Jonathan provides an insight into the forthcoming UK tax changes
Against the backdrop of a former Shadow Chancellor enjoying unexpected national popularity as a result of his efforts on Strictly Come Dancing, Philip Hammond delivered his first (and last) Autumn Statement on 23rd November.
The Statement did not create many surprises; even the announcement that the Autumn Statement would cease in its current form had been well reported in advance.
The Chancellor’s statement also included forecasts on the future of the UK’s prosperity over the next few years, principally a forecast from the Office of Budget Responsibility (OBR). In that sense, the new Chancellor and former Shadow Chancellor’s challenges became similar: how to remain popular with the public whilst receiving potentially negative comments from experts.
Despite the ongoing speculation about its demise in its current form, pension tax relief had yet another reprieve. The motivation behind offering this form of relief is to encourage private savings, and consequently reduce the future burden on the State. The reported cost to the Exchequer in the last tax year alone was approximately £48 billion.
Although it is good news that auto-enrolment has led to more people making provisions for retirement, with a corresponding increase in the amount of tax relief being claimed, around two-thirds of the relief still went to higher and additional-rate taxpayers. It could be argued that this does not accord with the Prime Minister’s vision for opportunities in the UK to be shared more equally, as the majority of those claiming relief are, in theory at least, able to save anyway. With much of the Statement focused on the UK economy, in particular the prospect of lower growth and higher borrowing in the short term, the big question is how long is this valuable benefit, and large expense to the Exchequer, going to prevail?
We now know that there will be an Autumn Budget and a Spring Statement, however it was also announced there will be two Budgets in 2017, and Mr Hammond has confirmed that these will be the medium through which he will announce tax changes, normally, once every year.
As a result, we would therefore encourage you to review your recent contributions for this, as well as the previous three tax years, and consider making a contribution before the Spring Budget to avoid missing an opportunity to claim relief at the current rates.
Staying with pensions, a potentially important pension-related deadline will be reached on the 5th April 2017; this is the last date that an application for Individual Protection 2014 can be made.
A successful application gives individuals a protected Lifetime Allowance (LTA) equal to the value of their pension savings on 5th April 2014, subject to an overall maximum of £1.5 million. Importantly, and unlike the various forms of Fixed Protection, if you have continued to contribute to pensions in the tax years after 2013/14, you can still apply.
With the prevailing LTA now reduced to £1 million, this could result in a potential tax saving of as much as £125,000.
There has been considerable discussion in the media about the current policy of the UK’s central bank. Most people agree that borrowers, and not savers, are most definitely the beneficiaries of the continuing low interest rates. To offer some, albeit negligible, help to savers, the government will issue a new savings bond through NS&I next April. The limit will be £3,000 per person, and the indicative rate will be 2.2% gross per annum over the three year term. Whilst it may not be life changing, if you intend to hold cash on deposit, boosting your returns by any margin is a sensible thing to do.
The Statement also confirmed that, as previously announced, the annual Individual Savings Account (ISA) allowance will increase to £20,000 from 6th April 2017, and if you are funding Junior ISAs for your children or grandchildren the amount you can contribute will increase to £4,128 for 2017/18.
The industry seems undecided on whether the Lifetime ISA is a necessary addition to the available savings products, concerned that it may mean people are worse off in the long term. The Chancellor however dismissed media speculation that the government would delay the launch.
From April 2017 the Lifetime ISA will be available for those aged between 18 and 40, to help them save for a home or retirement. The government will provide a 25% bonus on up to £4,000 of savings (a maximum of £1,000 per year). The bonus is only retained on withdrawal if the proceeds are used to purchase a first home that will be a main residence, or after the age of 60. We expect this to be very popular.
The increase in the Personal Allowance to £11,500 from 6th April 2017 is good news for anyone with income under £100,000, but for those earning a higher amount this results in an extension to the ‘60% band’ of Income Tax. Pension contributions and charitable donations are just some of the ways to reclaim lost Personal Allowance.
The dividend allowance and personal savings allowance, £5,000 and up to £1,000 respectively, will, from the next tax year be joined by two new allowances; a £1,000 trading income allowance and a £1,000 property income allowance. These are aimed at people letting out property or selling goods and services via, for example, ‘sharing economy’ websites.
The capital gains tax allowance, or annual exemption, for the current tax year remains the same as it was for 2015/16, and the Chancellor made no mention of an increase for 2017/18. This means that the amount of gains that can be made before an individual is taxed on the profit from selling an asset, will remain at £11,100.
The inheritance tax nil rate band is currently frozen at £325,000 until 2021. From April 2017 this allowance will be supplemented by a Residence Nil Rate Band (RNRB), which provides a further tax-free allowance where the family home is passed on death to a direct descendant. This RNRB will also be transferrable from one spouse or civil partner to the survivor, and is scheduled to increase to £175,000 by 6th April 2020.
The Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) tax reliefs were introduced in 1994 to encourage private investment in small unquoted companies, either by buying shares in EIS qualifying companies or indirectly through a VCT.
The government maintains a list of excluded activities as it wants to focus relief where it is needed, so if it is determined that a company could raise finance without the need for an incentive, the trade being carried out by the firm might also be excluded. We have seen this happen in recent times for businesses involved in renewable energy which heavily utilised these schemes to grow the sector.
Given that many people have now reduced or stopped pension savings, these instruments offer an opportunity to obtain, amongst other tax benefits, relief on annual savings.*
*Please note that investing into EIS qualifying companies is high risk and is not suitable for everyone. Professional advice should always be sought to ensure you understand all of the risks before you invest. EIS shares are investments in small companies that are generally not publicly traded or freely marketable and therefore may be less liquid (take longer to buy or sell).
In the last edition of dialogue we provided a summary of the main changes to non-dom taxation that had been proposed by the government. Draft legislation was published on the 5th December 2016 setting out more detail and, as anticipated, many of the proposals will be implemented as originally announced.
There are some changes which were no doubt influenced by comments from industry during the consultation process. Of significant note is the extension from one to two years of the window within which non-doms can rearrange their offshore portfolios, to separate the original capital from any income and gains. This may not be a straightforward task, and being granted more time to complete the exercise should be viewed as good news.
The draft legislation offered clarity around the tax treatment of non-UK resident trusts, and how HMRC will deal with individuals returning to the UK having formerly been a UK domicile. There were also more details on the expansion of Business Investment Relief (BIR) which is also a positive move in relation to encouraging investment into the UK.
What is abundantly clear is that tax advice will be needed by anybody who is, or who believes they may be, affected by the new rules. We would therefore strongly urge you to seek appropriate professional advice as soon as possible, and not to wait until the end of the tax year when it is highly likely that advisers will be inundated with enquiries.
Many of our clients use investment bonds as a tax-efficient way to hold some of their assets.
The government recognises that large and unintended tax bills can materialise by virtue of the mechanics of making withdrawals not always being fully understood.
Therefore legislation will be introduced in the Finance Bill 2017 to allow policyholders to apply to HMRC to have a disproportionate charge recalculated on a ‘just and reasonable’ basis.
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