TECHTALK APRIL 2016 ISSUE 4 VOLUME 15 BUDGET SPECIAL EDITION

Transcription

1 TECHTALK APRIL 2016 ISSUE 4 VOLUME 15 BUDGET SPECIAL EDITION

2 EDITOR CONTENTS Sandra Hogg Sandra is the senior tax manager within Scottish Widows with 17 years of hands on experience dealing with HMRC and advising owner managed businesses as an accountant and tax adviser. She also has over 17 years insurance industry experience as a financial planning expert within the group. She represents Scottish Widows at industry forums and at the ABI s Life Insurance Product Tax Panel and is Scottish Widows expert spokesperson on Tax and Financial Planning. CONTRIBUTORS Jeremy Branton Jeremy has over 25 years experience working for financial services providers in a number of technical and advisory roles in life, pensions and protection. Having joined the group in 2006 he now specialises in corporate pensions, with particular focus on pensions reform. Chris Jones Chris joined the group in He s worked in a number of technical roles in marketing, product development and technical support. After many years specialising in life and investment products his recent focus has been on the new pension reforms. Bernadette Lewis Bernadette joined the group in She has over 30 years experience in Financial Services with both intermediaries and providers. She has broad and deep technical experience across pensions, protection, tax and trusts. Ian Naismith Ian is a senior manager in retirement income & planning. He also writes and presents extensively on pensions as well as representing Scottish Widows on trade bodies and in consultations with Government. Thomas Coughlan Tom has spent over 15 years in technical roles. He has wide experience including the provision of technical support to financial advisers covering life, pensions and investment compliance. He currently specialises in pension planning and automatic enrolment THE TAPERED ANNUAL ALLOWANCE APPLIES AS PLANNED FROM 6 APRIL 2016 Sandra Hogg The restricted, or tapered, annual allowance restricts tax relievable pension contributions for individuals who have income of 150,000 or more each year from 6 April Here we focus on how the tapered annual allowance impacts employers and employees. PERSONAL TAXATION IN 2016/2017 Jeremy Branton A summary of changes applying to personal taxation in 2016/2017. BUDGET PENSIONS TECHNICAL CHANGES ROUND UP Chris Jones No news was the big news story for pensions in the Budget as after much speculation regarding radical reform, all the main tax advantages remained unchanged. However, there were a few minor technical changes along with some proposed changes to funding of financial advice. LIFETIME ISAs AND PENSIONS COMPARED. EITHER, OR BOTH? Bernadette Lewis A summary of the Lifetime ISA proposals compared to pensions, indicating why many savers should take advantage of both. PENSIONS REFORM STILL ON THE TABLE Ian Naismith The Government may have drawn back from fundamental reform of pensions taxation in the Budget, but it could come back into play after the EU Referendum. TAX-FREE CASH DIFFERENCES: DEFINED CONTRIBUTION vs DEFINED BENEFIT SCHEMES Bernadette Lewis An explanation of the key differences when calculating tax-free cash entitlements in DB and DC schemes. THE NEW DIVIDEND RULES: BETTER OR WORSE? Thomas Coughlan From 6 April 2016, new dividend taxation rules apply. The implications for business owners are looked at in detail. 2 techtalk

3 WELCOME TO THE BUDGET 2016 SPECIAL EDITION OF TECHTALK The Budget contained some significant statements, providing us with plenty of opportunities for discussion. In this bumper edition we examine the main announcements, cover important changes applying from the start of this tax year and look ahead to predict the direction of travel for pension tax relief. It was widely rumoured that fundamental reform of pension tax relief was set to be a Budget centrepiece. In the end, the March Budget contained little of direct relevance to pensions. However Ian Naismith believes there are clear indications that fundamental reform of pension tax relief is not off the table. He provides a thought provoking assessment of the future landscape for pension saving. One of the most significant announcements in the Budget was the Lifetime ISA. It will allow the under 40s to save for their first home and their retirement. Bernadette analyses the proposals and explains why many should consider saving in both a Lifetime ISA and a pension. The good news with the non announcement of pension tax relief reforms in the Budget is that taxfree cash and pension tax relief are still available. On the topic of tax-free cash Bernadette provides a useful comparison of how it works for final salary versus money purchase pensions. The pension freedoms available with money purchase pensions will lead many with final salary schemes to consider the pros and cons of transferring. Tax-free cash is one of the key factors. Chris summarises minor technical changes to pensions announced in the Budget, including proposed extensions of reliefs for funding of financial advice. Jeremy looks at the impacts of changes to personal taxation in the current tax year, including the personal savings allowance, dividend allowance and 0% savings allowance. These are useful reliefs, but also contain some traps for the unwary. Jeremy uses helpful examples to guide us through the complexities. Tom explains the effect of the removal of the 10% dividend tax credit on business owners. And I look at another major change applying from 2016/2017 the tapered annual allowance focussing on the impacts for employers with high earning employees. And for more information on workplace pension planning and pension freedoms please also take a look at our extensive range of support at: enrolment and I hope you will find this Budget special edition both a useful guide and an interesting read and that we will have helped you in your planning and in your discussions with your clients on these important topics. Please also see our Budget analysis and our online 2016/2017 Tax Card at: Enjoy the read. Sandra Hogg techtalk 3

4 THE TAPERED ANNUAL ALLOWANCE APPLIES AS PLANNED FROM 6 APRIL 2016 Sandra Hogg It had already been widely reported in the press that the Government would not be making any significant changes to the system of pension tax relief in this Budget. So the good news is that pension tax relief and the tax-free lump sum remain, despite earlier rumours to the contrary. The bad news is that the lifetime allowance reduction from 1.25 million to 1 million and the restricted (tapered) annual allowance for high income individuals also remain, and applied from 6 April 2016 as planned. It s not clear if the outcome of the Government s consultation on the future of pension tax relief has been shelved or simply deferred. However the proposed introduction of a new Lifetime ISA would seem to suggest the latter. The restricted, or tapered, annual allowance is a subject that is generating an enormous number of questions. It restricts tax relievable pension contributions for individuals who have income of 150,000 or more each year from 6 April The rules are very complicated and most misunderstandings at the moment arise out of the definitions of income. I m going to focus on how the tapered annual allowance impacts employers and employees. Those employees expecting to have income and employer pension contributions above 150,000 a year from 6 April 2016 will have needed to consider whether to maximise pre 6 April contributions ahead of the tapered annual allowance and benefit from higher rates of tax relief. Many will have been encouraged to do so in any case by rumours of a flat 25% or 30% rate of tax relief, or no tax relief at all, after 2015/2016. They ll also need to consider whether to reduce personal and / or employer contributions after 5 April to avoid the tapered annual allowance charge or whether it s better to maintain contributions but suffer the tapered annual allowance charge. The good news is that in the short term, carry forward may provide a solution. 4 techtalk

5 SO HOW WILL INDIVIDUALS KNOW IF THEY ARE IMPACTED AND WHAT CAN THEY DO? The annual allowance for a tax year will be reduced so that for every 2 of adjusted income the individual has over 150,000, their annual allowance is reduced by 1. The maximum reduction to the annual allowance will be 30,000, so that anyone with adjusted income of 210,000 or more will have an annual allowance of 10,000. Adjusted income includes earned income and non-earned income, so it s not just salary, it includes other income such as dividends, bank interest, rental income, and so on. This income is adjusted by making certain deductions such as trading losses and deductible interest payments, and retirement annuity contributions. It s then necessary to add employer pension contributions and to add back any personal contributions that have reduced the individual s taxable income. For defined contribution schemes you just add back the monetary amount. For defined benefit schemes it s a little more complicated, because you have to take the accrual figure and deduct the employee contributions (not AVCs) to arrive at the employer contribution. Adjusted income example Alan who is aged 50, receives a salary of 140,000 in 2016/2017. He also expects to receive interest and dividends of 5,000. He s a member of his employer s occupational pension scheme and pays 5% of salary 7,000 into that scheme and he also receives a 10% employer contribution of 14,000. His contributions will be paid via net pay because it s an occupational scheme which just means that the contribution is deducted from his salary before income tax is applied. So his net income in this case will be 138,000, his income after deducting the 7,000 he pays to the occupational scheme. To that, we have to add the 7,000 net pay contributions, returning the income level to what it would have been if Alan hadn t paid any personal contributions. And to that we have to add the 14,000 employer contribution as well. So in total that gives adjusted income in this instance of 159,000. This means that his 2016/2017 annual allowance is reduced (tapered) by 4,500 to 35,500. techtalk 5

6 THRESHOLD INCOME An exception aimed at preventing those with a one-off spike in adjusted income perhaps because of a high rate of Defined Benefit accrual in a particular year is that where net income is not more than 110,000, the annual allowance is not tapered. This is known as threshold income. To calculate threshold income the starting point is the same, so you start with the client s taxable income for the year, but you don t add back any personal contributions. Instead you deduct personal contributions which were paid to schemes that operate relief at source such as personal pensions. The only pension contributions you have to add are those that arise from a new salary exchange agreement entered into after the budget on 8 July (Salary exchange can t be used to reduce adjusted income, because employer pension contributions are added back.) The legislation has been carefully worded to ensure a reduction to the annual allowance can t be avoided through salary sacrifice or increasing pension contributions year on year. Threshold income example Continuing the example of Alan, the starting point will be his net income or taxable income of 138,000. Alan could make a contribution to a personal pension of 29,000 by 5 April 2017 (a net contribution of 23,200) to reduce his threshold income to below 110,000. That would prevent the tapered annual allowance from applying in 2016/2017. However, as that contribution would take his pension inputs to 50,000 he will need to have sufficient unused annual allowance available from earlier years to carry forward, if he is to avoid an annual allowance charge on the excess 10,000. Clearly, that s not going to be possible for Alan year on year. And in Alan s case it s not necessary for him to try to reduce his threshold income, because his 21,000 pension inputs were well within his remaining tapered annual allowance of 35,500. As you can see the planning can be quite complex. An added complication is that many individuals may not know if they are caught until it s too late, after the end of the tax year. The good news is that many high income individuals will still have plenty of scope to make full tax relievable contributions without triggering the tapered annual allowance charge. Adjusted income Tapering Available annual allowance* 210,000 and above 30,000 10, ,000 20,000 20, ,000 15,000 25, ,000 10,000 30, ,000 5,000 35, ,000 Nil 40,000 *assumes no other restrictions apply, such as income recycling anti-avoidance measures, or the money purchase annual allowance. And, for those high income individuals who are caught, full carry forward may still be available from the three previous tax years, so this is likely to provide a solution for many affected individuals. CARRY FORWARD The availability of carry forward is an important point to focus on. Employees impacted by the tapered annual allowance in the 2016/2017 tax year can use carry forward from 2013/2014, 2014/2015 and 2015/2016 based on the standard 40,000 allowance; 50,000 in 2013/2014. This may allow the employee and / or employer to continue contributions at current levels for up to 3 more tax years. Employees need to be aware of this, otherwise they might reduce or stop their contributions unnecessarily. For example Liz earns 220,000 a year and has received an employer contribution of 20,000 a year for the last 3 years. Her adjusted income exceeds 210,000 so her annual allowance is reduced to 10,000. However, as she has not maximised her annual allowance in the 3 previous years she can use carry forward to maintain her 20,000 contribution. In 2016/2017 she can carry forward 10,000 from 2013/2014. In 2017/2018 she can carry forward 10,000 from 2014/2015 and, in 2018/2019, 10,000 from 2015/2016. In fact, based on this scenario, she could even increase her contributions and carry forward the full available amounts from each of the previous years. Looking further ahead carry forward will still be very valuable particularly for those with fluctuating income. 6 techtalk

7 EMPLOYER SUPPORT The employee pays the annual allowance charge not the employer, so do employers with highly paid staff need to take any action? Many employers will want to warn their employees about this at the very least. Employers also need to consider the interaction between the minimum pension contributions imposed by automatic enrolment legislation and the maximum tax-relievable contributions that the tapered annual allowance rules will allow, and what action can be taken to ensure that compliance with one set of rules, does not cause an unintended breach of the other. A consequence of the tapered annual allowance and automatic enrolment legislation coming together, is that complying with the minimum contribution under automatic enrolment could result in a worker exceeding their tapered annual allowance and suffering a tax charge. Employers will not know the full income position of their employees, nor indeed will some employees themselves until the end of the tax year, so some employers may consider moving to a broad brush approach of limiting all employer contributions to 10,000 a year. However, they would have to consider their employees contractual entitlements first. The employee could either sweep up at the end of the tax year or in a following tax year, looking back for any excess annual allowance they have to carry forward from the three previous tax years. If this has the effect of reducing the pension contributions below the automatic enrolment minimum for the scheme, it would become non-qualifying for that member. In this instance, switching from a certification basis to an entitlement check where the employer checks that the monetary amount of contributions is at least equal to the minimum required for schemes that calculate contributions on a qualifying earnings basis may ensure that there is no breach for that member. The highest minimum contribution on a qualifying earnings basis is well below the minimum tapered annual allowance of 10,000. An entitlement check is specific for each member. If there are a large number of workers in this position, then instead of many individual entitlement checks, the employer could segment the group and certify a section of the scheme as receiving contributions that are at least as good as those calculated on the qualifying earnings basis. This is informally referred to as set 4. Dialogue with employees will often be the best approach; for example if the employer did reduce the contributions to 10,000 they might have to make it very clear that any other contributions the employee makes themselves could be subject to the annual allowance charge. OFFERING ALTERNATIVES TO PENSION CONTRIBUTIONS If employer pension contributions are reduced or stopped, the employer may want to consider offering additional salary or another benefit to affected employees instead of employer pension contributions. The provision of additional salary or another benefit is likely to be an expectation for many of the individuals affected bearing in mind these will generally be high earning employees, who will hold senior positions. If an employer provides additional salary or another benefit to affected employees instead of employer pension contributions there will generally be a national insurance (NI) cost to the employer (13.8%) and employee (2%) of doing this. Salary If the employer wants to offer additional salary at no extra cost to themselves, then they will need to offer it net of NI. For example Sally s income for 2016/2017 is estimated to be 220,000. Her employer normally contributes 30,000 a year to her pension. Sally doesn t make any contribution. Her adjusted income exceeds 210,000 so her annual allowance is reduced to 10,000. Instead of a 30,000 pension contribution, the employer could offer a 10,000 pension contribution plus additional salary. The maximum amount of additional salary at no extra cost to the employer would be 17,575 salary (ie 20,000/1.138). The employer will pay 13.8% NI on this additional salary, ie 2,425. So, the total cost to the employer is unchanged, at 30,000 ( 17,575 gross salary plus 2,425 employers NI plus the continuing 10,000 pension contribution). The employee would have been 9,000 worse off if the 20,000 pension contribution continued, ie 20,000 at 45% tax = 9,000 tapered annual allowance charge. If the employer replaces a 20,000 pension contribution with salary, the employee receives a net salary of 9,315 (ie 17,575 minus 45% tax and 2% NI) instead of a 20,000 addition to their pension fund, minus a 9,000 tapered annual allowance charge (ie 11,000). Employees with high incomes will need to take advice on the best course of action for them. techtalk 7

8 So, on the face of it the employee is worse off. However, it must be remembered that the pension fund will be taxed on exit. The employee would only receive 17,000 of their pension fund after tax in the best case scenario of being a 20% taxpayer in retirement, (ie 80% of 15,000 = 12,000 plus 5,000 tax-free cash.) This ignores any growth within the tax advantaged pension, and assumes the 9,315 is invested in a similar tax advantaged vehicle, such as an ISA. Whilst this is a very simplistic example, it demonstrates that overall an employee may be better off with salary ( 9,315 net salary in this example versus 17,000 net pension minus a 9,000 TAA charge = 8,000.) An adviser is likely to be needed to help the employee and employer work through the scenario of their particular case, before deciding on the best approach to take. Employee benefits There are some employee benefits that don t (currently) attract income tax or NI that employers might want to consider offering as an alternative to employer pension contributions, if they don t already. Examples include a parking space at or near the workplace, certain childcare provision, mobile telephones and free or subsidised meals in a staff canteen. The provision of pension information and advice costing not more than 150 per year is also exempt, as are payments by employers in respect of independent advice provided to employees in relation to conversions and transfers of pension scheme benefits. In a positive move to help employees, the Government also announced it will legislate to increase the amount available for employer-arranged pensions advice from 150 to 500, without a tax or national insurance charge. The new exemption will be available from April For more examples and information HMRC helpsheet HS207 provides further details. The provision of Relevant Life and Excepted Group Life also currently doesn t attract income tax or NI. There are also a number of tax advantaged share schemes, which may benefit employees without incurring income tax and NI, such as sharesave, company share option plans, enterprise management incentives and share incentive plans. And from 6 April 2016 there is a statutory exemption for trivial non-cash benefits of up to 50. The trivial benefit cannot be provided by way of a contractual obligation or salary exchange sacrifice arrangement and must be given for a non-work reason such as a birthday or social event. For close companies (broadly a company controlled by 5 or fewer shareholders or its directors) there is a 300 annual cap for directors and other office holders and family members but when those family members are also employees, they will get their own 300 annual cap. Savings vehicles Employers might want to consider offering an alternative savings vehicle to encourage their employees to save outside their pension, if the employee has decided to reduce or stop contributions as a result of the tapered annual allowance. However, it must be borne in mind that there will be no income tax or NI advantage for the employer or employee over salary. And note that because affected employees are high income individuals, they are extremely likely to have already invested in an ISA. They can only put money into one cash ISA and one stocks and shares ISA each tax year. PAYING THE TAPERED ANNUAL ALLOWANCE CHARGE The tapered annual allowance excess is added to the employee s other income and taxed at their marginal (ie highest) rate, so in nearly all cases this will be 45%. The employee can just pay it directly themselves via their self-assessment tax return. Normally the more favourable option is the scheme pays option. Schemes are obliged to pay the charge where requested to do so, provided the annual amount charged is at least 2,000 and the total savings into that scheme are at least the annual allowance for the tax year. So it is possible that, employees subject to the tapered annual allowance won t automatically qualify for the scheme pays option and will have to pay the charge from their own funds. INTERACTION WITH THE LIFETIME ALLOWANCE An additional complication for high earners will be the lifetime allowance. The lifetime allowance reduced to 1m on 6 April 2016, accompanied by another round of protection. This further reduction means many more individuals will be affected and be in need of advice. Where both the tapered annual allowance charge and the lifetime allowance charge would apply, consideration must be given to whether it is worth having a pension contribution at all. Whilst pension would be better than nothing, additional salary may be better. Also note that there are situations where the tax could actually be more than 100% if for example the employee had fixed protection and employer contributions continued, so that they lost that fixed protection. An adviser is likely to be needed to help the employee and employer work through the scenario of their particular case, before deciding on the best approach to take. 8 techtalk

9 PERSONAL TAXATION IN 2016/2017 Jeremy Branton Here we provide a brief round up of some of the key limits, rates and allowances applying to personal taxation in 2016/2017, as confirmed in the March Budget and including previous announcements. We now have the personal savings allowance and the dividend allowance in addition to the 0% starting rate tax band for savings. These are all useful reliefs, however, their interaction can be complicated, so we ve also used some examples to explain how they work. INCOME TAX The personal allowance increases to 11,000 for the 2016/2017 tax year and will rise to 11,500 in April The basic rate band is 32,000 for 2016/2017 and 33,500 for 2017/2018. So the threshold at which higher rate tax relief is payable by those who benefit from the standard personal allowance, is 43,000 for 2016/2017 rising to 45,000 for 2017/2018. There is no change to the limit at which taxable income reduces the personal allowance 100,000, nor the 150,000 limit above which additional tax rates apply. The continued availability of pension tax relief on an individual s highest marginal rate of tax in 2016/2017 makes a compelling case for pension saving. Benefits are enhanced where a pension contribution reduces a higher earning individual s taxable income to reclaim the personal allowance or to eliminate a high income child benefit charge. An individual with taxable income of 122,000 making a gross pension contribution of 22,000 becomes entitled to a full personal allowance at a cost of only 8,800, and effective tax relief of 60%. From April 2017, advisers will need to contrast the features of the Lifetime ISA for those individuals who are eligible alongside pensions when discussing retirement planning. For more information see our article on page 14. techtalk 9

10 Don t forget the Marriage Allowance, the ability for one spouse/civil partner to transfer up to 1,100 of their own personal allowance to the other, but only if both are basic rate taxpayers. This could be worthwhile if there is one non-earning or very low earning spouse. PERSONAL SAVINGS ALLOWANCE A personal savings allowance is introduced for individuals from 6 April This is worth up to 1,000 for basic rate tax payers and 500 for those with income attracting higher rate tax. Additional rate tax payers are not eligible for the allowance. To help facilitate this, banks, building societies and National Savings and Investments (NS&I) will stop deducting tax from interest payments paid or credited from 6 April Interest from ISAs doesn t count towards the personal savings allowance. Budget 2016 announced that interest from OEICs, unit trusts, investment trusts and peer to peer loans may also be paid without tax being deducted from April Income within an individual s personal savings allowance will still count towards their basic or higher rate limits and may affect the amount of allowance they are entitled to and the rate of tax applying to savings income exceeding the allowance. Individuals with taxable income below 17,000 won t pay tax on their savings due to an increased personal allowance of 11,000 and the 0% starting rate band which continues to apply to savings income up to 5,000. This is provided that taxable non-savings income doesn t exceed this amount and the 1,000 personal savings allowance. A couple with significant levels of savings might consider restructuring holdings between themselves to ensure full use is made of both of their allowances. A further 30,480 may be sheltered in ISAs including cash ISAs, in 2016/2017. Examples John is retired and receives pension income of 25,000 a year plus non ISA savings interest totalling 2,500 in 2016/2017. As he s entitled to a personal savings allowance of 1,000, he will pay tax at the basic rate of 20% on 1,500 of the interest received. This will normally be done by HMRC adjusting his tax code based on information supplied by the savings provider. Doug is a higher rate taxpayer while his wife Anne is a basic rate taxpayer. They each receive 500 of interest from individually held non ISA savings accounts in May As a result, Doug has used up his personal savings allowance while Anne has 500 of her allowance left. Doug could consider transferring some of his savings into Anne s name to enable her to use her remaining allowance but this would need to be an outright gift to be effective for tax purposes. The personal savings allowance doesn t apply to trusts. Interest falling within a discretionary trust s standard rate band will be taxed at 20% with any excess taxed at 45%. Trusts with an interest in possession would pay tax at 20% on interest received necessitating a reclaim for tax by a life tenant with unused personal savings allowance available. DIVIDEND ALLOWANCE From April 2016, the 10% dividend tax credit is abolished and replaced for individuals by a 5,000 a year dividend allowance. Dividend income above this will be taxed at the following rates: 7.5% for basic rate taxpayers 32.5% for higher rate tax payers 38.1% for additional rate taxpayers The new rates apply to the actual payment received there s no longer a requirement to gross-up the dividend. Dividends within the 5,000 allowance count towards an individual s basic or higher rate tax bands and so may affect the rate of tax paid on dividends received above the allowance. Examples Simon receives salary of 40,000 and dividends of 10,000 in tax year 2016/2017 which are held outside an ISA. Tax is applied as follows: 11,000 personal allowance applies to first part of salary 29,000 remaining salary taxed at basic rate 20% 3,000 first 3,000 of dividend allowance allocated against remaining basic rate band 2,000 remaining dividend allowance applies 5,000 remaining dividend taxed at 32.5% Annabel receives 2,000 in interest and 7,500 in dividend payments, both held outside an ISA in addition to her salary of 35,000 in 2016/2017. As she will pay tax at the higher rate on some of her income she s only entitled to a personal savings allowance of 500. Tax legislation states that dividends sit at the highest part of an individual s income where savings income is also received. Her income would be applied as follows: 11,000 personal allowance applies to first part of salary 24,000 remaining salary taxed at basic rate 20% 2,000 savings income applied against basic rate band 500 tax-free, 1,500 subject to basic rate tax at 20% 5,000 dividend allowance applied against basic rate band 1,000 dividends allocated against remaining basic rate band and taxed at basic rate 7.5% 1,500 dividends taxed at 32.5% higher rate Higher and additional rate taxpayers with modest share/oeic portfolios may find they pay less tax under the new dividend taxation rules. Those losing out are likely to be basic rate taxpayers with significant shareholdings. The dividend allowance won t apply to trusts. Dividend income falling with the standard rate band will be taxed at the ordinary rate of 7.5%, dividend income above this will be taxed at 38.1%. A trust with an interest in possession will be taxed at 7.5% on dividend income it receives. A life tenant would be able to reclaim this if they had unused dividend allowance available to cover this. 10 techtalk

11 RENT A ROOM RELIEF The limit for tax-free income that can be received from renting out a room(s) in an individual s sole or main residence increases from 4,250 to 7,500 per year from 6 April ABOLITION OF WEAR AND TEAR ALLOWANCE From April 2016, landlords of buy to let properties can get tax relief only on expenses actually incurred in replacing furnishings. Up to this date, landlords could get tax relief on 10% of the rental income as an automatic wear and tear allowance. LIFE POLICY TAXATION Budget 2016 announced the Government will amend the current rules for taxing part surrenders and part assignments of life policies to prevent excessive tax charges arising. The Government will consult on a range of alternatives with a view to draft legislation appearing in Finance Bill CAPITAL GAINS TAX The capital gains tax annual exempt amount remains at 11,100 for 2016/2017. It remains a maximum of 5,550 for most trusts. As it s not possible to carry forward any unused exemption it s a case of use it or lose it. Reallocating investment holdings between spouses/civil partners to take advantage of two full annual exemptions is possible due to the no gain/no loss rule applying at the time of the disposal between spouses. As already mentioned gifts must be unconditional to be effective for tax purposes. From 6 April 2016 the capital gains tax rates reduce to 10% and 20% for basic and higher rate taxpayers respectively. The rate for trustees and personal representatives also reduces from 28% to 20%. These rates won t apply to disposals of residential property that don t qualify for private residence relief for example buy to let property or to carried interest. Careful tax planning by those potentially facing a capital gains tax charge include disposing of assets standing at a loss, to set this against gains arising in the same year, and reducing income levels so more of a gain falls into the basic rate income tax band. A personal contribution to a pension will extend the basic rate band when calculating tax on a capital gain. Budget 2016 announced that entrepreneurs relief will be extended to external investors in unlisted trading companies. This will apply to newly issued shares purchased on or after 17 March 2016, proving they are held for a minimum period of three years from 6 April A separate lifetime limit of 10 million will apply to such qualifying gains. Further technical changes to entrepreneurs relief were announced including the ability to claim entrepreneurs relief when disposing of a private asset used by a business to a family member. INHERITANCE TAX The inheritance tax nil-rate band remains at 325,000 for 2016/2017 and is frozen until 5 April An additional nil-rate band the residence nil-rate band will apply from 6 April 2017 to estates where the main residence passes on death to direct descendants. Initially worth 100,000 in 2017/2018, it will rise in 25,000 increments to 175,000 by 2020/2021. For married couples/ civil partners, any unused residence nil rate band on first death can be transferred for use against the survivor s estate on their subsequent death after 6 April 2017, in a similar manner to the standard nil rate band - potentially providing a further 500,000 of nil rate band allowance to apply against the surviving spouse s estate. Those with net estates above 2 million will see their additional nil-rate band reduced by 1 for every 2 above this threshold. Legislation is being introduced in Finance Bill 2016 to ensure the residence nil-rate band will also be available to an individual downsizing or ceasing to own a home on/after 6 July This is contingent on them leaving assets of an equivalent value on their death to their direct descendants. Example Roger and Jan jointly own their home as tenants in common. Roger s Will leaves his entire estate to Jan and he d made no lifetime gifts affecting his standard nil rate band. His estate is valued at 1.75 million when he dies in May 2017, which means both the standard and residence nil rate bands can be enhanced by 100% on Jan s subsequent death. Jan dies in March 2021 by which time her estate has grown to 2.4 million. As a result of tapering, which is applied to the total residence nil rate band including the transferrable component, only 150,000 of residence nil rate band is available instead of 350,000. In addition, her estate has a standard nil rate band totalling 650,000 including the transferrable component provided she hasn t made any lifetime gifts in the previous seven years. At the time of writing, it appears possible to make a lifetime gift, even on a close to last minute basis, to bring the value of a death estate to below the 2 million tapering threshold, as this is based on the value of the estate actually transferred on death. For those still affected by inheritance tax, planning strategies will revolve around gifting or spending capital including the use of trusts to reduce the value of the estate. Those considering charitable legacies in their wills can take advantage of the reduced death rate of 36% subject to satisfying the associated conditions. Use of exemptions shouldn t be overlooked, in particular, normal expenditure out of income provided a regular funding commitment can be demonstrated and the individual s ability to maintain their normal standard of living isn t compromised. This could include funding regular contributions into a pension for a partner, child or grandchild. DRAWDOWN FUNDS As previously announced the Government will introduce legislation in Finance Bill 2016 to clarify that no charge to inheritance tax will apply to unused drawdown funds remaining on death. This will be backdated to cover deaths on or after 6 April techtalk 11

12 BUDGET PENSIONS TECHNICAL CHANGES ROUND UP Chris Jones No news was the big news story for pensions in the Budget as after much speculation regarding radical reform, all the main tax advantages remained unchanged. However, there were a few minor technical changes along with some proposed changes to funding of financial advice. The first set of changes was billed under the heading of pension flexibility. These are all essentially a tidy up of the legislation that was brought in under the Pensions Freedom and Choice reforms. All will come into effect as soon as the Finance Bill 2016 has been approved. These are as follows. DEPENDANT S DRAWDOWN FOR THOSE AGED UNDER 23 An odd anomaly in the pension freedom rules meant that where a flexi-access drawdown arrangement was set up for a dependant beneficiary aged 23 or below it would have to cease at age 23. This created an odd situation where if a member nominated their minor niece to receive pension death benefits and the niece took the funds via drawdown, the arrangement could potentially continue for the rest of her life. Whereas if someone nominated their daughter, as they were a dependant, their drawdown arrangement would have to end at age 23. The rules will be amended to allow dependant s flexi-access drawdown to continue beyond the age of 23 in the same way as currently for nominee s drawdown. 12 techtalk

13 SERIOUS ILL HEALTH PAYMENTS The serious ill health provisions are extended to allow lump sum payments to be made from any uncrystallised funds in a partially crystallised arrangement. All the other conditions remain. As a reminder, serious ill health payments can only be paid where the member has a life expectancy of less than 12 months. Where the member is under 75 lump sum payments will be free of tax. The taxation of post 75 serious ill health payments was also amended. Previously these were taxed at a flat rate of 45%. These will now be taxable at the member s marginal rate of tax. Together the changes bring the taxation of serious ill health payments into line with the payment of death benefits. CHARITY LUMP SUMS The rules relating to charity lump sum death benefits will be amended so that all payments whether crystallised or uncrystallised will be payable free of tax where the member died under the age of 75. In addition the normal two year rule, whereby benefits need to be paid within two years of the member s death in order to qualify for the tax advantages, will not apply to charity lump sums. TRIVIAL LUMP SUMS The trivial commutation rules are extended to allow a lump sum to be paid from a money purchase scheme pension in payment. DEATH BENEFITS UNDER A CASH BALANCE ARRANGEMENT Where the scheme tops up the death benefits to the level promised, the full payment will now be an authorised payment. As well as the technical changes there were also some proposed changes aimed at helping clients to better understand their pension benefits and increase the access to financial advice as recommended by the Financial Advice Market Review. PENSION DASHBOARD By 2019 the government will ensure that the pension industry puts in place what it calls a pension dashboard. This is an application that will allow clients to view the value of all their pension funds in one place. This is in response to research that showed that clients approaching retirement find it hard to understand the value of their pension savings. FINANCIAL ADVICE Currently, employers can fund individual financial advice for employees of up to 150 free of an income tax or national insurance charge. The government proposes to increase the amount to 500 for pension advice from April This will give far greater scope for companies to pay for personal financial advice for their employees and help them understand the increasing complexity of pension planning. Higher earners subject to the tapered annual allowance and/or lifetime allowance will be in particular need of individual advice. The government will also consult on a proposal to allow those under the age of 55 to take up to 500 from their defined contribution pension scheme to pay for financial advice. The withdrawals would be free of tax. They will also consult on introducing a single definition of financial advice. techtalk 13

14 LIFETIME ISAs AND PENSIONS COMPARED. EITHER, OR BOTH? Bernadette Lewis Lifetime ISAs will allow younger people to save for both their first home and their retirement in the same plan. We summarise the proposals and explain why many should consider saving in both a Lifetime ISA and a pension. 14 techtalk

15 The Government s stated purpose for the new Lifetime ISA is to provide a means for younger people to save for both their first home and their retirement. It seems to offer an easy and attractive solution to the house or pension? dilemma. It takes many familiar features of the ISA and adds the promise of a 25% Government bonus promoted as, the individual saves 4,000 and the Government adds 1,000. This somehow sounds so much better than getting 20% basic rate tax relief on a 4,000 net pension contribution, even though both result in a 5,000 savings pot. There s the added promise that withdrawals, including the Government bonus, will be tax-free for house purchase after 12 months and for all purposes from age 60. On the face of it, that s better for a basic rate taxpayer than pension withdrawals from age 55, offering 25% tax-free cash but with the balance taxed at the individual s marginal rate of income tax. However, for the increasing numbers with access to workplace pensions and as automatic enrolment rolls out, that ignores the boost from employer contributions and the benefits of salary exchange where available. The wary may feel that a promise of fully tax-free withdrawals is just a little too good to be true over the long term when looking at funds that will include a Government top up equivalent to basic rate tax relief. After all, we ve experienced a decade of tweaks to the 2006 pension simplification reforms, with significant reductions in the once promised levels of annual and lifetime allowances now restricting the tax benefits of pension saving. Overall, when it comes to planning, Lifetime ISAs probably make saver s choices more complicated, not less. Many younger savers probably shouldn t be relying just on the Lifetime ISA. Instead, they re likely to benefit from membership of a workplace pension, taking advantage of employer contributions and possibly also salary exchange. If they aren t on the housing ladder, then additional saving into a Lifetime ISA will give them access to a generous Government bonus to boost a deposit on their first home. However, that means they will still need to juggle affordability, with the risk that the apparently easy option of saving in a Lifetime ISA will lead them to opt out of their workplace pension. LIFETIME ISAs : THE PROPOSALS It s likely that some details will change before Lifetime ISAs become available in April 2017, as the Government will be consulting on the following proposals, with a view to issuing draft legislation in autumn People aged between 18 and 40 will be able to open Lifetime ISAs from April Between the ages of 18 and 50, they ll be able to save up to 4,000 a year out of after-tax income and receive a 25% Government bonus at the end of the tax year. Investment growth on the saver s own contributions and the Government bonus will be tax-free. The Government is considering allowing people to contribute more than 4,000 a year, or after age 50, although these funds won t qualify for a bonus. Contributions to a Lifetime ISA will count towards the increased 20,000 overall ISA limit for 2017/2018. The 20,000 limit also covers contributions to cash ISAs, stocks and shares ISAs and innovative finance ISAs. The usual providers will be able to offer Lifetime ISAs and the qualifying investments will be the same as for cash or stocks and shares ISAs. Individuals will be allowed to have more than one Lifetime ISA, so long as they pay into just one in a tax year. It will be possible to transfer Lifetime ISAs between providers in the normal way and to fund a Lifetime ISA by transferring in funds from existing ISAs. HELP TO BUY ISAs AND LIFETIME ISAs Help to Buy ISAs, available since December 2015, will remain open for new savers until 30 November 2019 and for new contributions until A saver who has both a Help to Buy ISA and a Lifetime ISA will be able to use the bonus from just one of these accounts towards purchasing a first home. During 2017/2018 only, it will be possible to transfer funds from an existing help to Buy ISA into a Lifetime ISA. Funds saved in the Help to Buy ISA up to 5 April 2017 won t count towards the Lifetime ISA contribution limit. The transferred funds will qualify for the Lifetime ISA bonus. The saver won t be able to access the funds toward first home purchase until 12 months after opening the Lifetime ISA. LIFETIME ISAs : PURCHASING A FIRST HOME Savers will be able to withdraw their own contributions plus the bonus tax-free when purchasing a first home in the UK worth up to 450,000 at any time from 12 months after opening a Lifetime ISA. They must intend to live in the property as their only home, not use it as a buy to let. If people are buying a property jointly, they can each use funds from their own Lifetime ISAs. If the purchase falls through, the funds can be returned to the existing Lifetime ISA without this counting as a new contribution. LIFETIME ISAs : ACCESS FROM AGE 60 Savers will also be able to fully or partially withdraw the funds, including the bonus, tax-free to use for any purpose from age 60 onwards. Any funds that are left invested will continue to grow tax-free. LIFETIME ISAs : ACCESS IN OTHER CIRCUMSTANCES It will be possible to withdraw all the funds, including the bonus, tax-free on diagnosis of terminal ill-health at any age. The Government will consult on whether savers should be able to withdraw their contributions and the bonus penaltyfree for other specific life events. It s also looking into whether it should allow people to borrow and fully repay funds penalty-free, using a similar approach to 401Ks in the USA. Otherwise, the Government proposes to allow withdrawals before age 60 that aren t in connection with buying a first home, subject to losing the bonus plus the associated interest / investment growth and a 5% penalty charge on the withdrawn funds. These proposed rules suggest that providers will have to maintain at least notional separate savings pots to identify each saver s own funds and related growth or interest, and the bonus funds plus growth/interest. techtalk 15

16 LIFETIME ISAs AND PENSIONS COMPARED Tax treatment of funds in Tax treatment of funds out Workplace arrangements Death benefits pre 75 Death benefits post 75 Lifetime ISA 25% Government bonus equates to 20% basic rate tax relief. Tax-free if used towards first house purchase after 12 months. Tax-free from age 60 or on diagnosis of terminal illness. Can access earlier, but lose bonus and growth on bonus and also liable to 5% charge. Employer can t contribute. In member s inheritance tax (IHT) estate. In member s IHT estate. Pension Income tax relief on member contributions at highest marginal rates. Relief at source schemes enable all non-taxpayers to benefit from basic rate tax relief automatically. A legislative anomaly relating to net pay schemes currently denies tax relief to workers with total earnings below the personal allowance. 25% tax-free cash from age 55 (age 57 from 2028). Balance available from age 55/57, subject to income tax at highest marginal rates. Employer can contribute to boost pension pot. Employer contributions exempt from employer national insurance (NI), employee NI and income tax. Employer/employee NI savings possible via salary exchange. Can use NI reductions to reduce costs or boost pension savings. Doesn t normally form part of member s IHT estate. Available as a lump sum or drawdown to nominated beneficiary free of all tax. Lifetime allowance restrictions can apply. Doesn t normally form part of member s IHT estate. Available as a lump sum or drawdown to nominated beneficiary, taxed at their marginal rate of income tax. Saving in a Lifetime ISA can look superficially more attractive than a pension for a basic rate taxpayer. This is more likely to be true for the self-employed, who will be able to save up to 4,000 a tax year and benefit from the 25% bonus, without having to calculate their relevant UK earnings. But employees with access to a workplace pension could lose out if they choose this route for their retirement income planning. They might be missing out on more than their employer s contributions, as many workplace pensions offer salary exchange (also know as salary sacrifice). On this front, there was some good news in the Budget, as the Government confirmed that any new salary sacrifice restrictions won t target pension saving. Example Lifetime ISA Pension Workplace pension & employer contribution Investment bonus 125 with tax relief 125 with tax relief + 75 employer Workplace pension & employer contribution & salary exchange 125 with tax relief + 15 NI + 75 employer Fund value after 10 years Value on withdrawal Assumptions: The member is a basic rate taxpayer throughout. The cost to the member is 100. The investment grows at 5% a year after all charges for 10 years. 25% tax-free cash is available from the pension options. Workplace pensions: 5% employee/ 3% employer contributions. Salary exchange option: only employee s 12% NIC saving is added to employer pension contribution, employer retains its own cost saving. We ve used a simplified approach to illustrate the planning point. Salary exchange offers a wide range of options for using any NI savings. 16 techtalk