George Osborne presented his eighth Budget on 16th March, when UK headlines were being dominated by other issues, principally the EU referendum, the US Presidential campaign and worries over the slowing world economy. This changed dramatically, however, when the Work and Pensions Secretary resigned from the government following cuts to disability benefits.
The chancellor has set himself a target of running a budget surplus by 2019/20, and whilst the UK economy appeared to be growing steadily, economic forecasts have become less optimistic. Against this backdrop, achieving the surplus will require cuts to previous expenditure plans.
Mr Osborne may have considered saving money by abolishing higher rate pension tax relief. Whilst pre-Budget rumours focused on this, in the end, tax relief on pensions remains unchanged. Savers were, however, encouraged with an ISA allowance increase and further incentives, such as a new Lifetime ISA.
There was a surprising reduction in the rate of capital gains tax. This rate reduction will not apply to capital gains on residential properties, which will inevitably disappoint property investors.
Encouraging business remains a key priority for the chancellor as he announced another reduction to corporation tax. Companies will now pay a corporation tax rate of only 17% with effect from 1st April 2020.
In terms of the proposed tax changes, this Budget is unlikely to be remembered as a headline event. Compared to the Budgets of March 2014 and July 2015, there were no revolutionary changes. In this Budget summary, we will look at the main aspects of personal taxation and highlight planning opportunities.
Summary of the personal taxation changes:
There were no changes to the previously announced income tax rates and personal allowances for 2016/17. The higher rate tax threshold will increase to £45,000 from 2017/18, which will keep a significant number of people out of the 40% income tax band.
The new basis for taxing dividends came into effect on 6th April and we expect many investors to utilise the annual £5,000 taxfree dividend allowance. This can be achieved by building up equity portfolios and also by structuring portfolios between married couples, so that both spouses use the taxfree dividend allowance.
One of the more difficult aspects of the current tax system is the abatement of the personal allowance when total income exceeds £100,000 per annum. This rule creates an effective 60% tax band on £22,000 of annual income above £100,000. In effect, the higher the personal allowance (£11,000 in 2016/17), the wider the band on which an effective rate of 60% applies.
Currently, pension contributions and charitable donations may both be used to provide relief against the 60% tax rate.
Some people may have considered the CGT rate of 28% was vulnerable to increase, but Mr Osborne decided lower CGT rates of 20% for higher rate taxpayers and 10% for basic rate taxpayers would be more effective. The rates are not being reduced, however, for capital gains on residential properties (in situations where principal private residence relief does not apply).
Outside of property transactions, the lower CGT rate could persuade people to realise gains on investments. With this in mind, a reduced rate could raise tax levels. It could also free up resources for other types of planning such as:
A number of individuals are reluctant to restructure their assets, either for investment purposes or for inheritance tax (IHT) planning, due to CGT. Although CGT will clearly still be a factor, a 20% tax rate on gains could encourage more people to try and save 40% IHT on the total value of the asset.
Beneficiaries of offshore trusts are often taxed at an increased rate on capital gains made by the trust. The new CGT rate of 20% will introduce a new ‘stockpiled’ gains rate of up to 32%. Beneficiaries who wish to receive more funds may now decide that paying the tax charge of up to 32% makes sense.
If we consider that the tax rate on stockpiled gains has been in the range of 28.8% to 64%, a tax rate of 32% on historic gains in offshore trusts does not look unfavourable. There may however, be other issues for tax advisers to consider which will vary from family to family.
We are also awaiting the outcome of a consultation which may affect the tax rate on distributions from offshore trusts from 2017.
Apart from providing 30% income tax relief, the Enterprise Investment Scheme (EIS) offers the opportunity to defer the taxation of capital gains. As there is the ability to defer those gains which were realised in the three-year period before an EIS investment is made, it is possible to defer gains on which 28% CGT is due (or has already been paid). The new lower CGT rate would then apply to the deferred gain on the disposal of the EIS investment.
Those who have already made EIS investments should therefore consider whether to make a CGT deferral claim if they have not done so already. Those considering a new EIS investment may still be in a position to achieve a CGT saving if they have already realised capital gains.
This effect could increase the popularity of EIS investing, although this is clearly just one of the many points to consider when considering a high-risk investment.
There were no changes to the main principles of the current IHT regime. The seven-year rule for gifts is still in place and the system of providing IHT relief on certain types of assets, such as agricultural land or business property, did not change.
After intense speculation on the abolition of higher rate pension tax relief in the run-up to the Budget, the chancellor decided on a pragmatic approach resulting in no major changes to tax relief on pension contributions. We should, however, remember that some very important changes are already in place; the lifetime allowance has now reduced to £1 million with effect from 6th April and the annual allowance for those with annual income in excess of £150,000 also reduced from 2016/17 onwards.
Those affected by these changes will need to plan their pension savings carefully.
One of the problems we encounter when reviewing pension tax relief is the estimated ‘cost’. Given the changes already in place, it is likely that many high earners will be reducing their pension savings (on account of the reduced annual allowance) or ceasing pension saving altogether (on account of the reduction in the lifetime allowance). This effect will have a significant bearing on the overall cost analysis of higher rate pension relief.
It should also be remembered that pensions are primarily tax deferral arrangements. Tax relief is provided at the outset but usually 75% of the fund is taken out as taxable income post-retirement.
We welcome the pragmatic approach to pensions. The pensions industry has had to deal with a significant amount of legislative change in recent years and would have struggled to implement another ‘pension revolution’.
It was suggested that the chancellor would seek to address the cost of upfront pension tax relief by creating pension ISAs. In the end, he decided to introduce a new form of ISA – the Lifetime ISA for those aged between 18 and 40. He also increased the annual ISA savings allowance.
Lifetime ISAs
Individuals will be able to save up to £4,000 per year into a Lifetime ISA which will then receive a 25% bonus from the government. The Lifetime ISA will be available from 6th April 2017 and will be limited to investors aged from 18 to 40. It will have two primary aims:
- To help people save for their first home
- To build savings which can be withdrawn from the age of 60
If funds are taken out for other purposes, the government bonus is lost and an additional 5% charge will be applied.
Increasing the ISA allowance
The overall annual ISA allowance will increase to £20,000 per annum from April 2017. This represents around a 31% increase in the current annual allowance of £15,240 and is clearly very positive news for savers.
In his 2015 Summer Budget, the chancellor confirmed that new tax rules will apply to longterm non-domiciled individuals. Essentially, individuals who have been a tax resident for 15 out of the preceding 20 tax years will become ‘deemed domiciled’ for all taxes from 6th April 2017.
Although further details are required, Mr Osborne announced that offshore assets held by nondomiciled individuals will be rebased to market value on 6th April 2017. We will need to understand the full implications of this announcement.
The new rules for offshore trusts are being considered in a consultation process which is still ongoing.
There was good news for companies as from 2020 the corporation tax rate will be reduced to 17% – more quickly than planned. It is hoped that this will boost investment into the UK and will also be good news to business owners whose tax bill on their dividend income will be increasing next year.
Statements concerning taxation are based on our understanding of the taxation law in force at the time of publication. The levels and basis of, and reliefs from, taxation may change. Readers should seek professional advice for their individual circumstances.
