With the war of words over the despatch boxes finally dying down, it is important to look at some of the more prominent changes being made by 2016’s Budget.
Major Changes Relating to Financial Planning
- The Income Tax personal allowance will be increased from £11,000 to £11,500 in the 2017-18 tax year. The threshold for the higher rate of 40% will also be raised to £45,000 in 2017-18.
- Capital Gains Tax is being reduced from 18% to 10% for basic rate taxpayers and from 28% to 20% for higher rate taxpayers (and basic rate taxpayers whose gains exceed the unused part of their basic rate tax band). These changes will have effect from 6th April 2016, but won’t apply to residential property gains unfortunately.
- A Personal Savings Allowance is coming into effect to allow a 0% rate on savings income up to £1,000. This was first announced in the Budget 2015 but will be coming into effect with the Finance Bill 2016.
- A Lifetime ISA is being created to allow adults under 40 to save up to £4000 per year. The government will add £1 for every £4 put in by the saver. The Lifetime ISA will be available from April 2017.
- Annual ISA subscription limit is to be increased to from £15,240 to £20,000 per year from 6th April 2017.
Pension Tax Changes
There are a number of changes to Pension tax detailed in the Budget, the main ones are as follows:
- Serious ill-health lump sum payments from pensions are to be tax free for someone aged under 75 with less than a year to live, even if they have already accessed their pension. If the individual is over 75 then it is taxable at their marginal rate instead. These provisions are to take effect from the date which the Finance Bill 2016 receives Royal Assent.
- Dependants’ Death benefits are being changed to enable the government to ‘top-up’ authorised payments upon the death of the pension holder. This is to take effect from the date which the Finance Bill 2016 receives Royal Assent.
- The position of drawdown pensions in relation to Inheritance Tax is also to be changed. A drawdown pension is one which allows you to take a tax-free lump sum amount from your pension pot, whilst the remaining funds are usually invested to provide a regular income. The new provisions ensure that no Inheritance Tax charge will apply when a pension scheme member designates funds for drawdown but does not draw all of the funds before their death. It is to be backdated to apply to deaths on or after 6 April 2011.
Changes to Taxes after Death
- ISAs during Estate Administration: The ISA savings of a deceased person will continue to benefit from tax advantages during the administration period of their estate.
No date has been set for when these measures will take effect but the Budget states that further plans for introducing the provisions will be brought out in 2016, after a technical consultation with ISA providers.
Residence Nil-Rate Band Available for People Downsizing
Provisions will be made to allow someone to use the residence nil-rate tax band when they downsize, or cease to own a home, on or after 8th July 2015. To qualify for this, the date of death must be on or after 6th April 2017 and the deceased’s smaller property, or assets of equivalent value, must be passed to their direct descendants (such as a child or grandchild).
Objects Granted Exemption from Estate Duty – Technical Amendments to Current Legislation
These changes affect objects considered exempt for Estate Duty on the basis of being culturally or historically significant. Estate Duty was essentially the forerunner to Inheritance Tax but there are still situations where the older tax of Estate Duty can still apply.
The changes represent the government trying to bring the law on such objects into the newer Inheritance Tax and Capital Gains Tax regimes. The newer regimes still allow for tax relief for such objects provided certain conditions are met, such as maintaining the object in good condition and displaying it for public view etc.
The main changes are:
- If exemption to the object was granted under Section 40 of the Finance Act 1930 then that exemption remains until the object is sold.
- Where both Estate Duty and Inheritance Tax could apply, HMRC can choose which charge to raise. This applies to chargeable events on or after 16th March 2016
- To allow a charge to be raised on objects that are currently subject to an Estate Duty exemption which have been lost. This does not apply if it is considered that the loss was outside of the owner’s control. This provision will take effect from the date of Royal Assent to the Finance Bill 2016.
- To allow certain galleries and museums, who have lost the benefit of Inheritance Tax exemptions due to their status as independent charitable trusts, back into the scope of the provisions. This will take effect from the date of Royal Assent to the Finance Bill 2016
Exemption for Compensation Payments for Victims of Persecution during WWII Era
This allows for an Inheritance Tax exemption to apply in respect of certain compensation payments for persecution suffered during the WWII era. It covers a number of schemes which provide compensation for wrongs suffered during this period, when the payments are received by the original victim or their surviving spouse.
For more information on the extent of these provisions, please see Extra Statutory Concession F20 in the following document:
Additionally, existing concessions will be extended to include payments received under the Child Survivor Fund. This Fund was established for Jewish Nazi victims born on or after 1st January 1928 who suffered persecution. More information on the Child Survivor Fund can be found here:
The Budget states that the legislation being brought in will also allow the Treasury to add additional payments from other particular schemes in the future. The provisions apply to deaths on or after 1st January 2015.