Caption: Angela Nottingham
On 16th March 2016, Chancellor George Osborne presented his Budget to the House of Commons.
He confirmed that the UK economy is showing slower growth than he anticipated since his Autumn statement.
The Office for National Statistics has revised down the UK’s GDP forecast and thus the government’s potential tax base. This has left Mr Osborne with the need to find further revenue raisers and some spending cuts.
He confirmed the world outlook has also slowed down and “the world is now more uncertain”.
In short, the Budget has provided the UK population with a few tax tweaks, but no major shocks.
I would like to highlight some of the changes and how these might affect you/our clients.
There is to be a 0.5% increase in Insurance Premium Tax, which was also raised in November 2015. This additional revenue is expected to raise £700 million which will be allocated to Flood defences. Around half of this sum is to be allocated to Cumbria and as the majority of FMB’s clients live in Cumbria, this is welcome and reassuring news.
The personal allowance will be increasing to £11,000 from 6th April 2016. Any income above this amount will be liable to income tax. The threshold will increase to £11,500 from April 2017, with the aim of reaching £12,500 by 2020. This announcement will benefit all of our clients.
In addition the higher rate tax threshold has been increased to £45,000, reducing the number of people who pay high rate tax.
Capital Gains Tax
For disposals on or after 6th April 2016, the highest rate of Capital Gains Tax (CGT) for individuals will reduce from 28% to 20%, and the basic rate will be reduced from 18% to 10%. CGT paid by Trustees will also reduce from 28% to 20%. Careful planning by our Financial Planners and regular use of the annual exempt amount should deliver long term tax efficiency for both FMB’s clients and Trustees.
This reduction should benefit many of FMB’s clients. However, for those clients who rent out properties, which do not qualify for Private Residence Relief, the CGT will continue to be taxed at 28% and 18%.
Although Inheritance Tax was not mentioned in this particular Budget, the current nil rate band will remain frozen at £325,000 until April 2021. As announced in the Summer 2015 Budget, an additional nil rate band will apply where a residence is passed on death to a direct descendant.
Nevertheless, these thresholds are still very low and as many of our clients have an Inheritance Tax ‘problem’ it is even more important they see their FMB Financial Planner, who can arrange suitable ways of mitigating this tax liability.
With a sigh of relief, there were no major changes to pension legislation. Prior to this Budget there were concerns in the Financial Services Industry that Mr Osborne might reduce the tax advantages of pension schemes. This would have been very unpopular and therefore pensions continue to remain a suitable tax efficient method of saving for retirement for many FMB clients.
Most of FMB’s clients use their annual tax free ISA allowance, currently £15,240 per individual. There will be a welcome and significant increase to £20,000 a year from April 2017. Hence our clients will be able to shelter more of their assets from income and capital gains tax.
For those clients, aged 18 to 40, there is to be a new Lifetime ISA with a limit of £4,000 per year. This ISA will enable investors to use the capital to either purchase their first home or use for their retirement. The capital can be withdrawn without penalty for a person’s first house purchase. Otherwise the capital cannot be accessed until age 60.
Unlike standard ISA’s the government will pay in £1 for every £4 the individual contributes, up to a maximum of £1,000 per year. If the investor encashes the ISA before age 60 and does not use the proceeds for their first house purchase there will be a 5% penalty, plus all the government contributions will be lost.
The UK recovery will take place, despite rather than because of the Budget.
Decisions over pension reform, delaying state pension age further and national insurance simplification were all ignored.
It is clear that this was a political Budget and Brexit remains the main question du jour and therefore other decisions have been left for another day.