Budget Summary

With only 50 days to go before the general election the budget delivered few surprises and a steady as she goes approach. There was little which was not consistent with the established direction of travel. We give below our summary of the key points likely to be of interest to clients 

Increased personal tax rates

The personal allowance will increase as follows:

£10,800 for 2016/17 

£11,000 for 2017/18

Also as a welcome counterbalance to the fiscal drag of recent years the basic rate threshold (i.e. the level of income at which higher rate taxes kick in) is also increasing– as follows:

£31,900 for 2016/17 

£32,300 for 2017/18

Good news for savers in that from April 2016 there will be a new tax-free personal savings allowance of £1,000 (or £500 for higher rate taxpayers). Any income received over and above the limit will be taxable in the usual way after the £1,000 (or £500) has been deducted.

Finally, the £2.75 weekly Class 2 NIC payable by self employed individuals or partners who earn in excess of £5,885 will be abolished in the next Parliament. This is good news from an administration perspective – the cost to collect this tax must have been out of proportion to the amounts raised – but we are as yet unaware as to whether this may result in a compensating increase to Class 4 NI 

Pensions – more reforms announced

It’s not an overstatement to say that in the last Budget George Osborne launched a pensions revolution, giving people with pension savings far greater freedom. However people who already had annuities did not benefit from these changes. To address this from April 2016 the government plans to free up the rules on annuities so that these can be sold to third parties in exchange for a capital sum, i.e. a reversal of the annuity process. If the money is then drawn down it will be subject to income tax at the individual’s marginal tax, rather than the current punitive 55% charge. The annuity has to be held personally (i.e. occupational schemes are excluded).  

There are no more changes to the annual allowance which remains at £40,000 pa, and individuals can still obtain income tax relief at their highest marginal rate for contributions. The opposition has indicated that they intend to restrict tax relief to basic rate if they get elected.

The Lifetime Allowance (the maximum size of pension pot which an individual can have) however has been restricted once again to £1 million after 5 April 2016 from its current level of £1.25 million.

Osborne’s recent reforms mean pensions can now be used as a tax-privileged “piggybank” with the ability for individuals over 55 to draw down all the monies in the scheme if they wish (25% tax-free lump sum, with the remainder taxed as income at the individual’s marginal rate). Changes to the post 75 and death position also open the way to family pension pot thinking which is very exciting. The price which has been paid is the significant reduction in the amount individuals can put into their pension in any year and in their lifetime which will impact very high earners and those with generous final salary schemes (which now basically means those who work for the government and the NHS).

ISAs – two exciting new changes!

A new “help-to-buy ISA” will see the Government add 25% when first-time-buyers put away savings towards a deposit on a house, for the next 4 years starting this Autumn. There is no minimum monthly amount to be saved  – but a maximum of £200 per month applies. The government ‘bonus’ is capped at £3,000 and is received when the house is purchased. The accounts are limited to one per person – meaning couples can double up. The relief applies to homes costing up to £250,000 (or £450,000 in London).

Also new rules will be introduced to give freedom to withdraw and replace ISA money in a tax year, without it counting toward the annual ISA subscription limit for that year, as long as repayment is made in the same tax year as the withdrawal. In the past, money taken out of an ISA lost its tax free status.  This is a small but welcome change.

Entrepreneurs’ Relief

There were no major changes to fundaments here basically there is still a lifetime allowance of up to £10M of qualifying gains taxed at a low 10% rate.  The changes announced will affect only a few individuals.

However with immediate effect ER will no longer be available on shares in a company that is not a trading company or holding company of a trading group in its own right. Up until now it was possible to set up a holding company for management to benefit from ER where they would not otherwise meet the 5% shareholding requirement. 

Up until now it has been fairly easy to benefit from ER in respect of personally held assets (usually buildings) used by a company which would qualify for ER. The rules required a ‘withdrawal from the business’ but there was no defined limit for this. As of today the ‘withdrawal’ needs to comprise a disposal of at least 5% of the shares or a 5% share of partnership assets.  Still in the case of most family businesses this should still be achievable.

Annual Investment Allowance - watch this space

The Annual Investment Allowance provides a 100% First Year Allowance for businesses in respect of investment in qualifying plant and machinery. The limit is currently set at a record high of £500,000, but had been set to reduce to £25,000 from 1 January 2016. The Chancellor has now said that the limit will not fall by that much, although he has yet to announce the actual figure.

Whilst this is good news, clarity is needed as soon as possible. Large capital projects do not happen overnight and when limits do change there are some nasty capping rules which come into play. As the AIA is likely to decrease businesses which want to take advantage of the current high limits should consider accelerating expenditure so that it takes place before 31 December 2015. 

Inheritance Tax (“IHT”)

There were no changes to inheritance tax rates or allowances. 

There was mention of a consultation process to review inheritance tax generally, including the use of Deeds of Variation (which can be used to change a Will, usually although not always with IHT mitigation in mind) and this is expected to propose a specific additional (£175,000 – was the figure picked up by the press). Any changes arising from this would not take place until at least April 2016.

EIS/VCT investments

Individuals can receive very valuable income tax and CGT relief by investing in EIS or VCT companies. Additional rules will apply from 6 April 2015, these are summarised below:

  • The company must be less than 12 years old when it receives its first EIS or VCT investment (except where the investment leads to a substantial change in the company’s activity). 
  • A cap will be introduced on the total amount invested in the company of £15 million (increased to £20 million for “knowledge-intensive companies”). 
  • The number of employees limit for certain “knowledge based companies” will increase from 249 to 499. 
  • At the moment 70% of the funds raised under SEIS must be spent before EIS or VCT funds can be raised. This requirement will be removed from 6 April 2015. 
  • All investors must now be independent from the company at the date of the first share issue.

Companies that receive substantial subsidies for the generation of renewable energy will not be allowed to benefit from EIS, SEIS and VCTs.

Tax enquiries and tax schemes

There will be a threefold increase in the issue of “Accelerated Payments Notices” (“APNs”) – these mean users of tax avoidance schemes are forced to pay any disputed tax upfront rather than when HMRC are successful with any challenge.

HMRC is also bringing to a close various disclosure facilities, the main ones of interest are:

The Employee Benefit Trust settlement opportunity closes to new entrants on 31 March 2015.

The closing date for making disclosure of offshore irregularities via the long running Liechtenstein Disclosure Facility will be brought forward from 2016 to the end of 2015.

There will be a new “last chance” disclosure facility offering less generous terms.

We have never promoted tax schemes, but if any readers are in receipt of APN’s, or have used tax schemes in the past, they should contact us as rapid settlement should be considered, as concessions become more limited.

Finally there was more on the ‘Diverted Profits Tax’ which aims to tackle profits made in the UK but shifted offshore.

Charities

The scheme which lets charities automatically claim gift aid on their donations is set to extend the limits from the first £5,000 raised to £8,000

And finally - the end of the tax return as we know it?

In an attempt to further “modernise” the tax system the government have signalled an end to the archaic tax return replacing it with digital tax accounts for millions of individuals and small businesses. This seems to herald a major change to the way people manage and pay their taxes. The “digital accounts” will use the data HMRC already holds (such as bank interest, employment income and benefits) to pre-populate digital accounts automatically. This will mean that millions of people will no longer have to complete a tax return but will simply be able to agree the figures that HMRC holds, whilst those with more complex tax affairs will be able to use their account to declare income and pay tax in the year.   One to watch that, as HMRC have not exactly covered themselves in glory on recent major IT changes – and we are still dealing with the fallout of the most recent (RTI).