UK Budget 2016: Act Now, Don’t Pay Later

The Chancellor didn’t push ahead with pension reforms. However, he did introduce the Lifetime ISA and reduce the personal CGT tax rates.

Here is our summary of the UK Budget 2016 pertaining to UK expats, and those expats with UK holdings.

 

Income Tax

Personal allowance

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.

Capital Gains Tax (CGT)

CGT rates

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.

Pensions

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 pensions 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.

Salary Sacrifice

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.

Pensions tax consultation

The Government has published a summary of responses to the consultation ‘Strengthening the incentive to save: a consultation on pensions tax relief’. We are awaiting the Government’s decision on the next steps to take if any.

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.

Convert a dependant’s flexi-access drawdown account to a nominee’s flexi-access drawdown account

When a dependant reaches their 23rd birthday, their account will be switched into a nominee’s account to correct a previous omission in the legislation.

Allowing a defined contribution pension in payment to be paid as a trivial commutation lump sum

This will be allowed if the total pension savings would be under £30,000.

Making top ups to fund dependants’ death benefits

These will become authorised payments. Further detail will be provided by the Treasury in due course.

Dependant Scheme Pensions

The Government will reduce the number of calculations that need to take place to determine whether a dependants’ scheme pension exceeds the authorised limit.  This will be contained within the Finance Bill 2016.

Undrawn pension funds in drawdown pensions

The Government will legislate to ensure a charge to inheritance tax will not arise when a pension scheme member designates funds for drawdown but does not draw all of the funds before death.  This will be contained within the Finance Bill 2016 and will be backdated to apply to deaths on, or after, 6 April 2011.

Public Financial Guidance Review

The Government will restructure the statutory financial guidance providers (the Money Advice Service, The Pensions Advisory Service and Pension Wise) to ensure that consumers can access the help they need to make effective financial decisions.

The new delivery model will direct more funding to the client-facing areas and will focus support on areas of greatest consumer need.

It will include a new pensions guidance body (to make sure that consumers can get all their pensions questions answered in one place, at all stages of their lives) and a new, slimmed-down money guidance body. This will be charged with identifying gaps in the financial guidance market and commissioning providers to fill these gaps to ensure that consumers can access the debt advice and money guidance they need.

New State Pension introduced

The full new State Pension will be £155.65 per week.

Abolition of contracting-out

It will no longer be possible to contract-out of the State Second Pension via a final salary, or hybrid, occupational pension scheme.

QROPS

No changes to QROPS were announced.

Life Assurance Policies

Chargeable Event Regime

The Government have announced that they will issue a Consultation later in 2017 on the taxation of Life Assurance policies (the chargeable event regime), more specifically the rules for part surrenders and part assignments.  This is announced as a direct consequence of the Upper Tribunal ruling in Joost Lobler v HMRC (2015), a case which centred around the principle of ‘artificial gain’ on a policy where an individual mistakenly took a partial surrender from a life assurance policy which resulted in a taxable gain that was disproportionate to the actual gain made within the investment. If they had taken the withdrawal by full surrender of individual policies this would have resulted in a more realistic tax charge.

Legislation will be introduced in the Finance Bill 2017.

Personal Portfolio Bonds (PPBs)

A consultation will be issued on changes to the categories of assets that life assurance policyholders can choose without giving rise to an annual tax charge under the PPB legislation.

Corporation Tax

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.

Tax allowance

New tax allowances for money earned from the sharing economy

Up to £1,000 in tax allowances for people who sell goods online and up to £1,000 income from property such as renting out a driveway or loft storage.

 

 

If you have any questions regarding the UK Budget 2016, or wish to discuss its implications for you, please contact your Intelligent Investments‘ wealth manager, or use the contact us form below to speak to one of the team today.

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