FYI Professional – Autumn Statement
FYI Professional – Autumn Statement
As announced in Budget 2013, most individuals will be entitled to a basic personal allowance of £10,000 for 2014/15 which means that higher earners can achieve even greater benefit by using pension contributions to reduce adjusted net income above £100,000. The age related personal allowances remain unchanged.
It is important, where possible, that couples seek to build pension funds that will deliver a pension in retirement that will (taking account of other income, including the state pension) at least fully use the personal allowance of each. Such a pension fund will then have delivered tax relief on contribution, tax free investment returns, tax free cash (up to 25% of the fund) and a tax free pension.
Transferable income tax allowance
As previously announced, from April 2015, spouses and civil partners will be entitled to transfer £1,000 of their personal allowance to their spouse or civil partner provided the recipient is not subject to income tax at the higher or additional rate. However, the introduction of a transferrable personal allowance will have little effect, as the benefit is limited to £200 a year.
This possibility, once introduced will need to be carefully born in mind by some in managing a couple’s investments so as to ensure that tax outflow on income produced – even if reinvested – is minimised.
Capital Gains Tax
As previously announced in the 2013 Budget, the annual exempt amount will increase from £10,900 to £11,000 for tax year 2014/15 and will increase to £11,100 for tax year 2015/16. Such a low increase in unlikely to be of any great benefit although it can result in an overall tax saving of £3,052 at current rates.
Regular use of the CGT exemption through efficient investment management (and remembering that the allowance is available to each of a couple) will help to minimise tax on the final realisation of investments. In doing so, of course, it will be necessary to ensure that the “bed and breakfast” anti-avoidance provisions are not triggered.
The revised annual exempt amounts for trustees will be £5,500 and £5,550 respectively – subject to a reduction to a minimum of £1,100 and £1,110 respectively where the same settlor has, broadly, created more than one trust.
Tax efficient investment management for trustees is an essential component in ensuring that the beneficiaries secure the best possible return from the trust. There is also the fact that the Trustee Act requires trustees to seek professional, experienced advice on investments.
Principal private residence relief
Property which has been an individual’s only or main residence at some time is exempt from capital gains tax for the final 36 months of ownership – known as the final period exemption. This rule applies regardless of whether they are occupying the property at the time of sale. From 6 April 2014 the final period exemption will be reduced from 36 months to 18 months.
An individual’s home in many cases forms the highest value asset they have and is sometimes, as well as being somewhere to live, also forms an important part of financial planning strategy, especially in later life. An important part of the financial planning process is to ensure that individuals are not over relying on accessing value from their residence at some time in the future with this assumption underpinning a lower than should be rate of saving and investment.
Non-residents and UK residential property
As speculated, from April 2015 the Government will introduce capital gains tax on ‘future gains’ made by non-UK residents disposing of UK residential property. The change will be subject to consultation which will be published in early 2014.
You will no doubt have noted this change which may be of relevance to non domiciled clients. Other tax efficient investments such as offshore bonds are available providing effective tax deferment without, subject to some exceptions, any concerns in relation to “remittance basis taxation” provisions.
Inheritance Tax and Trusts
The Inheritance tax nil-rate band has been frozen at £325,000 since 6 April 2009 and will remain so until 2017/2018. In light of this freeze together with the recent rise in asset values, should hopefully lead to an increased interest in inheritance tax planning.
Many acceptable financial product/trust combinations exist to deliver effective estate planning solutions with settlor control and access to investments and without triggering the gift with reservation or pre-owned asset tax provisions.
The Government’s Autumn statement gives an update on the consultation process regarding the proposed simplification of the inheritance tax treatment of relevant property trusts.
The proposal that has perhaps generated most concern is the “anti- fragmentation” provision that would result in the nil rate band available to a trust being determined by dividing the current nil rate band by the number of relevant property settlements created by the same settlor that have been in existence in the last 10 years.
So, on the basis of these proposals, if someone had already created four relevant property trusts in the last ten years, the nil rate band available to a fifth discretionary trust in the future would equal one fifth of the nil rate band.
If this proposal were implemented then it would effectively neutralise the current ‘Rysaffe planning’ which works on the basis that trusts created on different days are not related for IHT purposes, so each trust prima facie qualifies for a full nil rate band.
The proposal also takes no account of the value of assets held in an existing discretionary trust. This means that a discretionary trust with negligible value could be entitled to the same share of the nil rate band as a discretionary trust comprised of high value property.
Another point is that, in theory, all active discretionary trusts – whenever created – would be taken into account and this could cause a compliance nightmare for trustees who would need details of all those other trusts.
In the Autumn Statement, the Government confirmed that there will be further consultation on the proposals to split the IHT nil rate band available to trusts with a view to this change being introduced from 6 April 2015. Draft legislation is expected to be included in the Finance Bill 2014.
As well as the points mentioned above, a number of others were raised in representations that were made to HMRC before the closure date of the Consultation. It would seem that the Government have taken some of these on board and wish to consult with relevant parts further.
In the meantime, in the run up to the Budget 2014 and the publication of draft clauses (following the outcome of further consultation) careful thought will be needed before “multiple trusts” are established. It will be necessary for detailed “scenario planning” to take place in the period before any legislation becomes effective. The original proposals will have applied to all trusts whenever established. There is some hope that some form of transitional protection might be available for such trusts and for those established more than seven years apart. The financial planning sector is not unconcerned by this proposed change as the “Rysaffe” strategy has been over the years employed in connection with “low initial value” assets planning connected with large life policies and loan trusts in particular .
As previously announced, the main rate and small profits rate of corporation tax will be unified from 1 April 2015, at which point a single corporation tax rate of 20% will apply. The main rate will fall to 21% for 2014/2015. With this being the case larger companies with 31st March year-ends and sufficient profits should consider making employer pension contributions by 31st March 2014 to take full advantage of higher tax relief available.
Closing the ‘Tax Gap’ (the difference between the tax that should be collected if the tax code were applied as parliament intended and the tax that is actually collected) unsurprisingly remains a high priority for the Government.
As tax avoidance and “legal interpretation” are significant contributors to the Gap (evasion and crime being the biggest contributor) then it is not surprising that the Chancellor’s Autumn Statement provided a further significant package of measures to reduce “unacceptable” tax avoidance.
The Government remains conscious of not only doing something to prevent aggressive avoidance but also being seen as doing something.
It was stated in the Treasury documentation that:
“The vast majority of people and businesses in the UK pay the tax they owe on time and do not try to avoid their responsibilities. But where they exist, tax avoidance and aggressive tax planning damage the ability of the tax system to raise revenue fairly and impose additional costs on all taxpayers.”
Through a combination of many measures, including The Disclosure of Tax Avoidance Schemes (DOTAS) provisions, naming and shaming, targeted anti-avoidance rules, the GAAR and pursuing cases through the Courts and Tribunals, the Government has been achieving notable success.
We will not detail the package of measures here but suffice to say that even before this package of measures the relentless onslaught of action against unacceptable/aggressive avoidance arrangements has led to taxpayer appetite for these types of scheme becoming almost non-existent. This represents good news for financial planning clients who employ planning strategies that are “intentionally” permitted by legislation or accepted by HMRC.
Tax efficient investments
Individual savings account (ISA)
The annual ISA subscription limit will be increased from £11,520 to £11,880 for tax year 2014/15, of which £5,940 can be invested in cash.
The Government is also exploring whether to allow a wider range of retail bonds to be held within the stocks and shares element of an ISA wrapper by reducing the remaining term to maturity to below 5 years.
Junior ISA (JISA) and Child Trust Funds (CTFs)
The annual subscription limit for the Junior ISA and Child Trust Fund will increase from £3,720 to £3,840 for 2014/15 – the start date for the year for CTFs is the child’s birthday and the end date is the day before their next birthday. The Chancellor made no mention of the proposal to permit the transfer of an existing CTF to a JISA.
For those who would like more control over the investment than a JISA or CTF delivers, consideration should be given to a discretionary trust holding collectives.
Venture Capital Trusts (VCTs)
From 6 April 2014 investments which are conditionally linked in any way to a VCT share buy-back, or that have been made within 6 months of a disposal of shares in the same VCT, will not qualify for new income tax relief.
Exchange traded funds (ETFs)
From April 2014 stamp duty and Stamp Duty Reserve Tax (SDRT) on the purchase of shares in ETFs, that would currently apply if an ETF were domiciled in the UK, will be removed.
Major pension announcements were made relating to the bringing forward of the increase in State Pension Age and the retention of the current drawdown tables. However, the overriding pension issues for most clients are likely to be on planning for the reduction in the annual and lifetime allowances from 6 April 2014 and the ever increasing automatic enrolment market.
The main pension announcements in the Autumn Statement are as follows:
- A new guiding principle that people should, on average, expect to spend one-third of their adult life in receipt of state pension, will underpin future reviews of State Pension Age (SPA). The Pensions Bill 2013 already makes provision for the increase in the SPA to 67 to be brought forward to between 2026 and 2028. Current legislation currently expects the SPA to be increased to 68 between 2044 and2046. Applying the new guiding principle the Government expects that the increase in SPA to 68 will now take effect from the mid 2030s, while a further increase to age 69 will apply from the late 2040s.
In the January 2013 White Paper on the new single-tier state pension, the Government had already indicated that SPA would be reviewed at least every 5 years, with the first review being in the next Parliament and with its results issued no later than 7 May 2017. These reviews will take account of the latest demographic data available at the time and be informed by an independently led report on wider factors.
DWP will be publishing further details of how this principle will work in practice.
- The Government confirms that Individual Protection, will be introduced as a transitional protection option in conjunction with the reduction in the standard lifetime allowance to £1.25 million from 2014/15 tax year.
- At the 2013 Budget the Government Actuary’s Department (GAD) were commissioned to review the drawdown tables to determine whether they were a reasonable match for annuity rates. It is now confirmed that following that review the Government will not be changing the basis on which the drawdown tables are formulated.
- The Basic State Pension and the Additional State Pension will be exempt from the Government’s cap on welfare spending.
- The Basic State pension from April 2014 will be increased by 2.7% in accordance with the triple lock (i.e. the higher of average earnings growth, CPI inflation and 2.5%). This is an increase of £2.95 per week in the Basic State Pension for a single person, bringing this up to £110.15 per week.
The standard minimum income guarantee in Pension Credit will be increased by £2.95 per week, while the Savings Credit threshold will be increased by 4.4%.
The Government will remove the Assessed Income Period in Pension Credit awards. This means that from April 2016 households on Pension Credit will now need to report all changes in their circumstances that will affect their benefit as they happen. Pensioners aged 75 and over who have an indefinite assessed income period in place will be exempt unless the assessed income period would end under current rules.
- In October 2015 the Government will introduce a new class (3A) of voluntary NICs to allow pensioners who reach SPA before 6 April 2016 a time limited opportunity to top up their State Additional Pension entitlements. The details of the scheme will be set out closer to the time of implementation, with the price of the new class of National Insurance being set at a broadly actuarially fair rate. The Government will legislate for this scheme at the earliest available opportunity.
- The Budget 2013 announced that payments of £5,000 would be made to people who bought With-Profits Annuities from Equitable Life before September 1992, with a further £5,000 going to those on Pension Credit. The Autumn Statement 2013 confirms that the bulk of these payments will be made through direct payment into policyholders’ bank accounts in December 2013.