Pension contributions (Table B)

The whole system of tax advantages for pension savings changes fundamentally on 6 April 2006, but this was announced in advance and only a few details were adjusted in the Budget.

In outline, the most important changes are:

• personal pensions and employee pensions are brought within the same rules, instead of having radically different limits applying;
  
  

• individuals can enjoy tax relief on up to £3,600 (gross) or 100% of current year earnings up to £215,000;
  
  

• employers can contribute up to £215,000 for an employee in a year (less any contributions made by the individual), and will obtain a deduction for the expense if "wholly and exclusively for the trade";
  
  

• maximum tax advantaged fund at the time benefits are taken is £1.5m (above which a clawback income tax charge will apply).
  
  

The limit of 100% of current year earnings is significantly different from the previous personal pensions rule of a percentage (between 17.5% and 40%) of an "earnings cap" (£105,600 for 2005/06), where the individual could take account of the highest level of earnings in the current or previous five years. The rules allowing "carry back" of pension contributions are also finally abolished.

In the Pre-Budget Report in December 2005, Gordon Brown closed down a number of suggested ways of exploiting the new regime, including most investment in residential property and the "recycling" of tax-free lump sums into new pension policies. One further suggested benefit has been closed down: it had been suggested that pension funds could be passed on free of inheritance tax (IHT) to dependants by taking an "alternatively secured pension" at age 75. The rules will be clarified to provide that:

• in most circumstances where an investor dies before the age of 75, the pension fund can be passed free of IHT if benefits have not been drawn but have also not been deferred specifically because of a short life expectancy;
  
  

• over the age of 75, a "left-over" pension fund will be charged to IHT unless it is passed to a spouse, civil partner or "financially dependent" person.
  
  

Where the fund provides an income for a spouse, civil partner or dependant for a limited period, the IHT charge will be deferred until the end of that period but will then become due.

Venture Capital Trusts (VCTs) and Enterprise Investment Scheme (EIS)

For new subscriptions to VCTs from 6 April 2006, the rate of income tax relief falls from 40% to 30%. This relief will become permanent once the shares have been held for 5 years (up from 3 years).

For new subscriptions to EIS companies from 6 April 2006, the annual investment limit rises to £400,000. The rate of tax relief remains 20%.

There are also changes to the types of company that qualify for investment through VCTs and EIS, the most significant being a reduction in the maximum size from gross assets of £15m before the issue and £16m afterwards, to £7m before the issue and £8m afterwards.

Child Trust Fund

The Government pays a voucher for £250 into CTF accounts (£500 in poorer families) for each child born from 1 September 2002 onwards. Parents and others can add up to £1,200 a year in total into these accounts, which will be able to grow tax-free like an ISA. The child will only be able to touch the money at age 18.

The Chancellor announced that the Government will make further payments of £250 and £500 into CTF accounts when the child is 7.

Real Estate Investment Trusts (REITs)

The introduction of REITs in the UK is confirmed from 1 January 2007. A REIT will be a collective investment scheme which invests in property and meets certain conditions (including being a quoted company). It will enjoy exemption from corporation tax on income and gains from its property holdings, but distributions from these sources to shareholders will be taxed as property income. This means that the investors will only suffer one charge to tax (as if they owned the properties directly), rather than suffering two charges on the same money (once in the company and once on distribution). This new investment vehicle is supposed to increase liquidity and investment opportunities in the property market.