Choosing to put the next generation first
The Chancellor George Osborne’s eighth Budget statement was positioned as a Budget that chooses to ‘put the next generation first’. While arguably not as significant as most others which he had delivered, it did contain some surprising developments.
- A change to the Capital Gains Tax rates for both basic and higher-rate taxpayers
- The introduction of a Lifetime ISA
- Continued focus on curtailing tax evasion and avoidance
- No significant changes to the pensions system
The Chancellor announced a surprise cut in Capital Gains Tax (CGT) from 6 April 2016, hoping it will help to boost enterprise and encourage investment in companies rather than property. Rates will reduce from 28% to 20% for higher rate taxpayers, and from 18% to 10% at the basic rate, with the exception of gains on residential property and carried interest, which will remain at previous levels.
To try and encourage a strong investment culture, the government has also extended Entrepreneur’s Relief (ER) to long-term external investors in unlisted companies. For higher-rate taxpayers, CGT will therefore reduce to 10%, subject to a lifetime limit of £10m of gains (separate to the current ER lifetime limit). To qualify, newly issued shares must be purchased on or after 17 March 2016 and be held for a minimum of three years from 6 April 2016.
The government also intends to review the definition of a trading company for ER purposes. No changes were made to Principal Residence Relief which continues to ensure an individual’s main home is not subject to CGT.
The Chancellor is introducing a new Lifetime ISA that can be used to save flexibly towards retirement or to buy a first property.
The accounts will be available from April 2017, with a maximum permitted annual contribution of £4,000 per year. Accounts can be opened by anyone aged between 18 and 40, with savings added prior to a taxpayer’s 50th birthday attracting a 25% bonus from the government. This means that people who save the maximum amount will receive a £1,000 bonus each year.
The amount saved will count towards the overall annual ISA limit. This will be increased from £15,240 to £20,000 from April 2017.
After a taxpayer’s 60th birthday, accumulated funds can be withdrawn tax-free. Funds withdrawn prior to age 60 and used to purchase your first home in the UK worth up to £450,000 will benefit from the government bonus (this will not include buy-to-let properties). Alternatively, funds can be used for other purposes but the bonus (and any interest or growth on this) will be clawed back and a 5% charge will be levied.
Taxpayers with an existing Help to Buy ISA will be able to continue to make contributions to it until 2029 and use funds from both this and the Lifetime ISA to buy their first home. However, while both ISAs attract bonuses, only the government bonus from one of the accounts can be used. Which bonus is used, and which remains, will determine the treatment of the ‘unused’ bonus, which can take numerous options. For a limited period, there will be an option to transfer funds in a Help to Buy ISA into a Lifetime ISA.
The new ISA inheritance tax treatment will also apply to Lifetime ISAs. On the death of the account holder, their spouse or civil partner will be able to invest as much into their ISA as the account holder used to have, on top of their own allowance. Exceptions will also apply where people are diagnosed with terminal ill health.
Following a period of consultation, the final legislation is expected in Autumn 2016.
The Chancellor reaffirmed his intention to raise the personal allowance to £12,500 and the higher-rate threshold to £50,000 by the end of this Parliament. In line with this, the personal allowance for 2017-18 will increase to £11,500 and the higher-rate threshold to £45,000.
This was announced as the biggest above-inflation cash increase to the threshold since its introduction in 1989 and reverses the trend that has seen an increasing number of individuals paying tax at the higher rate.
The Chancellor followed earlier announcements from the Autumn Statement 2015 stating that the government will take action to ensure those that have used disguised remuneration tax avoidance schemes pay their fair share of tax and National Insurance Contributions (NICs). There are many types of disguised remuneration schemes and most seek to pay an individual in the form of a loan that is not subject to Income Tax or NICs. Historically Employee Benefit Trusts (EBT) had been a popular vehicle for this, with more recent use of Employer Financed Retirement Benefit Schemes (EFRBS).
HMRC’s view is broadly that these schemes do not work and is pursuing unpaid tax and NIC liabilities through the courts. In addition, a new Income Tax charge will be introduced on all loans from disguised remuneration schemes that remain outstanding as at 5 April 2019.
Termination payments in excess of £30,000 are currently subject to Income Tax. The Chancellor announced that from 2018, payments in excess of £30,000 will also be subject to employer NIC’s.
A key announcement, although not resulting in a change to the regime, was that the pension commencement lump sum will continue to exist. A number of other pension-led issues were covered in the supporting Budget documents including amongst others:
- A consultation was announced on the introduction of a Pensions Advice Allowance, allowing individuals under age 55 to withdraw up to £500 tax free from their defined contribution scheme to pay for financial advice.
- Broader proposals to salary sacrifice arrangements. However, the Budget confirmed that the government intends that pensions will continue to benefit from such arrangements.
- The government will ensure that the pension industry designs, funds and launches a ‘Pensions Dashboard’ by 2019. The Pensions Dashboard will be a digital interface where an individual can view all their retirement savings in one place.
- Lump sum death benefits can now be paid to a charity tax-free if the death occurs under the age of 75, in line with other lump sum death benefits, from Royal Assent of Finance Bill.
A reduction in the Corporation Tax rate to 19% in 2017 and 18% in 2020 had previously been announced but the Chancellor went further today and confirmed that the rate will now fall to 17% in 2020 in a drive to encourage growth and support business.
The government will also cap the amount of relief for interest to 30% of taxable earnings in the UK or based on net interest-to-earnings ratio of the worldwide group. This is subject to a £2 m threshold for net UK interest expense.
Today’s Budget has changed the rules for calculating stamp duty land tax (SDLT) charged on purchases of non-residential properties and transactions involving a mix of residential and non-residential property.
Before 17 March SDLT was charged at a single percentage of the price paid, depending on the rate band within which the purchase price fell.
On and after 17 March the SDLT will be based on the portion of the purchase price that falls within each rate band, as it does now for residential property. The new rates and thresholds for freehold purchases are:
- 0% for transactions falling between £0 and £150,000;
- 2% for transactions falling between £150,001 and £250,000; and
- 5% for transactions of more than £250,000.
Where contracts have been exchanged but transactions have not been completed before 17 March, purchasers will have a choice of whether the old or new structure and rates apply.
The government will legislate in Finance Bill 2016 to ensure offshore structures cannot be used to avoid UK tax on profits that are generated from the development of UK property.
From April 2017, the government will introduce new £1,000 allowances for both property income and trading income. Individuals with property income or trading income below £1,000 will no longer need to declare or pay tax on that income. Those with income above the allowance will be able to calculate their taxable profit either by deducting their expenses in the normal way or by simply deducting the relevant allowance. This is intended to take many of the increasing number of micro-entrepreneurs generating low-level income from sites such as eBay or Airbnb out of the current tax rules, which can seem daunting and complex.
The standard rate of IPT will increase from 9.5% to 10% with effect from 1 October 2016.
In the Summer Budget 2015, the government announced a number of changes to the taxation of individuals who are not domiciled in the UK. These are due to come into force on 6 April 2017. The government has announced that these reforms will be legislated in the Finance Bill 2017. However, there are a number of clarifications that were announced as part of the 2016 Budget. These relate to the proposal that non-UK domiciled individuals will be deemed UK domiciled for all tax purposes (i.e. income tax, capital gains tax and inheritance tax) after they have been UK resident for 15 of the past 20 tax years.
The points confirmed were as follows:
- Non-doms who have a non-UK resident trust set up before becoming deemed domiciled in the UK will not be taxed on income and gains retained in the trust.
- Non-doms who become deemed domiciled in the UK in April 2017 can treat the cost base of their non-UK based assets as being the market value of those assets on 6 April 2017.
- There will be transitional rules for those who become deemed domiciled on 6 April 2017 to provide certainty as to the tax treatment of amounts remitted to the UK.
As had been announced previously, the following changes will take effect from April 2016:
- The notional dividend tax credit will be abolished and a new £5,000 tax-free dividend allowance will be introduced. The new tax rates on dividend income in excess of the allowance will be 7.5% (basic rate), 32.5% (higher rate) and 38.1% (additional rate).
- A personal savings allowance comes into effect that effectively exempts the first £1,000 of a basic-rate taxpayer’s savings income from tax each year. The allowance reduces to £500 for higher-rate taxpayers and is not available for additional-rate taxpayers.
- The wear and tear property allowance will be replaced with a new relief that allows residential landlords to deduct the actual costs of replacing furnishings.
- Farmers will have the choice of averaging their profits for income tax purposes over two or five years.
The government highlighted its intention to consult on a number of different issues, including:
- Life insurance taxation – the current tax rules for part surrenders and part assignments of life policies will change to prevent excessive tax charges from arising on these products.
- Partnership taxation – this will focus on how partnerships calculate their tax liabilities and will include a number of areas where the taxation of partnerships could be seen as uncertain.
The information in this document is believed to be correct but cannot be guaranteed. Opinions and forecasts constitute our judgment as at the date of issue and are subject to change without notice. You should not rely upon any tax information provided here for your personal tax planning purposes as it may not apply to your specific circumstances. It is strongly recommended that you seek your own independent tax advice before contemplating any transaction. Tax reliefs and other matters referred to are those available under current or proposed legislation, which may change, and their availability and value will depend on your individual circumstances.
The analysis contained in this document has been procured, and may have been acted upon, by Adam & Company Investment Management Limited and connected companies for their own purposes, and the results are being made available to you on this understanding. To the extent permitted by law and without being inconsistent with any applicable regulation, neither Adam & Company Investment Management Limited nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such analysis.