As well as highlighting some of the key points we have also provided some key planning opportunities which now exist.
As the headlines focus on the new sugar tax, a number of announcements in the latest budget present financial planning opportunities for individuals and businesses alike.
We believe that some of the more unpalatable plans the Chancellor has in store will be saved for the autumn statement in November / December, there have been hints of what lies ahead for pensions but a number of opportunities still exist.
As well as highlighting some of the key points we have also provided some key planning opportunities which now exist and if you would explore these in more detail please contact a member of the team to discuss further.
For the meantime at least there are no changes to pensions with the amount that individuals can contribute each year and the total savings which can be accumulated remaining unchanged.
In this case no news is good news as individuals, particularly higher and additional rate taxpayers, can continue to receive tax relief on contributions, whilst the new Lifetime ISA could provide a complimentary means of saving for retirement.
The ability to make contributions via salary sacrifice remain available whilst there have been some tweaks to the rules around flexible drawdown pensions to fix anomalies which had been created for those beneficiaries under age 23 and those with terminal illnesses.
This appears very similar to the mooted Pension ISA with a form of tax relief paid at a flat rate of 25% on contributions up to £4,000 for those under 40.
The features of the new plan are as follows:
- Available from 6 April 2017 for those between 18 and 40.
- Any savings made up to age 50 will attract tax relief of 25% – so long as the funds are used to purchase a first home or withdrawn after age 60 to assist with funding retirement.
- Maximum contribution is £4,000 per year. The maximum contribution will therefore attract £1,000 tax relief each year.
- Funds can be withdrawn at any time free of tax but if withdrawal is made before age 60 (and is not being used to purchase a first home) then any tax relief received will be removed, together with any interest / growth received on that portion of the fund and a 5% penalty will be applied.
- As long as the plan was started before age 40 tax relief will be added to contributions until age 50.
- If you have established a ‘Help to buy ISA’ you will be able to transfer these funds into this new arrangement, you will also be able to transfer any other ISA arrangements into these new plans.
ISA Contribution Levels
The total which can be paid into ISA’s from 6 April 2017 will be increased to £20,000 per annum.
This can be spread across Cash ISA, Investment ISA, Lifetime ISA, Help to Buy ISA or Innovative Finance ISA
Personal allowance and tax thresholds
The Budget included the announcement that the personal allowance for 2017/18 will increase to £11,500, and the basic rate limit will increase to £33,500 giving a higher rate threshold of £45,000
The government has an objective to raise the personal allowance to £12,500 and the higher rate threshold to £50,000 by the end of this parliament.
As already announced, the dividend tax credit will be replaced by a new £5,000 tax-free dividend allowance for all taxpayers from 6th April 2016. Dividends that exceed this allowance will be taxed as follows:
- Basic rate band – 7.5%
- Higher rate band – 32.5%
- Additional rate band – 38.1%
Capital gains tax rates
For individuals, trusts and personal representatives who pay Capital Gains Tax (CGT) the rates of CGT will reduce from 6th April 2016. The 18% rate of CGT will reduce to 10% and the 28% rate to 20%, except in relation to gains accruing on the disposal of residential property (that do not qualify for private residence relief), and carried interest. The reduced rates apply to relevant gains accruing on or after 6th April 2016.
The government wants to create a strong enterprise and investment culture. Cutting the rates of CGT for most assets is intended to support companies to access the capital they need to expand and create jobs. Retaining the 28% and 18% rates for residential property is intended to provide an incentive for individuals to invest in companies over property.
Higher rates of Stamp Duty Land Tax (SDLT) on purchases of additional residential properties
The introduction of higher rates of Stamp Duty Land Tax (SDLT) on purchases of additional residential properties is designed to try and redress the balance between those who are struggling to buy their first property and those who are able to invest in additional properties.
The higher rates will be 3 percentage points above the current SDLT rates, and will take effect on and after 1st April 2016. Alongside the Budget the government announced a few amendments to the original rules:
- To provide additional support for those moving home, those people who are moving from one main residence to another and are disposing of a previous main residence will have 36 months (rather than 18 as originally planned) to buy a new main residence before the higher rates apply assuming they retain their additional property.
- The higher rates will apply equally to all purchasers without an exemption for significant investors.
- Married couples who are living separately in circumstances that are likely to become permanent will not be treated as one unit for the purposes of this policy.
- When applying the higher rates, a small share (50% or less) in a single property which has been inherited within the 36 months prior to the transaction will not be considered as an additional property. This is intended to provide flexibility for purchasers who may find it difficult to dispose of a share in a property quickly.
The government will legislate for the changes in Finance Bill 2016 and the higher rates will apply to purchases which complete on or after 1st April 2016.
HMRC will provide detailed guidance on the changes which will set out how they apply in practice.
Rent a Room Relief increase
As previously announced, from 6th April 2016 the level of Rent a Room relief, which provides for tax-free income that can be received from renting out a room or rooms in an individual’s only or main residential property, will increase from £4,250 to £7,500 per year. It also increases the level if an individual rent’s out rooms in a guest house, bed and breakfast or similar, providing that it is their main residence.
Restricting tax relief for wealthier landlords
Currently, individual landlords can deduct their costs – including mortgage interest – from their profits before they pay tax, giving them an advantage over other home buyers. Wealthier landlords receive tax relief at 40% and 45%. This tax relief will be restricted to 20% for all individuals by April 2020.
In addition, from April 2016, the ‘wear and tear allowance’, which allows landlords to reduce the tax they pay (regardless of whether they replace furnishings in their property) will also be replaced by a new system that only allows them to get tax relief when they replace furnishings.
The main rate of corporation tax will be reduced to 17% from the financial year beginning 1 April 2020.
Given the reduction already announced by Stormont, which will prove to be lower than this reduction, this will have little impact on Northern Irish companies, however for the executive it will mean having to find less money from their budget to fund this change.
Insurance Premium Tax (IPT)
From November 2015 the standard rate of Insurance Premium Tax was increased from 6% to 9.5%. The Budget announced that the standard rate of IPT will be increasing again by 0.5% to bring the rate up to 10% (lower than expected).
Stamp Duty Land Tax on commercial properties
Stamp Duty Land Tax on non-residential property transactions is being reformed to reduce distortions, cutting the tax for many businesses purchasing property (0% on up to £150,000, 2% on next £100,000 and 5% on the amount above £250,000). This change is with effect from 17 March 2016.
Transaction Value Rate
- £0-£150k 0%
- £150,001-£250k 2%
- £250,001+ 5%
Abolition of class 2 NI
Class 2 National Insurance contributions (NICs) are to be abolished from April 2018, which will reduce the NICs paid by self-employed individuals by an average of £134 a year and will end an outdated and complex feature of the NICs system.
Key Planning Points
The feeling is that this is a budget for savers and small businesses and in light of the information we have seen so far we have identified a number of areas which are worthy of consideration in the short term:
- Maximise Pension Contributions – For higher and additional rate taxpayers tax relief remains available. It would be sensible to take advantage of this as far as possible to help maximise funding your pension to assist with your retirement plans. You may also be able to use the new Lifetime ISA to compliment this strategy once it is available.
- Utilise your Annual ISA Allowance – Make sure to use your £15,240 annual allowance before 6th April 2016. This cannot be carried forward and will be lost if not used before this date.
- Consider taking dividends before 6 April 2016 – the tax applied to Dividends over the new £5,000 allowance will increase by 7.5% from April. Draw special dividends from your business now to avoid this increase. You should seek specialised tax advice to consider the merits of this strategy for your business.
- Consider other, more tax efficient investments, rather than a 2nd property – The changes to allowable expenses associated with 2nd properties means they become less attractive when compared with other investments. Review your options and consider alternatives to avoid paying unnecessary tax.
- Review Insurance Based Contracts – with further increases to Insurance Premium Tax, now, more than ever is a good time to review the costs associated with your insurance (including Private Medical Insurance) to unnecessary costs.
To discuss these topics and any others arising from the budget or in advance of the end of tax year please contact the Wealth Management team on 02890 329042 to arrange a meeting.
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