July 2015 Budget – what this means for you

There's only been another flamin' budget Ern...

There’s only been another flamin’ budget Ern…

The following is reproduced by kind permission of Standard Life’s technical consulting team. I’m holding a week of free consultations Monday July 27th-Friday July 31st, so if your finances need some analysis and guidance, give me a call on 0345 013 6525 to set up an appointment:

Two bites at AA as PIPs are aligned with tax years from 2016 As a small step towards re-simplification of the pension rules, from 6 April 2016 all pension input periods (PIPs) will be aligned to the tax year. And it won’t be possible to change them. But related transitional rules potentially create an extra £40k annual allowance (AA) for the 2015/16 tax year, giving some savers two bites at the AA cherry this year. As ever, the devil is in the detail. Look out for our article and case study for insight on how to help your clients make the most of this change.

AA cut for high earners from 2016 – get it while you can Those with ‘adjusted income’ over £150k will have their annual allowance (AA) cut from the 2016/17 tax year, creating a ‘get it while you can’ pension funding window this tax year. The standard £40k AA will be cut by £1 for every £2 of ‘adjusted income’ over £150k in a tax year. The maximum AA reduction is £30k, giving those with income of £210k or above a £10k AA. Carry forward of unused AA will still be available, but only the balance of the reduced AA can be carried forward from any year where a reduced AA applied. The ‘adjusted income’ the £150k test is based on is broadly the total of:

  • the individual’s income (without deducting their own pension contributions); plus
  • the value of any employer pension contributions made for them.

The reduced AA won’t however apply where an individual’s net income for the tax year plus the value of any income given up for an employer pension contribution via a salary sacrifice arrangement entered into after 8 July 2015, is £110k or less.

Pension tax framework under review The Government has kicked off a fundamental review of the pension tax framework to ensure it remains fit for purpose, and sustainable, for a changing society. In a consultation launched today, HM Treasury is seeking views on a range of very open questions around what changes (if any) would:

  • reduce complexity and increase transparency;
  • make best use of available tax reliefs;
  • increase engagement and aid retirement planning.

This welcome consultation raises the prospect of radical reform to restore the vision of a genuinely ‘simplified’ retirement saving framework. The consultation closes on 30 September. Jamie Jenkins, Head of Pensions Strategy, comments ‘Pensions tax relief was ripe for review. Despite some suggesting that the industry was resistant to any change in this area, quite the contrary, we have been calling for a more fundamental review rather than constant tinkering. This consultation provides us with a great opportunity to simplify the pensions tax system once and for all.

Other pension news

  • Lifetime allowance: The proposed reduction in the lifetime allowance from £1.25M to £1M will go ahead as planned from the 2016/17 tax year. It will be indexed in line with CPI from 2018/19. Details are awaited of a new transitional protection option for those with existing pension savings already over £1M who would otherwise face a retrospective tax hit.
  • Death tax: As promised as part of the ‘freedom and choice’ reforms, all pension lump sum death benefits paid after 5 April 2016 in relation to a death at age 75 or above will be taxed as the recipient’s income (removing the flat 45% tax that applies in the 2015/16 tax year).
  • Salary sacrifice: Despite wide pre-Budget rumours, there are no changes to salary sacrifice rules. The Government will, however, be monitoring the growth of such schemes and their impact on tax take.
  • Transfers: To improve consumer access to ‘freedom and choice’, the Government will consult about how to improve the pension transfer process and, potentially, cap charges for over 55s.
  • Annuities: The ability for pensioners to sell their annuities will be delayed until 2017. This allows more time to ensure the related consumer safeguards are in place. More details will be announced in the autumn.
  • State Pensions: The Chancellor has reaffirmed the Government’s commitment to retaining the ‘triple lock’ State pension increase promise, giving more security to older people.

Individual tax allowances Both the personal allowance and higher rate income tax thresholds will increase over the next two years as follows: 2016/17:

  • Personal Allowance increases to £11,000;
  • Higher rate threshold increases to £43,000.

A basic rate taxpayer will be better off by £80. Higher rate taxpayers will be better off by £203.

2017/18:

  • Personal Allowance increases to £11,200;
  • Higher rate threshold increases to £43,600.

A basic rate taxpayer will be better off by a further £40, and higher rate taxpayers by £160. These increases are on the way to meeting government pledges to raise the personal allowance to £12,500 and the higher rate threshold to £50,000 during this Parliament.

New dividend allowance The system of dividend tax credits will be abolished from April 2016. It will be replaced by a new tax free dividend allowance of £5,000. Dividends in excess of this allowance will be taxed at the following rates, depending on which tax band they fall in:

  • Basic rate – 7.5%;
  • Higher rate – 32.5%;
  • Additional rate – 38.1%.

This means that from April 2016, a basic rate taxpayer could 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. Making full use of these new allowances can make savings last longer in retirement and potentially leave a larger legacy for loved ones. And strengthens the case for holistic multiple wrapper retirement income planning.

Inheritance Tax: family home nil rate band – but not yet The Government will introduce a new IHT nil rate band of up to £175,000 where the family home is passed to children or grandchildren. This is in addition to the current nil rate band of £325,000 which has been frozen since 2009 and will remain frozen for the next 5 tax years, until the end of 2020/21.

Who will benefit The extra nil rate band will be fully available to anyone who:

  • passes the family home to their children or grandchildren on death; or
  • or had a family home, then downsized (passing on assets of equivalent value to children/grandchildren); and
  • has an estate below £2M.

However, the full £175,000 won’t be available until 2020/21. The allowance will first become available in 2017/18 at £100,000 and increase to £125,000 in 2018/19, £150,000 in 2019/20 and £175,000 in 2020/21. It will then increase in line with the Consumer Price Index (CPI). Like the existing nil rate band the new property nil rate band can be transferred between spouses or civil partners. This means a married couple could pass £1M in 2020/21 to their children tax free on death provided the family home is worth at least £350,000, saving £140,000 in IHT.

Who may miss out 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.

ISA changes Replacing withdrawals The proposed changes to ISA, allowing savers to dip into the savings and replace them without it affecting their annual subscription limits, will go ahead from 6 April 2016. The new contributions would have to be paid within the same tax year as the withdrawal for it not to be counted. These new flexible funding rules will only apply to cash ISAs and any cash element within a stocks and shares ISA. However, it is now possible to move ISA holdings between cash and stocks and shares without restriction, so clients in stocks and shares will be able to benefit provided they move into cash first.

Help to Buy ISA First time home buyers will get help from the Government when saving to get their foot on the property ladder. The Help to Buy ISA will be available from 1 December 2015. The scheme will provide 25% tax relief on savings up to £12,000. So someone saving the full £12,000 would see the government add a further £3,000 to their savings, giving them £15,000 towards the purchase of their first home. This tax relief isn’t given at the point of saving in the same way as a pension contribution, but is instead added when the saver buys the home. The new scheme will be a form of Cash ISA and, in line with current rules, it won’t be possible to subscribe to two separate Cash ISAs (Cash & Help to Buy) in the same tax year. Savings will be limited to a maximum single initial premium of £1,000 and regular savings of £200 each month. And to get the Government bonus, property values can be no more than £250,000 (£450,000 for properties in London).

Non Doms – deemed domicile after 15 tax years, applies to all taxes ‘Non-doms’ are individuals who, although resident in the UK, can legally claim that another country is their home (‘domicile’). This means that they can access some tax benefits not available to those who are resident and domiciled in the UK. New rules apply from April 2017 to restrict this. Individuals will become ‘deemed domicile’ (taxed in the usual way that UK domiciled residents are taxed) more quickly – after 15 tax years spent in the UK instead of 17. And ‘deemed domicile’ will apply to more taxes – income tax, CGT and IHT, instead of just IHT. Excluded Property Trusts used with offshore bonds can continue to benefit from an advantageous IHT treatment. But individuals with their affairs set up to take advantage of the remittance basis may wish to review their investments to ensure this will still be tax efficient under the new regime.

Source: Standard Life Technical Consulting – “Our team of technical experts has more than 300 years experience in the financial services industry. This experience, along with relevant qualifications, ensures we have the skills and knowledge to deliver this invaluable service to you.” 

Tax Year-End: VCTs and tax mitigation

Where an investor is more adventurous and interested in the significant tax rebates available from HMRC, I favour Venture Capital Trusts (VCTs) over Enterprise Investment Schemes (EIS).

They are both higher risk than typical equity -based funds as they invest in smaller, relatively new companies. Simply put, a VCT is an investment trust comprising a number of different investments, and an EIS is typically just a single investment. It’s an eggs and baskets thing for me – an EIS requires a greater leap of faith.

The tax breaks on VCTs are significant. Provided they are held for the qualifying term (5 years) they offer 30% tax rebate based on the amount you invest (invest £100k, get £30k reduction on your current year’s tax bill – but you must have incurred that much income tax in that tax year in order to benefit) – and all income streams – dividends and capital gains, are tax free.

Innovative providers of VCTs have designed “lower risk” limited life offerings which are designed to liquidate after the qualifying period is up (in practice this is around a 6 year cycle). They invest mainly in asset-backed businesses (e.g. those with significant real estate) and/or those with predictable income streams. Staying within the rules, they  offer fairly modest gross returns whilst mitigating risk as far as they can. When added to the 30% initial tax saving, the IRR on such investments might for example be 7% to 9% for a higher rate taxpayer. After liquidation, the funds can be re-invested again and obtain a further tax rebates. Limited Life VCTs also avoid the criticism levied against traditional VCTs – where encashment is nearly always at a discount price compared to net asset value. A limited life VCT liquidates, so the investor receives full NAV.

But for those who like to buy and hold, then “Evergreen” VCTs can offer more risky but often more rewarding returns, with no tax on the income streams from year to year.

There is a VCT “season which commences in December each year and carries on past the tax year-end, offering investment in one or both tax years for a particular offering. Up to £200,000 per tax year means a maximum of £400k can be invested across the tax year-end. Minimum investments are usually £5,000 to £10,000.

If you would like to hear more about VCTs, please contact me.

Tax Year-End: Capital Gains considerations

Just a quick note to remind those of you with non-ISA investments that just because you haven’t earned crystallised  capital gains in excess of your annual CGT allowance (£11,000 in 2014-15) doesn’t mean you can ignore the planning. The markets have been pretty good over the past few years and many non-ISA investors will have holdings “pregnant” with potentially taxable gains.

And this applies to trustees too – your CGT allowance is 50% of the personal allowance at £5,500.

Unless your investments are modest, my advice is to try and crystallise gains up to just under your annual allowance, so that your portfolio is no longer carrying those gains into a later year, when future sales may cause aggregate gains over the allowance and tax becomes payable.

Even where you do not wish to make any wholesale changes to your investments, it is possible to swap one share (or fund) for another which is very similar. For example, swapping one UK tracker fund for another. This crystallises the gain into the current tax year.

Or maybe you have brought forward capital losses from earlier tax years. Can you utilise them against current gains in an efficient manner?

No reporting of capital gains under the annual allowance is required on a self-assessment tax return to HMRC.

Just sensible housekeeping really 🙂

Tax Year-End: Capped Drawdown plans have one big advantage over their Flexible new friends, but will disappear April 5th 2015

In all the hype over the new pensions rules and flexibility beginning next April, it is easy to miss the rules concerning contribution allowances whilst in drawdown.

There can be reasons and/or advantages to an individual in running a drawdown arrangement and taking income from it whilst simultaneously making contributions (or keeping the option to make future contributions). Care needs to be taken not to fall foul of rules prohibiting the recycling of tax-free cash.

Existing capped drawdown plans which are maintained within their GAD withdrawal limits will retain the annual allowance for further contributions of £40,000, whereas an active flexible plan will have a reduced allowance of £10,000 after April 5th 2015. However, capped Drawdown will no longer be an option after April 2015, when all new drawdown plans will qualify as “flexible” regardless of withdrawal levels. After April 5th, as soon as a “trigger” event occurs, such as taking income or cashing in a small pension in its entirety, the new reduced annual allowance of £10,000 applies.

So, investors wishing to carry on an active drawdown arrangement yet take advantage of the £40,000 contributions limit in future, who do not currently have such a plan,  would need to quickly set up a plan (and make a crystallisation event – e.g. a small withdrawal of tax free cash) prior to April 2015, to be able keep that greater level of annual contribution allowance.

To maintain the £40,000 limit going forward, capped drawdown members must not exceed their GAD income limits in any tax year. To do so creates an event which triggers the smaller contributions allowance going forward.

This is an area where financial advice is essential – in fact drawdown plan providers will generally only deal with you through an adviser(!)

Most new drawdown plans are initiated via a transfer of existing pension money from one or more other pension plans, but in view of the rapidly closing window (realistically you’d need to get a new application in by around March 20th at the very latest),  for a capped plan I would suggest the time for that is already past. However, if you have a reasonable cash lump sum which you can contribute now, then it may still be possible to find a capped drawdown provider and set the account up with instant crystallisation.

NB the above is a brief summary only – we will advise on pertinent rules as appropriate. If you think this sounds suitable for you, we’re happy to advise further – just give us a call on 0345 013 6525 to discuss.

Tax Year-End: Do you want to make more than £40,000 pension contributions this year? – Carry Forward!

The annual allowance for pension contributions in 2014-15 is £40,000, which is the gross equivalent and includes all contributions from all sources (i.e. incl. employer contributions). Unused allowances from the previous three years may be carried forward and used in the current tax year.  (You need to have been a member of any UK pension scheme in a given tax year to qualify for the contribution allowance in that year).

Carry forward of pension annual allowances can have its intricacies, but basically you must first use the current year’s and then work backwards. All of the tax relief obtained is applied against current year’s income. The annual allowance was £50,000 in each of 2011-12, 2012-13 and 2013-14 (so potentially an individual could pay up to £190,000 into pensions in the current tax year).

Please give me a call if you are interested in any last minute lump sums into pensions.

Tax Year-End: ISA Allowances

OK they’re apparently “NISAs” following the latest upgrades, but I’m sticking to the old name for now.

This is pretty straight-forward stuff. You must use your ISA allowance in its tax year, or else it is lost. You must be over 16 for a cash ISA, or over 18 for “Stocks and Shares” ISAs (typically unit trusts or similar mutual funds).

The allowances are:

  • 2014-15 (up to)£15,000 each
  • 2015-16:(up to) £15,240 each

From 2014-15, you can invest any proportion into cash or Stocks and Shares – e.g. you can now invest £15,000 into just a cash ISA, or  £15,000 into Stocks and Shares ISA, or anything in between.

A married couple could invest £60,480 across both tax years. Most of the larger ISA providers will facilitate a double payment now – (they just hold next year’s part of the payment for a week or two and the invest it for you on April 6th).

(Junior ISAs apply for younger people, which have lower allowances than for adults – see  earlier posts).

made-it

Made It!

If you leave it to the last minute and are having difficulty with your provider, or you’d like to set up a new ISA account this year, please give me a call. We have last minute facilities with most of the big platforms (Fidelity, Old Mutual, Cofunds etc.) where we can get your application in. And don’t forget we offer an investment advice service – customised portfolios built around your preferences. Our on-going fee for this service is just 0.5% per year.

Tax Year-End: Avoiding the 60% tax band!

For those of you earning over £100,000 this tax year, remember that for every £2 of income earned over £100,000 an individual loses £1 of their personal allowance until they have no allowance left.

This makes the effective rate of tax 60% on income between £100,000 and £120,000 for 2014/15. (40% tax on the £2 (80p) plus 40% tax on the lost £1 allowance (40p) = £1.20 tax on £2).

So when your income is over £120,000 all the personal allowance is lost as this is double the personal allowance.

The measure of £100,000 is the ‘adjusted net income’. Broadly, this is total taxable income less certain deductions e.g. gift aid donations and gross personal pension contributions.

The Plan

You can get your adjusted net income back down below the £100,000 if you can make a lump sum pension contribution of a suitable size:

  • Identify total income for personal allowance purposes i.e. adjusted net income
  • Calculate excess over £100,000 limit
  • Calculate contribution to reduce adjusted net income to £100,000
  • Make the personal pension contribution in the tax year in which the personal allowance is lost.

Example

Mr Savvy has income of £110,000 so has lost some of his personal allowance. A personal pension contribution of £8,000 net, £10,000 gross is made.

pension-graphic

So, the contribution has the dual impact of increasing the amount of tax free income through the reclaimed allowance as well as pushing out the basic rate band.

For a resulting net spend of £4,000 Mr Savvy has reduced his tax bill by £6,000 and generated a £10,000 into his pension pot.

The contribution of £10,000 has saved £4,000 in tax and received relief in the pension of £2,000 – an effective rate of tax relief of 60%!

The Chancellor’s Autumn Statement – the Taxy bits

A summary of the main UK tax changes announced December 3rd 2014. For info on the changes affecting inheritance and pensions, please see The Chancellor’s Autumn Statement – the Sexy bits blog.

Personal Allowance – Income Tax

The personal allowance will be increased to £10,600 in 2015-16, £100 more than previously stated. The higher rate (40%) threshold will be £42,385.

ISA changes

From April 2015 the ISA allowance will rise to £15,240, following the substantial rise last summer to £15,000.

Junior ISA and CTF raised to £4,080 p.a.

Non-Domicile Basis of Taxation – Charges to Increase

Non-Doms not Dum-dums

Non-Doms not Dum-dums

Non-doms (a phrase which always makes me think of the Easter Island talking head in “Night at the Museum”) who choose to use the remittance basis and have been resident for at least 7 of the past 9 years, currently pay a charge of £30,000, rising to £50,000 once resident for 12 out of 14 years. This latter amount will increase to £60,000 (from £50,000) in 2014/15, and a new charge of £90,000 will be brought in for those who’ve been resident 17 of the last 20 years in the UK.

The Government will also consult on making the choice to pay the remittance basis charge stick for a minimum of 3 years, so that non-doms are not easily able to swap the basis on which they’re taxed from one year to another.

Non-doms might consider using offshore bonds to help mitigate their taxation, since offshore bonds are not taxed until a chargeable gain arises, and hence controlling chargeable gains can control the tax.

Stamp Duty – changes to rates 

Stamp duty will now cost less to the average house buyer. The Chancellor has introduced (with immediate effect) a banded system whereby you pay across all relevant bands, not just the highest applicable to your property. They are revised as follows:

Purchase price of property (£)
 
New rates paid on the part of the property price within each tax band
Tax Within the band
0 – 125,000
0%
    Nil
125,001 – 250,000
2%
£2,500
250,001 – 925,000
5%
£33,750
925,001 – 1,500,000
10%
£57,500
1,500,001 and over
12%
£ ++++

The magic value is £937,500. Below that there is less duty to pay than previously, and above that there is more.

Interaction of Flexible Pensions and Means testing of Govt. Pension Credit

The treatment of existing pensions, both crystallised and uncrystallised, is now slightly more favourable when means-testing state benefits. The notional income factor to be applied to such benefits is now based on 100% of an equivalent annuity rather than 150%, the previously factor. However, if the income actually being drawn is greater than this, it will be the higher figure that is taken into account.

The Chancellor’s Autumn Statement – the Sexy bits

OK so there wasn’t anything that really made the eyes roll this time around, but there were some pleasant confirmations and a relaxation on ISA inheritance: (see also separate blog “The Chancellor’s Autumn Statement – the Taxy bits” for the more routine stuff)…

smug pension kid

Daddy has a really nice pension!

Flexible Pensions and Death Benefits confirmed.

These changes will  have an increasing influence on the direction of estate planning, as their repercussions become more widely accepted.

On death before age 75, any death benefit will be paid tax free provided it is within the Lifetime Allowance (LTA). Thus there is no longer a distinction between “crystallised” and uncrystallised” pots for pre-75 death benefits.

On death at 75 and later, the remaining fund forms death benefits which are taxable on the recipient at his / her income tax rate, when they draw the funds.

Any individual beneficiary of a flexible pension can choose to keep their inherited pension pot in the drawdown wrapper and decide when (or if) they draw down on it. Inheritable Pensions! This IMHO puts pensions at the forefront of inheritance planning going forward.

Inheritability of ISAs

Previously, upon death of a married account holder, their  ISA money would no longer carry ISA status in the hands of the inheriting spouse / civil partner. It now does, so the surviving spouse has the benefit of continuance of that tax-free savings wrapper . This only applies to spouses (spice?) or civil partners however, other beneficiaries will receive the money without ISA status.

Whilst inheriting ISA funds from your spouse is free of inheritance tax (because of the spouse exemption) it is still going to be taxable as part of the estate on second death. So there can be instances where individuals (who are near to or already over age 55) can find it to their advantage to use a personal pension contract to receive their ISA funds:

  • You need earnings to qualify for tax relief on the contributions (although you can contribute a small sum without earnings – £2,880 p.a. net).
  • you can still withdraw the funds from the pension (if 55 or above)
  • you (usually) end up with more cash net of tax
  • the death benefits are the whole fund is payable tax free on death pre-75
  • the death benefits can be directed into a discretionary trust if you prefer (spouse bypass trust)

Single Lifetime IHT Settlement nil rate band

This idea has been dropped (sigh of relief there). The idea of just a single IHT nil rate band for lifetime settlements, i.e. allowing only £325,000 to be gifted in one’s lifetime and allocated across all relevant property trusts they created, has been axed. For the time being at least, the £325k rate will re-set every seven years as before. However there is still likely to be a simplification of periodic and exit IHT tax charges on trusts, to stop people taking advantage of the rule in “Rysaffe” where multiple trusts reduce the overall tax bill.

Changes to intestacy Rules: Inheritance tax and trustees’ powers act 2014

In May the Inheritance and Trustees’ Powers Act 2014 received Royal Assent. The Act contains important revisions to the intestacy rules in England and Wales, and took effect on 1st October 2014. (Statutory instrument SI 2014 No 2039)

The most significant changes cover two common situations where someone dies without a valid will.

1) Leaves a surviving spouse/civil partner but no issue (children, grandchildren, etc)
OLD RULES: Under the current rules the spouse/civil partner is entitled to:

• personal chattels (car, jewellery, etc);
• £450,000 outright; and
• A life interest (a right to income only) in half the residue.

The other half of the residue passes to parents, failing them brothers and sisters and, failing them, their issue. They will also receive the capital from the life interest when the surviving spouse or civil partner dies.

NEW RULES: The new rules will instead pass absolutely everything to the surviving spouse/civil partner.

2. Leaves a surviving spouse/civil partner and issue
OLD RULES: Under the current rules the spouse/civil partner is entitled to:

• personal chattels (car, jewellery, etc);
• £250,000 outright; and
• A life interest in half the residue.

The other half of the residue passes to the child/children (under trust if under 18), with the remaining value of life interest half being paid on the surviving spouse or civil partner’s death.

NEW RULES:The new rules will give the surviving spouse/civil partner half of the residue outright, rather than wrapped in a trust. The children thus lose their reversionary interest.

These new rules will only apply in England and Wales; Northern Ireland and Scotland have their own intestacy rules, although history suggests Northern Ireland will soon copy the English reforms.

However, as we all know, there is no excuse for not having a properly drafted and up-to-date will.

Wills - we all need 'em

We all need one. Without a valid will, your estate probably won’t be distributed in anything like the manner you would wish, and its omission may well cost your estate more in taxes.