Budget 2016 Review
Published byAnnie Pearson
Now that the dust is settling, here is WJM's quick look at some of the key changes in George Osborne’s 8th budget and how they will affect private client matters.
Please contact your usual Wealth Planning or Private Client contact if you have any queries. If you don't have a main contact, please get in touch with Grant Johnston, Graham Murray or Annie Pearson.
Taxation of Dividends
Although not part of the Budget, it’s appropriate to look again at how the new rules on taxation of dividends coming in on 6 April 2016 will affect trusts and executors.
There has been plenty of commentary on how the changes will impact on individuals (see Karen Currie’s article here) but very little regarding the wider impact. This is mainly because, despite the regime being a mere two weeks away from implementation, HMRC has yet to issue clear guidance on how trusts and Executors will be expected to report dividend income.
If, as looks likely, the £5,000 dividend personal allowance will not be available to trustees or executors the likely effect is that almost all executries with investments will be required to make an annual tax return, regardless of how minimal their dividend income is.
Similarly, the number of small trusts, whose income has always been within the available standard rate band will now have to enter the self assessment regime. Whether HMRC are equipped to deal with the likely avalanche of new tax returns remains to be seen.
Money Advice Service
The Money Advice Service, set up in 2010 to provide financial advice to individuals, is to be abolished.
It will be replaced by a more streamlined body aimed at identifying and filling gaps in the private Financial Advice market, either directly or through providing funding to third parties.
Capital Gains Tax
One of the few surprises of the Budget was the cutting of the rates of Capital Gains Tax from 18/28% to 10/20%.
This cut will be a big relief to clients looking to raise cash by selling capital assets or for trust clients looking to transfer assets out to beneficiaries. The new rate will make it much less painful for trustees of liferent (Interest in Possession) trusts to advance capital to beneficiaries, and trustees of discretionary trusts might also find beneficiaries more amenable to receiving assets subject to a holdover election now that their CGT liability on converting the assets to cash will be significantly lower.
The exclusion of residential property from the rate cuts will be disappointing for landlords looking to sell properties to avoid being disadvantaged by the upcoming withdrawal of Wear and Tear Allowance and the reduction in available mortgage interest relief.
There has been no adjustment to the tax rate available under Entrepreneurs Relief, which remains at 10%.
ISAs and Help To Save
Annual ISA Limit Increase
The annual ISA limit will increase significantly to £20,000 from April 2017, from £15,240 in 2016/17. This large increase will make ISA products an even more attractive prospect for those with moderate to large savings pots, particularly where pension savings might not be possible.
New Lifetime ISA
As well as the increase to the ISA limit, this Budget also announced the creation of Lifetime ISAs starting from April 2017. These ISAs will be available to those aged 18-40 and are intended to help those saving for first homes or pensions.
Account holders may place up to £4,000 per year in their ISA and will receive a 25% bonus on their annual contribution from the exchequer up until age 50 (although they may continue to make their own contributions into their 50s and beyond).
The rules surrounding withdrawal of funds are not yet fully developed. After 12 months, up to 100% of the funds can be withdrawn for use as a deposit on a first home. Savings may also be withdrawn for any purpose after age 60. Any withdrawals outside of these parameters will see the government bonus lost and a 5% charge incurred. It is not yet clear whether the amount of bonus forfeited will be limited to that given in the year of withdrawal, scaled in accordance with the sum withdrawn, or whether a “cliff edge” application could see savers withdrawing funds at age 55 lose up to £37,000 of accrued bonuses plus the attendant growth and interest.
New Help to Save Scheme
To be introduced no later than 2018, Help to Save will give very low earners who save up to £50 per month for two years a 50% bonus at the end of the two year period. Savers will then have the option to continue the scheme for a further two years. A saver taking maximum advantage of the scheme over 4 years will therefore receive £1,200 of savings bonus.
The scheme will be open to those in work and receiving either Working Tax Credit or Universal Credit, whose weekly income is equivalent to 16 hours at the National Living Wage (£7.20 in 2016/17). The government estimates this to be around 3.5 million people.
Income Tax
Personal Allowance
The Personal Allowance will continue to rise, with it now set at £11,000 for 16/17 and £11,500 for 17/18. It is the Treasury’s stated intention to increase the Personal Allowance to £12,000 by the end of this Parliament. Although Holyrood will gain new Income Tax powers in 2017 under the new Scotland Act, the Personal Allowance will remain a reserved matter and so cannot be amended by the Scottish Government.
Higher Rate Threshold
The threshold for the higher 40% rate will rise from £43,000 in 2016/17 to £45,000 in 2017/18. Again this is a step toward the longer term goal of the threshold reaching £50,000 by the end of the parliament.
Personal Savings Allowance
A new allowance will be introduced from 6 April 2016 to be set against savings income. The allowance will exempt the first £1,000 of savings income for basic rate taxpayers and the first £500 for higher rate taxpayers, giving potential tax savings of £200. This new allowance will apply in addition to the starting rate band already in operation, which allows those with very little non-savings income a tax rate of 0% on up to £5,000 of their savings income.
The information contained in this newsletter is for general guidance only and represents our understanding of relevant law and practice as at March 2016. Wright, Johnston & Mackenzie LLP cannot be held responsible for any action taken or not taken in reliance upon the contents. Specific advice should be taken on any individual matter. Transmissions to or from our email system and calls to or from our offices may be monitored and/or recorded for regulatory purposes. Authorised and regulated by the Financial Conduct Authority. Registered office: 319 St Vincent Street, Glasgow, G2 5RZ. A limited liability partnership registered in Scotland, number SO 300336.
