduced due to complexity involved.

13:21 – GO will work with industry on alternative ways to raise similar amount of money from pension tax relief changes being introduced next year, possibly reducing the annual allowance instead.

13:22 – Income tax personal allowance being increased by £1,000 from 6th April 2011, as predicted. Higher rate taxpayers will not benefit from this change, with higher rate income tax thresholds remaining frozen until 2013/14. Aim remains to increase income tax personal allowance to £10,000 by end of parliament.

13:24 – Lasting help for pensioners being provided by relinking the basic state pension to earnings from April 2011. Also being protected by ‘triple lock’ guaranteeing annual rise in state pension by earnings, prices or 2.5%, whichever is greater.

13:27 – Child element of child tax credit will be increased by £150 over inflation next year.

“The most urgent priority is making pension contributions, if you are a higher rate taxpayer and had planned to make contributions at some point during this tax year anyway,”

“There is a high probability that higher rate income tax relief on pension contributions will be abolished or scaled back even further in the Budget, so making these contributions now makes real sense.”

The article also explored taking action ahead of likely changes to capital gains tax. On this point, Martin warned not to let tax decisions dictate investments:

“We are not advising our clients to realise capital gains,” he says. “While we expect to see the rate of CGT increased in line with income tax rates and the annual exemption reduced, there is a good chance this will apply from the start of this tax year. This could mean those investors who have rushed to dispose of assets will face a hefty tax bill,” says Bamford.

“You should never let the tax tail wag the investment dog, so selling investments quickly is a foolish strategy.”

You can read the article in full here.

 Indeed, some articles have been encouraging investors to ‘sell everything’ before they incur CGT at 40% or 50%. At the time of posting it is still unclear as to what form any changes might take. If the history of this form of taxation is any guide, it should be remembered that prior to the reduction in CGT to a flat rate of 18%, the lower rate of CGT was only 20%; not much different to the current rate of 18%. The higher rate of 40% would only become payable if the individual was already a higher-rate taxpayer or the gain, when added to annual income, exceeded the lower rate tax band.

 In addition, Taper Relief was available which reduced the tax payable for investments that had been held for more than three years.

 If this type of structure were to be re-introduced, the current higher-rate tax threshold of around £44,000 per annum would allow those on modest incomes to crystallise significant gains (especially on jointly-owned assets) before suffering tax at anything above 20%. However, the benefit of the tax-free CGT allowance looks likely to be reduced substantially so any investments with inherent gains might benefit from some crystallisation of profit before the Budget, on the basis of ‘use it, or lose it’.

 This may not be of comfort to anyone who has invested in property assets (which are difficult to sell-off in ‘bits’), although it should be remembered that many people invested in property when the old CGT regime was in force (i.e. tax at up to 40%), though they did benefit from taper relief. As there is some optimism that some form of taper relief might be re-introduced, I suggest that anyone who is tempted to ‘panic-sell’ takes advice from a professional adviser and reconsiders the fundamental reasons for making the investment in the first place, rather than resorting to ‘knee-jerk’ strategies.

 If you consider that one of the reasons that the increase in CGT is being mooted is to prevent the use of share schemes as a means of allowing highly-paid individuals to avoid paying higher-rate income tax (replacing this with CGT at 18%) then there may be grounds for some optimism with regard to the treatment of ordinary savers. All will be revealed on 22^nd June, Emergency Budget Day!

Commenting in an article in Money Marketing, Informed Choice chartered financial planner Martin Bamford has called for taper relief to avoid penalising investors with long-term holdings.

“The Government needs to reward people that hold on to investments for longer.

Taper relief is the fairest and simplest way of doing this but the Government needs to look at the timescale. I think they should reward those who hold on to investments for even longer than five years, with incentives to invest for 10 or 15 years.”

This follows calls from Conservative backbencher John Redwood who has suggested a new CGT regime designed to encourage long-term investors.

Business Secretary Vince Cable has since sought to reassure investors that the CGT increases will not damage entrepreneurs.

Whilst we have to wait until 22nd June to see what emerges, we expect to see the rate of CGT rise from 18% to 40% or 50% on non-business assets. The changes could also see the CGT annual exemption reduced from the current rate of £10,100.

There is also the possibility that CGT changes will be backdated to the start of this tax-year, as it is unusual for the rules to be changed part way through a tax year. Whilst retrospective tax changes are virtually unheard of, the severity of the budget deficit and need to raise additional tax revenues to fund other changes to the tax system could prompt the coalition government to take these steps.

If retrospective changes are applied then it could mean bad news for investors, particularly property owners, who have rushed to sell assets ahead of the emergency budget.

Compromises have been made on both sides; most notably the Conservatives have dropped plans to raise the Inheritance Tax threshold to £1 million and therefore will not now take more estates out of this tax’s scope.

The Lib Dems have agreed to “shelve” their “mansion tax” on properties worth £2 million or more.

Proposals to raise the employee National Insurance (NI) contributions are not now going ahead whereas employer NI contributions are still set to rise. Both parties are keen to increase the income tax threshold to £10,000 over the next few years.

Capital Gains Tax on non-business assets is set to increase to similar rates as income tax meaning that the current rate of 18% will be replaced by one much higher.

There has been talk of a new VAT rate of 20% to move in line with the European average but nothing is cast in stone here yet.

The default retirement age is planned to be phased out, with a review to establish the dates at which state pension retirement age begins to rise to 66.

The smart can learn a few lessons here.

As the old saying goes “never put off till tomorrow what can be done today”. Some investors may have put off estate planning believing their estates will fall out of the scope of inheritance tax when the government changed. For those of that mindset this area of planning will now urgently need rethinking.

Likewise, the impact of the new CGT changes no doubt will need consideration in investor’s portfolio management. The timing of realising gains and losses will be directly affected by an increased tax burden.

Retirement planning has long been on the agenda for anyone serious about having “a life” rather than a “survival” in retirement and these plans underline the need for constant reviewing and audit of those plans already in place.