Summer 2015 Budget Summary

The Conservative’s first Budget as a majority government since 1996 certainly contained a lot of proposals, as well as detail on previously mooted points. This document can be read in isolation, or as a fuller discussion of the shorter document which accompanies this. It’s important to stress that the areas of tax and legislation discussed here are still only proposals and need to be included within the Finance Bill to become law. Epoch Wealth Management is not a tax adviser and cannot be held liable for any inaccuracies in this document.

The Budget was split into 6 areas of interest to our clients and those we work with:

  1. Inheritance Tax
  2. Main Residence nil-rate band
  1. Pensions
  2. annual allowance reduction for ‘high’ earners
  3. Removal of the pension Input Period (PIP) and transitional rules
  4. Lifetime allowance reduced
  5. Salary sacrifice ‘under the microscope’
  6. Annuity buy-back postponed
  7. Future changes?
  1. Personal Taxes
  2. Increased personal allowances
  3. Dividend personal allowance & rates
  1. Business taxation
  2. Lower corporation tax rates
  3. Higher national minimum wage
  4. National Insurance relief
  1. Buy-to-let – reliefs cut back
  1. ISAs – cash withdrawal & top-up extended to all ISAs

Section 7 deals with some worked examples for the new rules on IHT and pensions.

1.Inheritance Tax

  1. Nil rate band

Legislation will be introduced in Summer Finance Bill 2015 to provide for an additional main residence nil-rate band for an estate if the deceased's interest in a residential property, which has been their residence at some point and is included in their estate, is left to one or more direct descendants on death.

The value of the main residence nil-rate band for an estate will be the lower of the net value of the interest in the residential property (after deducting any liabilities such a mortgage) or the maximum amount of the band. The maximum amount will be phased in so that it is:

Tax Year / Allowance / Max estate value before allowance Lost
2017/18 / £100,000 / £2.20m
2018/19 / £125,000 / £2.25m
2019/20 / £150,000 / £2.30m
2020/21 / £175,000 / £2.35m

It will then increase in line with CPI for subsequent years.

The qualifying residential interest will be limited to one residential property but personal representatives will be able to nominate which residential property should qualify if there is more than one in the estate. A property which was never a residence of the deceased, such as a buy-to-let property, will not qualify.

A direct descendant will be a child (including a step-child, adopted child or foster child) of the deceased and their lineal descendants so this change will be of no use to those without children.

A claim will have to be made on the death of a person's surviving spouse or civil partner to transfer any unused proportion of the additional nil-rate band unused by the person on their death, in the same way that the existing nil-rate band can be transferred.

If the net value of the estate (after deducting any liabilities but before reliefs and exemptions) is above £2 million, the additional nil-rate band will be tapered away by £1 for every £2 that the net value exceeds that amount. 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).The taper threshold at which the additional nil-rate band is gradually withdrawn will rise in line with CPI from 2021-22 onwards.

The legislation will also extend the current freeze of the existing nil-rate band at £325,000 until the end of 2020-21.

In addition, legislation in Finance Bill 2016 will provide that where part of the main residence nil-rate band might be lost because the deceased had downsized to a less valuable residence or had ceased to own a residence on or after 8th July 2015, that part will still be available provided the deceased left that smaller residence, or assets of equivalent value, to direct descendants. However, the total amount available will not exceed the maximum available residence nil-rate band. The technical details of how the additional nil-rate band will be enhanced to support those who have downsized or ceased to own their home will be the subject of a consultation to be published in September 2015 ahead of the draft Finance Bill 2016.

The measure will take effect for relevant transfers on death on or after 6th April 2017. It will apply to reduce the tax payable by an estate on death; it will not apply to reduce the tax payable on lifetime transfers that are chargeable as a result of death. The main residence nil-rate band will be transferable where the second spouse or civil partner of a couple dies on or after 6th April 2017 irrespective of when the first of the couple died.

Please see examples 1 – 4 in the appendix for details of how this works in practice.

2.Pensions

  1. Pensions annual allowance and aligning pension input periods

Most people can contribute or have contributions made on their behalf up to £40,000 a year without suffering a tax charge. From April 2016, this amount will be reduced for individuals with incomes of over £150,000, including pension contributions (employer and employee). Their annual allowance (AA) will be reduced by £1 for every £2 of income they have over £150,000 with a maximum reduction of £30,000 - 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' used to test whether the £150k limit is exceeded 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 (for DB schemes this means calculating the pension input amount, i.e. annual accrual, in the normal way and then subtracting the amount of employee contributions paid).

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

In advance of the introduction of this tapered annual allowance, transitional rules are being introduced from Budget Day (8th July 2015) to align pension input periods (PIPs) with the tax year by April 2016 and to protect any savings already made before Budget from retrospective tax charges.

The Government has published a technical note providing draft guidance on the transitional rules that apply from Budget Day along with a brief overview of the tapered annual allowance rules. You should be aware that this information is based on the draft legislation which is subject to change as it progresses through Parliament.

  1. Transitional rules for pension input periods

All pension input periods open on Budget Day will end on that day (8th July 2015).The next PIP will be 9th July 2015 to 5th April 2016 for these arrangements.

This means that all existing arrangements on 8th July 2015 will have two or three pension input periods ending in tax year 2015-16, depending on the start date of the open PIP.

For new arrangements that have their first PIP on or after 9th July 2015 and on or before 5th April 2016, the PIP will start on the normal commencement day and end on 5th April 2016.

Pension input period rules from 6th April 2016

PIPs will continue to exist from 6th April 2016, but they will be aligned with the tax year. The

Government will consider at a later stage whether it can further simplify the rules by removingthe concept of a PIP altogether.

From 6th April 2016, all existing arrangements will have a 12 month PIP from 6th April 2016 to 5thApril 2017. All subsequent PIPs will be in line with the tax year. It will not be possible to vary this PIP.

As in most arrangements, the length of all the pension input periods that will end in tax year 2015-16 will be greater than 12 months, transitional rules are required to protect savers who have made savings prior to Budget on the assumption that their pension input period would not change. Everyone will have a total annual allowance of £80,000 for 2015-16, plus any available carry forward. Individuals will then have an allowance of up to £40,000 (of the £80,000) for post-Budget savings plus remaining carry forward from 2014-15, 2013-14 or 2012- 13.

Example A:Ian has pension savings of £73,000 for pension input periods ending in 2015-16 of which£61,000 was made before 9 July 2015 and £12,000 after. Ian is not subject to the moneypurchase annual allowance. As Ian’s total savings are less than £80,000 and his post-budgetsavings are less than £40,000, Ian will not have an annual allowance charge for 2015-16.

So basically, in terms of annual allowance, anyone who has paid £40k before 8th July cancontribute another £40k before the end of this tax year (earnings etc. permitting if to be fullytax-relievable).

How this will work

All PIPs open on 8th July 2015 will end on that date with the next pension input period 9th July2015 to 5th April 2016. Savings for PIPs ending in 2015-16 will then be split into two mini taxyears depending on whether the PIP ends on or before Budget or is a post-Budget PIP whichwill end on 5th April 2016. Individuals will have an annual allowance of £80,000, plus anyavailable carry forward, for all their pension savings in all PIPs ending on or after 6th April 2015and on or before 8th July 2015. Savings from 9th July 2015 to 5th April 2016 will have a nil annualallowance, but up to £40,000 of any unused annual allowance from the period up to 8th July2015 is added to this. If an individual had pension savings at some time in the period 9th July2015 to 5th April 2016 but was not a member of a registered pension scheme at any time duringthe period 6th April 2015 to 8th July 2015 that individual will have an annual allowance of £40,000 for the period 9th July 2015 to 5th April 2016.

Example B:Ian has made pension savings of £61,000 for PIPs ending from 6th April 2015 to 8th July 2015.

This is tested against the annual allowance of £80,000 for that period. His savings are therefore£19,000 less than £80,000, and so Ian’s annual allowance for post-Budget savings is theallowance of nil plus the £19,000 carry forward from pre-Budget plus any other carry forwardthat he has available.

Splitting the 2015-16 tax year and the annual allowance

The 2015-16 tax year will be split into two mini tax years for the purpose of the annual allowance, the pre-alignment tax year and the post-alignment tax year (referred to as mini tax years).

The pre-alignment tax year

The annual allowance for savings made during PIPs ending in the pre-alignment tax year is £80,000, plus any available carry forward. That is for any savings in any PIP ending between 6th April 2015 and 8th July 2015.

Example C:Leonora is a member of an arrangement with a PIP from 1st June 2014 to 31st May 2015. Under the Budget changes, the next PIP will be from 1st June 2015 to 8th July 2015. Leonora’s combined pension savings in these two PIPs ending in the pre-alignment tax year, will be tested against the pre-alignment annual allowance of £80,000.

The post-alignment tax year

The annual allowance for savings made during the post-alignment tax year is the amount of the £80,000 that has not been used from the pre-alignment tax year, subject to a maximum of £40,000, plus any remaining available carry forward from 2012-13, 2013-14 or 2014-15. That is for any savings in the PIP that will end on 5th April 2016. For those who haven’t been a member of a registered pension scheme during the pre-alignment tax year, they will have an annual allowance of £40,000 for the post-alignment tax year.

ExampleD:Leonora’s savings in the pre-alignment tax year are £17,000. Her annual allowance for the post-alignment tax year will therefore be the maximum of £40,000 plus any available carry forward.

ExampleE:Ian’s savings in the pre-alignment tax year are £61,000. His annual allowance for the post-alignment tax year is therefore £19,000 plus any available carry forward.

Carry Forward

Carry forward will continue to apply as currently, that is any unused annual allowance from the three previous tax years can be carried forward to the current tax year. However there are special rules that apply for tax year 2015-16, as for the purposes of the annual allowance 2015-16 has been split into two mini tax years, the pre-alignment tax year and the post-alignment tax year. The two mini tax years will be treated as one tax year for the purposes of calculating which years unused annual allowance can be carried forward from.

For the pre-alignment tax year, carry forward will therefore be available for any unused annual allowance from 2012-13, 2013-14, and 2014-15, as at present.

For the post-alignment tax year, carry forward will be available for any unused annual allowance from these same three tax years, 2012-13, 2013-14, and 2014-15, where it hasn’t been used up by the pre-alignment tax year, plus the limited carry forward (up to £40,000) from the pre-alignment tax year.

For three tax years after 2015-16, carry forward will be available as follows:

  • For 2016-17 from 2013-14, 2014-15 and the pre-alignment tax year
  • For 2017-18 from 2014-15, the pre-alignment tax year and 2016-17
  • For 2018-19 from the pre-alignment tax year, 2016-17 and 2017-18.

Lump sum death benefits

Lump sum death benefits paid from registered pension schemes on death after age 75 are taxed at 45% in 2015-16. It was expected that this tax rate would change for lump sums paid from 6th April 2016 onwards so as to be taxed at the recipient’s own income tax rate(s) and this has now been confirmed in the Budget.

Where a lump sum death benefit is taxable it will be subject to the recipient’s marginal rate of tax where the lump sum is paid directly from the pension scheme to an individual who is the ultimate beneficiary. The lump sum will be taxed as pension income and tax will be deducted under PAYE.

The tax charge will remain at 45% where the taxable lump sum death benefit is paid to someone other than an individual who is the ultimate beneficiary, such as a trust or a company.

Strengthening the incentive to save: a consultation on pension tax relief

The government is consulting on whether there is a case for reforming pension tax relief to strengthen incentives to save and offer savers greater simplicity and transparency, or whether it would be best to keep with the current system.

The consultation closes on 30th September 2015. The government will then consider all responses and publish a ‘summary of responses’ which will set out how it intends to proceed.

  1. Lifetime allowance

The proposed reduction in the lifetime allowance to £1m in 2016-17 will go ahead. It will be indexed in line with CPI from 2018-19. Details are awaited of new transitional protection options.

  1. Salary sacrifice

Although rumoured to be heading for a clampdown in the Budget, there were no changes to the salary sacrifice rules. The Government will, however, be monitoring the growth of such schemes and their impact on tax take.

  1. Secondary annuity market

Will be delayed until 2017 to allow more time to ensure the necessary consumer safeguards are in place. More details will be announced in the autumn.

  1. Future changes?

In his budget speech, Mr Osborne said he was open to “radical changes” within the pension industry and has launched a Green Paper to consult on the issue. He mentioned a possible solution being that monies contributed would not receive tax relief but would grow tax free and would not have tax on income or gains, or on surrender. This is clearly an area of planning which will continue to evolve over time.

Please see examples 5 – 7 in the appendix for details of how this works in practice.

3.Personal Taxes

  1. Personal allowance and tax thresholds

From next April there will no longer be an age-related Personal Allowance as the standard Personal Allowance will then overtake the frozen age-related allowance of £10,660. So the same Personal Allowance will apply regardless of age.

Tax year / Personal Allowance / Basic rate limit / Higher rate threshold
2016-17 / £11,000 / £32,000 / £43,000
2017-18 / £11,200 / £32,400 / £43,600

From 2018-19, rises will be in line with CPI, not RPI.

  1. Dividend tax

The dividend tax credit will be replaced by a new £5,000 tax-free dividend allowance for all taxpayers from April 2016. Dividends that exceed this allowance will be taxed as follows:

  • Basic rate band - 7.5%
  • Higher rate band - 32.5%
  • Additional rate band - 38.1%

So in 2016-17, a basic rate taxpayer could potentially have tax free income of up to £17,000 (£11,000 personal allowance plus £1,000 personal savings allowance plus £5,000 dividend allowance) and a higher rate taxpayer £16,500 (personal savings allowance is £500 for higher rate taxpayers).

Some people may also be able to take advantage of the tax free £5,000 savings rate band. With the right combination of income levels and types, tax free income of up to £22,000 is possible. More important than ever to assess an individual’s overall income position in order to take maximum advantage of these tax breaks where possible.

This change will, from 6th April 2016, affect the comparison of the alternative remuneration structures available to directors/shareholders of private businesses - take salary/bonus and pay NI or take dividends with no NI but with the new dividend tax charge.

According to the Chancellor, “Those who either pay themselves in dividends or have large shareholdings worth typically over £140,000 will pay more tax; 85% of those who receive dividends will see no change or be better off. These changes will also start to reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities. This will reduce the cost to the Exchequer of future tax motivated incorporation (TMI) by £500m a year from 2019.”