The income tax threshold changes are largely as expected – in 2016/17 a basic rate taxpayer will be better off by £80. Higher rate taxpayers will be better off by £203.
These increases are part of government pledges to raise the personal allowance to £12,500 and the higher rate threshold to £50,000 by 2020.
The increase in the Inheritance tax (IHT) allowance potentially to allow a married couple to pass on a £1m home tax-free on second death had been widely anticipated.
We are concerned that the new IHT rules will favour property over other types of investment, fuelling an already over-heated property market in many parts of the UK. Also, the IHT change is not a simple increase in the Nil Rate Band, so may not be well understood and the ability to retain an IHT advantage by downsizing adds additional complexity.
But not everyone will benefit from the additional IHT free allowance. Anyone with a net estate over £2m will begin to see their property nil rate band reduced until it is completely lost once the estate is over £2.2m (2017/18) £2.25m (2018/19), £2.3m (2019/20) or £2.35m (2020/21).
It will only apply to transfers to children and grandchildren. Meaning those without children will miss out. And it is not possible to use the exemption for lifetime transfers which may discourage some clients from passing on their wealth during their lifetime.
Clients who could benefit from the property Nil Rate Band may need to revisit their existing wills to ensure they continue to reflect their wishes and remain as tax efficient as possible.
The dividend tax changes are one of the most eye-catching announcements and radically change how dividends are taxed. The change should benefit basic rate taxpayers.
This means that from April 2016, a basic rate taxpayer could potentially have tax-free income of up to £17,000 pa when added to the personal allowance of £11,000 and the new ‘personal savings allowance’ announced in the Spring Budget of £1,000. Higher rate taxpayers could have up to £16,500 (as the personal savings allowance is restricted to £500 for these individuals).
Certain individuals may also have savings income falling into the £5,000 savings rate ‘band’, currently taxed at 0%. There is no mention of any change to this band, in which case certain individuals may have tax free income of up to £22,000, depending on the sources of their income.
Higher rate taxpayers will be hard hit by the restriction on tax relief on mortgage interest on buy-to-let properties.
We welcome the continuation of the triple lock protection on State pensions and no change to pension salary sacrifice arrangements. It is also good news that plans to allow pensioners to sell annuities are being delayed to allow proper consideration of the issues.
We are concerned that more tinkering with pensions is likely as a result of another Green Paper on pensions. Whilst ISAs are well understood, pensions have in recent years been a political football. What is now needed is a period of stability with regard to pension legislation, so individuals can have confidence that pensions are the right vehicle for long-term retirement savings.
The alignment of Pension Input Periods with tax years from April 2016 creates an opportunity for some clients with sufficient earnings to make use of transitional arrangements to make use of two £40k Annual Allowances in 2015/16.
High earners with adjusted income over £150k will have their Annual Allowance cut from 2016/17 to £10,000 so there is an opportunity for pension funding this tax year.
The reduction in the Lifetime Allowance to £1m from April 2016 will need careful consideration in pension planning to avoid a possible future recovery tax charge. Transitional protection is expected for those with pension funds between £1m and £1.25m.
Please note, this article is for information only and does not constitute investment or tax advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise; pension rules and tax legislation are subject to change; we do not give tax advice. If you would like investment or pension advice on your individual circumstances, please do not hesitate to get in touch on 01392 875500 or info@SeabrookClark.co.uk