The Chancellor George Osborne delivered the first Conservative Budget for almost 20 years in the Commons last week. He unveiled a raft of new measures and presented the budget as “a plan for Britain for the next five years to keep moving us from a low wage, high tax, high welfare economy, to the higher wage, lower tax, lower welfare country we intend to create.” Some of the headline features of the budget include the introduction of a new ‘living wage’, raising the inheritance tax threshold, scrapping ‘non-dom’ status, a tax hike for dividend payments, a consultation on making pensions more like ISAs, and a fundamental review of the pensions tax framework. Reactions to the budget have been mixed within the investment industry, to say the least.
Importantly, plans to return to a budget surplus have been pushed back until 2019/20 amid the announcement that outlined just under half of the £37bn in cuts that are needed to clear the UK’s deficit by 2018. Concerns remain around the challenges facing economic growth, but the Chancellor was upbeat, stating: “For the second year in a row, Britain is expected to have the strongest economic growth of any major advanced economy in the world. In 2016 the OBR (Office for Budget Responsibility) have growth unchanged at 2.3% – and it is then revised up to 2.4% in the following year; a level of strong, steady growth it predicts for the rest of the decade.”
Budget Highlights for Quadrant Investors:
- There will be an additional IHT nil-rate band for personal residential property passed on death to direct descendants of £100,000 from 2017/18 rising to £175,000 in 2020/21.
- A consultation will be undertaken to reform the framework for pensions tax relief.
- From 2016/17 the amount that can be saved into a pension tax free will be reduced for incomes over £150,000.
- The pension input period is being aligned with the tax year, potentially creating an extra £40K annual allowance for 2015/16.
- Reduced pension tax-free lifetime allowance from £1.25m to £1m from April 2016.
- Non-UK domiciled individuals will be deemed UK domiciled after 15 years.
- The threshold for higher rate tax will increase to £43,000 from April 2016.
The budget delivered on the promise of inheritance tax (IHT) allowing couples to pass on their family home worth up to £1m. The amount that couples can pass on tax-free will rise from £650,000 to £1m, including a property allowance.
From April 2020, a personal residential property threshold of £175,000 per person (on top of the existing £325,000 tax-free allowance) will mean individuals can pass on assets worth up to £500,000, including a home, without paying any IHT at all. For married couples, the total is £1m.
This is in addition to the existing Inheritance Tax nil-rate band of £325,000, which will remain frozen until April 2021. The additional allowance will taper at a rate of £1 for every £2 for estates with a net value of more than £2 million.
The additional nil-rate band will only apply to transfers on death and will be transferable between married couples and civil partners to the extent that it is not used on first death. The additional nil-rate band will not be available to use in relation to assets other than the family or main home, nor is it available where the home is left to family members other than direct descendants.
The additional nil-rate band will also be available when an individual downsizes or ceases to own a home and assets of an equivalent value, up to the value of the additional nil rate band, are passed on death to direct family descendants.
These proposals are subject to further consultation later this year.
The government will consult on whether and how to undertake a wider reform of pensions tax relief, which the Chancellor announced could include treating pensions more like ISAs, with payments made from taxed income and benefits available tax-free.
The announcement of a fundamental review of the pension tax framework raises the prospect of radical reform to genuinely simplify the retirement saving framework. This consultation promises to reduce complexity, increase transparency, make the best use of available tax reliefs and aid retirement planning. The consultation closes on 30 September and we can expect the results in the following months.
Reduced Annual Allowance
Under the new rules announced in the Budget, the current £40,000 allowance that can be put into a pension tax-free will be reduced for those whose total income is above £150,000 in 2016/17.
In working out whether your income is above £150,000, you need to include the value of any pension contributions you make, any pension contributions made by your employer, and the increase in value of any final salary scheme over the tax year – called adjusted income.
For every £2 of adjusted income you have over £150,000, your annual allowance will be reduced by £1. The maximum reduction is £30,000, leaving an annual allowance of £10,000. So once your income is over £210,000, there is no further reduction.
If your taxable income after pension contributions and other reliefs is £110,000 or less, then these rules will not apply.
As the changes will not be implemented until 6 April 2016, there is a significant opportunity for high earners to maximise their pension contributions in the current tax year. The transitional pension input period this year is being aligned with the tax year, as a small step towards simplification which will potentially create an extra £40K annual allowance for 2015/16.
Legislation will also be introduced to align pension input periods with the tax year, as well as transitional rules to protect individuals who might otherwise be affected by the alignment of their pension input periods.
Reduced Lifetime Allowance
As expected, the amount that can be saved in a pension tax-free over the course of a lifetime is to be reduced from £1.25m to £1m from April 2016.
If your pension savings are more than £1m by that date, or you expect that what you have already saved will have grown to more than £1.25m by the time you take your pension, it is likely that you will be able to protect the funds you already have, as long as you do not put any more into the pension.
HM Revenue and Customs (HMRC) are expected to publish details of this shortly. Transitional protection similar to Fixed Protection and Individual Protection 2014 will be introduced alongside this reduction to ensure the change is not retrospective.
Secondary Market for Annuities
Following consultation, the government has decided to delay implementation of this measure until 2017, in order to ensure there is a robust package to support consumers in making their decision. It will set out further plans for introducing this measure in the autumn.
Dividend Tax Allowance
The Chancellor announced reforms to the taxation of dividends by replacing dividend tax credits with a dividend tax allowance of £5,000 and introducing new dividend tax rates, with effect from April 2016, of 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. Those who receive significant dividend income will pay more tax under the new rules.
From April 2017, individuals who are born in the UK to parents who are domiciled here will no longer be able to claim non-domicile status whilst they are resident in the UK.
In addition, permanent non-domiciled status will be abolished and replaced with a 15-year rule. Individuals who have been UK resident for more than 15 of the past 20 years will be deemed domicile for all tax purposes in the UK. For the avoidance of doubt, this means that they will become subject to UK tax on their worldwide income and gains on an arising basis and subject to UK Inheritance Tax on their worldwide assets. Excluded property trusts will continue to have the same Inheritance Tax treatment as at present, with the exception of UK residential property held within such a trust as outlined below. On departure from the UK, the deemed domicile status will be retained for five years.
It was also announced that UK residential property that is held by a non-domiciled individual will be assessed for UK Inheritance Tax on death, regardless of how that property is held. This means that properties held within trusts, corporate entities or other opaque structures will be subject to UK Inheritance Tax.
Further consultation has been announced and will be published towards the end of the summer. The resulting legislation will be effective from 6 April 2017.
The government will restrict to the basic rate of tax the relief on buy-to-let financing costs available to individual landlords. The restriction will be phased in over four years, starting from April 2017.
Increase in Insurance Premium Tax
There will be an increase in Insurance Premium Tax from the current 6% to a new rate of 9.5%, which will hike the cost of insurance from 1 November 2015. The increase will affect both individuals and companies. Where certain benefits are offered by employers, employees may incur an increase in the P11D value of their benefits.
There will be a four month concessionary period during which premiums received that relate to policies entered into before 1 November 2015 will continue to be liable to Insurance Premium Tax at 6%. From 1 March 2016, all premiums received by insurers will be taxed at the new rate of 9.5%, regardless of when the policy commenced.
Allowances and Rates
The Income Tax personal allowance will increase to £11,000 from April 2016 and the government committed to future increases to meet its manifesto pledge of attaining a personal allowance of £12,500. Subsequent increases will be linked to increases in the National Minimum Wage.
The threshold for higher rate tax will increase to £43,000 from April 2016, with a further manifesto pledge to raise this to £50,000.
The Chancellor announced a reduction in the rate of corporation tax to 19% from 1 April 2017, reducing to 18% by 2020.
VCTs and EISs
The government confirmed its previous announcement that companies investing in certain types of projects will no longer qualify for relief under VCTs and EISs, with the government confirming it will review the list of qualifying activities as and when required. There were also changes to the amounts that a company can raise and some technical restrictions. However, there were no changes to the overall rates of reliefs available for individual investors.
Overall, the Summer Budget emphasises the need for careful consideration of how to structure your assets in a tax-efficient manner, and the importance of ensuring you maximise the opportunities available. Timing can be critical, especially this year to make the most of pension allowances. In his speech the Chancellor made a point of confirming the government’s ongoing commitment to tackling tax avoidance and aggressive tax planning schemes.
If you have any questions about how this budget might affect your wealth or would simply like to review your current investments, please do get in touch.
This article does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections.