Budget 2016: Private Client
There was good news for Private Clients in the Budget. There will be a significant drop in the rate of CGT from 28% to 20% for higher rate taxpayers (and from 18% to 10% for basic rate taxpayers) from 6 April this year. There will also be a further modest increase to the 40% tax threshold from April 2017. This continues into the savings arena with a significant increase to the ISA allowance in 2017/18 together with the introduction of the Lifetime ISA. It was also good news that there was no further tinkering to the pension regime although this may be just a stay of execution rather than a decision to leave things alone in the longer term.
Increased personal tax allowance and higher rate threshold from 6 April 2017
The Government has confirmed that for the 2017/18 tax year, the personal tax-free allowance will increase to £11,500 (2016/17: £11,000) and the higher rate tax threshold will increase to £45,000 (2016/17: £43,000).
KS comment: As well as taking some lower paid workers out of tax completely and reducing the number of individuals subject to higher rate tax, these changes will also reduce the tax liability of other 40% taxpayers earning under £100,000 by increasing the threshold at which higher rate tax becomes payable. With an annual tax saving of £700 compared to 2015/16, these changes are likely to be well received by individuals in this income bracket.
However, the increased personal allowance extends the effective 60% tax bracket to between £100,000 and £123,000, which exacerbates this problem with the tax system.
Reduction in Capital Gains Tax rates
The Chancellor has announced that with effect from 6 April 2016 there will be a reduction in the CGT rates for individuals, trustees and personal representatives but subject to exclusions for residential property and carried interest for private equity managers. The existing rates of 28% for trustees and higher rate taxpayers and 18% for basic rate taxpayers will be reduced to 20% and 10% respectively for gains realised on or after 6 April 2016. Gains on residential property (if not exempt e.g. under the principal private residence rules) and on carried interest will remain taxable at the existing 28% or 18% rates.
KS comment: Only around 0.5% of taxpayers actually pay CGT so the change will have no effect for many people but for those it does affect there will be a significant reduction in their tax liability on gains. Anyone about to sell assets may want to stop and think about the timing of any disposal. If looking to take advantage of the new rates, remember that the relevant date for CGT is the contract date and not (if different) completion. The differential rates for residential property will inevitably add some extra complexity and continues the recent trend of less favourable tax treatment for such properties. With an increased differential between Income Tax and CGT rates, now as much as 25%, there will be an increased incentive to take returns as capital rather than income where possible.
The Lifetime ISA and other saving opportunities
The annual ISA contribution will rise from April 2017 to £20,000 from £15,240. Furthermore, from the same date the Chancellor will introduce a new “Lifetime ISA”. Anyone under the age of 40 will be able to start one of these plans which will allow up to £4,000 per annum to be saved every year and savers will receive a 25% bonus from the Government on this money. You will not be able to contribute further after you reach 50. The money invested into the Lifetime ISA can be saved until the age of 60 when all the funds can be withdrawn tax free. You will be able to withdraw the money at any time before that but will not receive any bonus and will have to pay a 5% charge.
KS comment: The increased ISA limit is a welcome measure, which in conjunction with the Lifetime ISA will enable quite appreciable sums to be set aside annually. The bad news is that we see this as a precursor to the anticipated curtailment of the current pension saving regime which many commentators predicted would be announced in this budget.
Low income tax exemptions
From April 2017 there will be two new £1,000 tax free allowances, one for income derived from property that you own, the other for “trading income”.
KS comment: From the examples in the government’s press release such as the income arising from sharing power tools, providing a lift-share or renting out a driveway, this would just seem to be legitimising a small section of the black economy. We suspect that very few taxpayers will have even thought that this “income” was taxable so the cost to the Treasury will be miniscule. However, it will give HMRC greater scope to pursue those taxpayers earning greater levels of income and may serve to encourage some taxpayers to voluntarily declare such income.
Scrapping of Class 2 National Insurance Contributions (NICs)
Class 2 NICs, currently payable at the rate of £2.80 per week by self employed individuals earning over £5,965 per year, will be scrapped from 6 April 2018.
KS comment: Self-employed individuals are currently subject to Class 2 (fixed rate) and Class 4 (profits based) NICs. The scrapping of Class 2 NICs will save approximately £145 per year for self-employed individuals from April 2018, although it should be noted that HMRC plan to reform Class 4 NICs at the same date, details of which are yet to be released. While the reduced complexity is welcomed, we await further changes to self-employed NICs with interest.