George Osborne presented us with a few little surprises in this week’s budget. These were pretty positive on the whole, particularly from a personal tax and financial planning perspective…but as ever, the devil will no doubt be in the detail.
This initial briefing highlights the main areas that will impact you from the new tax year onwards.
For tax year 2016/17 the personal allowance will increase to £11,000 and for 2017/18 it will increase to £11,500. This means that the age allowance is no longer relevant. For tax year 2016/17 the higher rate threshold, the level after which taxpayers begin to pay 40% tax will increase to £43,000 and for 2017/18 it will increase to £45,000. The higher threshold is expected to reduce the numbers of higher rate taxpayers.
Dividend tax credit will be abolished from 6 April 2016 and replaced with a new dividend allowance of £5,000 per annum. The new rates of tax on dividend income above the allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
A new personal savings allowance will also be introduced on 6 April 2016. This means that up to £1,000 of interest will be free of tax for basic rate taxpayers, and £500 for higher rate taxpayers. Additional rate taxpayers will not receive an allowance.
As previously announced, banks and building societies will pay interest without the deduction of tax from 6 April 2016. The government has also announced that from April 2017 they will change the tax rules so that interest from OEICs, authorised unit trusts, investment trust companies and peer to peer loans may be paid without the deduction of income tax.
The increase in the personal allowance and higher rate threshold for this year is welcomed, though many limited company owners are likely to be worse off due to the change in dividend taxation.
As widely reported in the past couple of weeks, there were no major changes to pensions in the Budget. Below is a summary of the previous announcements taking effect from 6 April 2016, and the changes announced in the Budget as follows:
Pensions Tapered Annual Allowance (High Earners)
The tapered annual allowance was announced in the 2015 Summer Budget and starts from 6 April 2016.
Put very simply, if your net adjusted income exceeds £150,000, the pension annual allowance will be reduced by £1 for every £2 of income over this. The reduction is capped at £30,000 meaning the maximum reduction is from £40,000 to £10,000.
If you’re in and around this income level, I would urge you to seek advice to ensure you avoid potentially hefty tax charges applied to pension payments over your allowable limits.
As announced in the March 2015 Budget, the lifetime allowance will reduce from £1.25 million to £1 million from 6 April 2016. Transitional protection in the form of Fixed Protection 2016 and Individual Protection 2016 will be available from 6 April 2016.
Pensions & Inheritance Tax
As previously announced in the Autumn Statement, the Government will legislate to ensure that a charge to IHT does not arise where a pension scheme member designates funds for drawdown but does not draw all of the funds before death. This was an unintended consequence of the interaction of pensions and IHT legislation and will be backdated to apply to all deaths on or after 6 April 2011.
A period of stability in pensions will be welcomed by many with only minor amendments to current legislation announced in the Budget. Pensions continue to be an attractive option for retirement savings and there was a clear message in Mr Osborne’s speech that tax free cash will not be abolished.
Capital Gains Tax
For disposals on or after 6 April 2016 the highest rate of capital gains tax for individuals will reduce from 28% to 20%, and the basic rate will be reduced from 18% to 10%. Capital gains tax paid by trustees will also reduce from 28% to 20%.
Chargeable gains on residential property that does not qualify for Private Residence Relief will continue to be taxed at 28% and 18%.
An interesting addition is that entrepreneurs’ relief will be extended to long term investors in unlisted companies. This will provide a 10% rate of CGT for gains on newly issued shares in unlisted companies purchased on or after the 17 March 2016, providing they are held for a minimum of three years from 6 April 2016, and are subject to a separate lifetime limit of £10million of gains.
The reduction in the rate of capital gains tax is very welcome. For many investors careful planning and regular use of the annual exempt amount (£11,100 for 2016/17) should deliver long term tax efficiency for both individuals and trustees.
The current nil rate band of £325,000 will remain frozen at this level until April 2021. As announced in the Summer Budget from April 2017 an additional nil rate band will apply where a residence is passed on death to a direct descendant. The Government has confirmed that they will legislate to ensure that the residence nil rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 where assets are passed on death to direct descendants.
From a planning perspective the freezing of the nil rate band makes it important to review nil rate band/transferable nil rate strategies. It cannot be assumed that all couples will have already put in place and updated their estate destination and Inheritance Tax reduction plans.
A new Lifetime ISA will be available from April 2017 for adults under the age of 40. They will be able to contribute up to £4,000 per year, and receive a 25% bonus from the Government. Funds, including the Government bonus, from the Lifetime ISA can be used to buy a first home at any time from 12 months after the account opening, and be withdrawn from age 60.
The main features of the new Lifetime ISA can be summarised as follows:
· For investors aged 18 to 40, 25% Government bonus earned on savings made before age 50
· No maximum monthly contribution limit as little or as much as can be afforded each month, up to the overall limit of £4,000 a year
· The total subscription limit for all ISAs will be increased from £15,240 to £20,000 from April 2017. This figure includes the £4,000 Lifetime ISA allowance.
· Savings and the Government bonus can be used towards a deposit on a first home worth up to £450,000.
· Existing Help to Buy ISAs can be transferred into a Lifetime ISA in 2017. It will be possible to save into both but the Government bonus from one can only be used for house purchase.
· After age 60 all proceeds will be available tax free.
· Proceeds can be accessed before age 60 but the Government bonus and the associated interest and growth will be lost and there will be a 5% penalty charge.
Choice and flexibility for savers is a good thing and people under age 40 saving for their first home may welcome the Lifetime ISA. There’s much talk of the Pension ISA being introduced in the next few years, so watch this space.
Stamp Duty Land Tax (SDLT) on investment properties
As announced in the Autumn Statement the Government will introduce higher rates of SDLT on purchases of additional residential properties from 1 April 2016. The higher rates will be 3% above the current SDLT rates.
Following consultation, there will be no exemption from the higher rates for significant investors. Purchasers will have 36 months rather than 18 months to claim a refund of the higher rates if they buy a new main residence before disposing of their previous main residence. Purchasers will also have 36 months between selling a main residence and replacing it with another without having to pay the higher rates.
This is a blow to property investors. The increased costs of purchasing additional properties together with the tax deductibility of relevant expenditure must be fully understood when considering the viability of any buy to let investment opportunity.
Life Insurance Taxation
The Government has announced it will change the current tax rules for part surrenders and part assignments of life insurance bonds to prevent excessive tax charges arising when large partial withdrawals are taken in excess of the accumulated 5% allowance. The Government will consult later this year on alternatives to the current rules with a view to legislating in Finance Bill 2017.
After a number of high profile court cases the Government has decided to overhaul the taxation of investment bond withdrawals so that is not possible to inadvertently generate large artificial gains (and an associated tax liability) when making partial withdrawals across all policy segments.
There are clear instances where many will pay less tax but if you’re in any doubt you should seek professional advice as to how the changes affect you personally.
The one thing that’s abundantly clear is that further change is likely in future, so your financial plan needs to be well structured, agile and reviewed on a regular basis.
As ever, feel free to get in touch if I can be of any help to you and your financial plans.
Thanks for reading.