The dust has settled on the Budget and we now have over 440
pages of Finance Bill to reflect on. However the two main issues
for many individuals remain the increase in the higher rate of tax
to 50 percent and the restrictions on higher rate tax relief for
By way of reminder, the new 50 percent tax rate (actually an
effective 36.11 percent rate for dividends) for income over
£150,000 ($227,019)takes effect from 6 April 2010, while higher
rate tax relief for pension contributions will be withdrawn for
high income individuals (defined as those individuals with more
than £150,000 of gross income) from 6 April 2011.
In addition, we have the forestalling provisions that will mean
that many high income individuals will actually lose the benefit of
higher rate tax relief on all pension contributions in excess of
£20,000 made on or after Budget Day (22 April 2009).
So where have wealth managers and, more importantly, their clients
The most obvious effect of the Budget announcements is that with a
differential in tax rate between capital and income returns from
next April of 32 percent many investors will be looking for
investments that deliver capital, rather than income, returns. This
demand will also be fuelled by investors who have significant
There will be some investors though who will see the new 50 percent
tax rate as likely to be short-lived, and these individuals will be
looking for opportunities that allow them to roll up income and
gains in the short-term.
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This will then allow them to take out “profits” when tax rates have
fallen. For those only in the UK for a temporary period, or who are
planning to retire abroad, rolled up income could be extracted
after they have left the UK and become non-resident.
Many investors unfortunately now also see the UK tax system as
relatively unstable, and this means that we will see increasing
demand for investment products that offer flexibility allowing
investors to react to changing tax legislation.
The current economic backdrop will also mean that investments that
permit tax-free switching between asset classes and regions will be
attractive for many.
The impact of the pension changes will also be significant.
Treasury figures published at the time of the Budget show that the
higher rate tax relief foregone as a result of the new measures
will be £3.1 billion, which (depending on precisely how this number
was calculated) suggests that somewhere between £10 billion and
£15.5 billion of pension contributions will no longer attract
higher-rate tax relief after April 2011.
The question then obviously becomes one of how this will impact
investor behaviour and attitudes. While undoubtedly some
individuals will continue to invest in their existing pension
arrangements, many will look for alternative ways to save for
retirement, not only because of the loss of higher rate relief on
contributions into their pension fund but also because they will
have lost faith that pensions will not be “raided” further.
This means that even after taking into account that some of the
funds previously used for pension contributions will just be spent,
or may well be used to invest in property (can we expect a
resurgence of interest in buy to let?) there will be significant
amounts of additional cash for investment that have not previously
been in the domain of private client wealth managers.
So, as ever, it will be those private client wealth managers who
talk to and who know their clients, and who listen to and
understand their objectives and their concerns, who will be best
placed to take advantage of the future opportunities.
Leonie Kerswill is the tax partner responsible for leading PwC’s
London private client business. Her clients include shareholders
and senior management of private companies, entrepreneurs and