Another budget comes and goes with no amendments to pension legislation or tax relief.
Phillip Hammond announced one significant change which will impact on some tax planning strategies. The dividend allowance has been reduced from £5,000 per annum per person to £2,000 per annum from April 2018. The tax rates on dividends after this allowance will be 7.5% for basic rate tax payers, 32.5% for higher rate tax payers and 38.1% for additional rate tax payers.
Phillip Hammond also confirmed no changes to the reduction in the Money Purchase Annual Allowance, and the introduction of two new financial initiatives from April 2017 which may be of interest to you.
Money Purchase Annual Allowance (MPAA)
The Money Purchase Annual Allowance (MPAA) was introduced from 6th April 2015 to discourage individuals who seek to abuse the new flexible pension rules.
If you have used the new flexibility rules to access your pension pot you may be restricted with what new monies can be added to your pension – the MPAA for 2016/17 was £10,000. From 6th April 2017 the MPAA reduces further to £4,000.
Any excess over the MPAA will be subject to a tax charge.
Lifetime ISA (LISA)
The LISA targets individual’s aged 18-39 and will enable individuals to save up to £4,000 each tax year and receive a 25% bonus on their contributions
The LISA has two purposes; to help first time buyers build up a deposit for their first home (subject to conditions) or provide access to a tax free savings pot from age 60 to help fund retirement.
What we know: –
- The LISA must be opened before age 40; contributions made until age 50 will earn the government bonus. Contributions can continue until retirement although no bonus is payable from age 50.
- Tax and penalty free withdrawals can be made upon purchasing a first home (subject to conditions) or after age 60.
- The LISA must be held for at least one year to receive the bonus; in the first year of launch (2017/18 tax year) the bonus will be paid annually. If you pull out for any reason no bonus will become payment in that year with an additional charge of 6.25% of the amount withdrawn.
From 2018/19 the 25% bonus will be paid monthly. At which point a penalty of 25% of the amount withdrawn and a charge of 6.25% on the amount invested is expected to become payable.
The LISA can be held as cash or stocks and shares and will count towards an individual’s normal ISA allowance.
At first glance the LISA combines the tax efficiency of a pension and ISA. This could also be a tax efficient way for grandparents for example to build up funds for future generations.
The LISA will not always be a first point of call for savers; the LISA is not as flexible as the ‘normal’ ISA due to the penalties and loss of bonus potential. Also, higher and highest rate tax payers may be better off directing their savings into a pension contract in the first instance to access greater tax relief.
We will be considering this product for inclusion within our client’s portfolios where appropriate.
Residence Nil Rate Band
The Residence Nil Rate Band is an additional inheritance tax allowance on top of your normal Nil Rate Band and will be available from April 2017. By 2020/21 there is an opportunity for the first £1million of an estate to suffer no Inheritance Tax.
The increases in a person’s Nil Rate Band will be as follows: –
|Current Nil Rate band (2016/17)||£325,000|
|April 2017 – March 2018 (+£100,000)||£425,000|
|April 2018 – March 2019 (+£25,000)||£450,000|
|April 2019 – March 2020 (+£25,000)||£475,000|
|April 2020 – March 2021 (+£25,000)||£500,000|
If a surviving spouse received all wealth on death of their loved one, they would inherit their loved one’s nil rate band. In this event, by 2020/21 the nil rate band for that individual will be £1million.
Watch for the small print; to benefit from this additional Inheritance tax nil rate band your total wealth needs to be below £2million AND you must leave your main residence to direct descendants (children or grandchildren).
You should review your will to ensure the second point above is satisfied. Below are two examples of potential conflict: –
- If your will includes a Discretionary trust to receive your wealth on death for the benefit of your children or grandchildren this will not satisfy the second point above. However, if an Absolute trust is established in your will this will qualify.
- The question of whether your main residence should be held ‘Tenant in Common’ or ‘Joint Tenancy’ are back in the spotlight. Many clients will hold their property in Joint Tenancy which means that on first death the survivor automatically inherits the house. If the total wealth is above £2million holding the property ‘Tenancy in Common’ now brings an opportunity to reduce the wealth below £2million on first death.
And as has happened often in the past, once again, the drafting appears to have left planning opportunities open – and at first glance it looks as if the £2 million limit can, under certain circumstances, be doubled up to £4 million !!!
If any of the subjects are of interest to you please do not hesitate to contact us.
The contents of this bulletin do not constitute personal advice. The Financial Conduct Authority does not regulate Tax Advice.