As suspected the Chancellor didn’t push ahead with the pension reforms, he did however introduce the Lifetime ISA and reduce the personal CGT tax rates. Read our summary of the details that may be relevant to you.
The tax-free personal allowance is being increased to £11,000 in 2016-17, and £11,500 in 2017-18.
For higher rate taxpayers, the government will also increase the threshold above which higher earners start paying 40% tax. It will increase to £43,000 in 2016-17, and to £45,000 in 2017-18.
The overall ISA subscription limit is being increased from £15,240 to £20,000 with effect from 6 April 2017. The Government has also announced a new Lifetime ISA for those aged between 18 and 40 which will become available from April 2017.
The Lifetime ISA is a new ISA and will sit alongside the Cash, Stocks and Shares and Innovative Finance ISAs. Qualifying investments in a Lifetime ISA will be the same as for a cash or stocks and shares ISA. The rules will in most ways be identical to opening a regular ISA and individuals will be able to open more than one Lifetime ISA during their lives but will only be able to pay into one Lifetime ISA in each tax year.
This new ISA will allow savers to contribute up to £4,000 each tax year (within the overall annual subscription) and receive a 25% bonus on those contributions from the government at the end of each tax year.
The bonus will be payable by the Government annually to allow for investors to benefit from the tax-free growth on the bonus from the time it is added. The bonus will be limited to £1,000 maximum each year but will only apply until the investor attains age 50.
Investors can choose to withdraw their funds to purchase their first home or to retain their investment until age 60 for retirement.
The Lifetime ISA will interact with the Help to Buy ISA and during 2017-18 only, additional transfers may be made and matched from the Help to Buy: ISA. Going forward if you have both types of ISA you cannot use the Government bonus from both accounts to put towards your first house purchase.
The Government is going to explore with the industry whether there should be the flexibility to borrow funds from the Lifetime ISA without incurring a charge if the borrowed funds are fully repaid. In the US for example, some retirement plans allow 50% to be borrowed up to a maximum of $50,000.
Legislation for the Lifetime ISA is expected in the autumn following engagement with the industry.
ISA tax advantages during the administration of a deceased’s estate:
The government has confirmed that they will legislate to allow the ISA savings of a deceased person to continue to benefit from tax advantages during the administration of their estate. Further plans will follow technical consultation with ISA providers. (Finance Bill 2016)
Automatic deduction of savings income tax:
The government has announced its intention to change the tax rules so that interest from Open-Ended Investment Companies, authorized unit trusts, investment trust companies and peer-to-peer loans may be paid without deduction of income tax from April 2017. (Finance Bill 2017)
Capital Gains Tax (CGT)
CGT rates will reduce from 18% to 10% (basic rate) and 28% to 20% (higher rate) for chargeable gains, except those made in relation to chargeable gains accruing on the disposal of residential property (that do not qualify for private residence relief), and receipt of carried interest.
Provisions will also make clear that a residential property interest includes an interest in land that has, at any time in the person’s ownership, consisted of or included a dwelling, and an interest in land subsisting under a contract for an off-plan purchase. Rules will set out how gains should be calculated in the case of mixed use properties.
Trustee rate of CGT will also be reduced to 20% unless the gain is from residential property.
There is no change to the 10% rate available for gains qualifying for Entrepreneurs’ Relief.
CGT – Lifetime limit on Employee Shareholder Status exemption
Lifetime limit of £100,000 on CGT exempt gains that a person can make on the disposal of shares acquired under Employee Shareholder Agreements entered into after 16 March 2016. Gains made in excess of the lifetime limit will be chargeable to CGT.
For transfers between spouses or civil partners, the transfer will be treated as being for consideration, therefore the gain will count against the transferor’s unused lifetime limit.
Although the rate of tax is remaining unchanged, a number of changes in relation to the definition of qualifying gain will be introduced. At a high level these are:
long term investors – external investors in unlisted trading companies will be eligible if held for 3 years+ i.e. no longer need to be employed by the company
treatment of joint ventures and partnerships – new definitions applying to individuals and trustees who realise gains on shares in a company which invests in a joint venture company
goodwill on incorporation – to allow Entrepreneurs’ Relief to be claimed in respect of gains on the goodwill of a business
associated disposals – allows Entrepreneurs’ Relief to be claimed on an ‘associated disposal’ of a privately-held asset when the accompanying disposal of business assets is to a family member
Lifetime Allowance to reduce from £1,250,000 to £1,000,000
A member of a registered pension scheme can currently crystallise up to a value of £1,250,000 (Lifetime Allowance) and not be subject to any additional tax charges. Usually, 25% of the payment can be taken tax-free with the balance taxable as income. This limit for the Lifetime Allowance will reduce to £1,000,000 in 2016/17.
The Lifetime Allowance is currently scheduled to begin to rise in line with the consumers prices index (CPI) from 06/04/2018
Fixed Protection 2016 and Individual Protection 2016
As applied in previous tax years when the Lifetime Allowance was reduced, the government is introducing new forms of protection for those close to the current Lifetime Allowance.
There will be two new forms of protection:
Individual Protection 2016
Fixed Protection 2016
Tapered annual allowance
For anyone who has not triggered the money purchase annual allowance, the standard annual allowance will be £40,000.
However, for higher earners, the annual allowance will be reduced if a member’s threshold income is above £110,000 and their adjusted income is above £150,000.
The annual allowance reduction is £1 for every £2 that the adjusted income exceeds £150,000, subject to a maximum reduction of £30,000, i.e. an annual allowance of £10,000.
If a client has any unused annual allowance from any of the previous three tax years, this can also be carried forward.
Changes to death benefit taxation
If a member of a registered pension scheme (RPS) dies:
a) on, or after, their 75th birthday; and
b) the death benefit is not paid to a UK charity within two years of the date that the scheme administrator became aware of the member’s death, any payment to a ‘qualifying person’ (i.e. an individual in their own capacity) would be taxed at the recipient’s marginal income tax rate(s) using the pay as you earn (PAYE) system.
Pensions tax relief
No change to the existing pension tax relief system announced, but we don’t think further reform is off the table permanently. A new Lifetime ISA has been announced but does not seem to impact the current pension’s tax regime. However, it may lead to younger individuals without a mortgage opting out of their automatic enrolment scheme in favour of saving for their first property.
The Government confirmed that income tax and National Insurance Contribution relief provided through salary sacrifice will continue for pension savings and other benefits, for example childcare and health-related benefits. However, it may restrict the range of other benefits that can be provided through salary sacrifice arrangements. This is a sensible approach and is good news for working families and pension savers.
Serious ill-health lump sum (SIHLS) taxation
The Government will alter the tax treatment of a SIHLS to bring it into line with the way that lump sum death benefits are taxed. This means a SIHLS will be tax-free when someone aged under 75 has less than a year to live but has already accessed their pension. A SIHLS will be taxable at the member’s marginal income tax rate(s) if the member is aged at least 75.
Corporation tax will be reduced to 17% in 2020.
Stamp duty land tax changes – additional residential properties
Following consultation, the following changes will apply.
The specified timescale will increase from 18 months to 36 months
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.
A small share (50% or less) in a single property which has been inherited within 36 months prior to the transaction will not be considered an additional property.
Stamp duty land tax changes – commercial properties
From 17 March 2016 the rates will apply to the value of property over each tax band. The new rates and tax bands will be 0% for the portion of the transaction up to £150,000; 2% between £150,001 and £250,000 and 5% above £250,000.
Non Domicile Taxation
It was announced in 2015 that Non-UK domicile taxation will be changing. In summary:
An individual will be deemed UK domicile for tax purposes after they are resident for 15 of the past 20 tax years; and
Individuals who were born in the UK and have a UK domicile of origin will revert to UK domiciled status for tax purposes whilst they are resident in the UK.
No additional announcements were made in this Budget. Legislation for these changes will be introduced in 2017 and include charges to UK Inheritance tax on UK residential property held, from April 2017, in an offshore structure such as a trust.
Tax avoidance and tax evasion
The Government will issue a number of consultations in the summer of 2017 which propose introducing the principle that the issuance of licenses and access to services be conditional on being registered for tax in the UK.
Additionally, a new legal requirement will be introduced in 2017 to correct past offshore non-compliance. Tough sanctions will be introduced for those who do not make such correction.