It was the first Conservative budget in 20 years and whilst George Osbourne brought little by way of surprises when compared to those changes introduced in March, there were some useful points of clarity and issues to consider when looking at your financial planning.
Budget Summary – July 2015
It was the first Conservative budget in 20 years and whilst George Osbourne brought little by way of surprises when compared to those changes introduced in March, there were some useful points of clarity and issues to consider when looking at your financial planning. Below is a summary of some of the key points which we believe may be most important for our clients:
March’s budget brought about increased flexibility for individuals both in terms of accessing benefits and also as a means of passing pension assets to dependants or other beneficiaries in a tax efficient manner in the event of death– resulting in many of the barriers, previously associated with pensions, now being removed.
- Lifetime allowance – The lifetime allowance reduction announced in the March 2015 budget will go ahead meaning a drop from £1.25 million to £1 million from 6 April 2016. New fund protection options will be introduced to allow those with funds in excess of this limit to protect the greater amount held. The Lifetime allowance will then increase in line with the Consumer Price Index (CPI) from April 2018.
- Annual Allowance – To pay for the reforms to Inheritance Tax, there will be a reduced annual allowance from 6 April 2016 for those with ‘adjusted annual incomes’ of over £150,000 including pension contributions (but not including charitable donations). For every £2.00 of income above £150,000 the annual allowance will reduce by £1.00. In practice, an individual with income of £180,000 will have an annual allowance of £25,000 whilst anyone with income of £210,000 or above will have an annual allowance of £10,000.
- Pension Input Periods – With immediate effect all pension input periods will be aligned with the tax year – these can no longer be changed by a pension scheme member or provider – the longer term goal appears to be to abolish these altogether.
- Taxation of death benefits – From 6 April 2016 taxable lump sum and income death benefits payable to a beneficiary who is an individual will be subject to tax at the recipients marginal rate of income tax (currently taxed at 45% if paid in 2015/16 tax year).
- Salary Sacrifice – Despite rumours to the contrary, there have been no changes to the rules surrounding salary sacrifice, however the government have noted the increase in popularity of this type of arrangement and the impact that this has had on tax receipts. If the popularity of such planning continues then expect action to be taken.
- Secondary Annuity Market – The government are allowing themselves further time to consult on how this will work in practice with concerns raised by annuity providers and possible adverse tax consequences to be considered in more detail. The aim is to create a robust package to support the decision making process for annuitants.
For those with annuities or third way product this means a further wait to gain flexible access to the monies held within these arrangements.
Inheritance Tax Main Residence Nil Rate Band
An additional main residence nil rate band is to be introduced with effect from April 2017, for each parent passing their main residential property to their children or grandchildren. The additional allowance is going to be phased in over four years, as follow:
- £100,000 in 2017/18
- £125,000 in 2018/19
- £150,000 in 2019/20
- £175,000 from 2020/21
Thereafter it will rise in line with Consumer Price Index (CPI)
With many people’s wealth in the UK tied up in their home, this announcement in the budget will bring some comfort that their family will now benefit from their nest egg. The nil-rate band has not changed since 2009 whilst house prices have soared by some 44% in the same period.
As with the current nil rate band, any unused allowance can be transferred to the surviving spouse for use on their subsequent death. This will mean that where couples own a main residential property, they will potentially be able to benefit from a combined nil rate bank of £1,000,000 from 2020/21.
There will be a tapered withdrawal of the additional allowance where the net value of the inheritance Tax estate is greater than £2,000,000. A £1 reduction in the additional allowance will occur for every £2 that the estate exceeds the £2,000,000 threshold.
Provision will be made from 8 July 2015 for those who choose to downsize or sell their home, so that equivalent value can be passed to their direct descendants, however those who have already sold their property to move in to care, or couples who have moved into a residence worth less than £350,000, will not be entitled to benefit from the new relief in full.
In order to have a £1 million joint inheritance tax allowances in April 2020, a couple cannot have used up any of their nil-rate band in the preceding seven years.
The current nil rate band will be frozen at the current level of £325,000 until the end of 2020/21.
While this news will help the burden of inheritance tax for some families, it is likely to be less far-reaching than anticipated and so there remains a very real need to seek advice on how to maximise the inheritance that can be left behind.
From April 2017, anyone who has been resident in the UK for more than 15 out of the past 20 tax years (reducing from 17 out of the past 20) will be deemed UK domiciled for tax purposes.
This will bring more people into the net for UK Inheritance Tax on their worldwide assets upon death and income tax and CGT on their worldwide income and gains
Insurance Premium Tax
This is to be increased from 6% to 9.5% from 1 November 2015.
This will impact upon the costs associated with many of your insurances and for our clients this will have the most impact on any Private Medical arrangements they may have in place.
This move serves as a reminder of the importance of reviewing the costs associated with your scheme in comparison with the rest of the market to ensure you receive good value for money and are not paying over the odds.
Premiums on Life Cover and Critical Illness Cover continue to be unaffected by this tax.
Buy To Let Property
Mortgage Interest relief for landlords is to be cut to basic rate and the 10% wear and tear allowance is to be abolished and tax relief will only be available for costs that landlords actually incur.
These measures, together with the increased attractiveness of pensions, as a means of investing, under the new legislation will make investments in buy to let properties slightly less attractive.
The 10% notional tax credits for dividends is to be abolished from April 2016. As things stand the tax on dividends for basic rate taxpayers in the 20% income tax bracket is 10%, therefore basic rate taxpayers receive dividend income free of tax.
This will be replaced by a new yearly £5,000 tax free dividend allowance, which will be available to all tax payers.
From April 2016, where their dividend income is greater than £5,000, a basic rate taxpayer will pay tax at 7.5%, a higher rate taxpayer will pay tax at 32.5% and an additional rate taxpayer at 38.1% on their dividend income. Pensions and ISA’s won’t be impacted by these measures.
For those receiving dividend income of less than £5,000 this will remain an attractive option Anyone earning more than this may wish to consider drawing income from alternate sources
The Personal allowance will increase to £11,000 and the higher rate threshold to £43,000 for 2016/17. The government’s continued objective is to raise the personal allowance to £12,500 and the higher rate threshold to £50,000 by the end of this parliament. As always if you would like to review and discuss the impact of these announcements on your personal circumstances then please do not hesitate to contact a member of our Wealth Management team.
James Trimble Dip PFS
‘This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at (insert date). You are recommended to seek competent professional advice before taking any action.’
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