Financial Planning Bulletin - Aviva

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Pensions National Insurance Income Tax Capital Gains Tax Inheritance Tax Lifetime ISA Property Tax Life Insurance Taxation Corporation Tax

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Budget Briefing March 2016 In this Budget Briefing we look at the key changes introduced in the Chancellor’s Budget (together with those previously announced) and consider the financial planning opportunities. Pensions As widely reported in the past couple of weeks, there are no major changes to pensions in the Budget. Below is a summary of the previous announcements taking effect from 6 April 2016, and the changes announced in the Budget as follows: Pensions Tapered Annual Allowance The tapered annual allowance was announced in the 2015 Summer Budget and starts from 6 April 2016. Individuals with ‘threshold’ income (total taxable income) in excess of £110,000 and who have ‘adjusted’ income (total taxable income plus the value of any pension contributions) of over £150,000 will be subject to the tapered annual allowance. The annual allowance will be reduced by £1 for every £2 of income in excess of £150,000. The reduction is capped at £30,000 and hence the maximum reduction is from £40,000 to £10,000. This means that individuals with   

Threshold income of £110,000 or less will retain the full annual allowance of £40,000 (irrespective of the amount of their adjusted income) Threshold income of more than £110,000 and adjusted income of £210,000 and above will have an annual allowance of £10,000 Threshold income of more than £110,000 and adjusted income between £150,000 and £210,000 will have an annual allowance of between £10,000 and £40,000. For example if ‘adjusted income’ is £180,000 the calculation is £180,000 - £150,000 = £30,000 divided by 2 = £15,000. The annual allowance will therefore be £40,000 - £15,000 = £25,000.

Lifetime Allowance As announced in the March 2015 Budget, the lifetime allowance will reduce from £1.25 million to £1 million from 6 April 2016. Transitional protection in the form of Fixed Protection 2016 (FP2016) and Individual Protection 2016 (IP2016) will be available from 6 April 2016. Individuals will be able to apply online for FP2016 and IP2016 from July 2016, and there is an interim paper process available from 6 April 2016 for those who intend to take benefits between 6 April 2016 and July 2016. Any paper applications sent before 6 April 2016 will not be retained by HMRC and a new one would need to be submitted. Anyone who uses this interim process will receive a temporary reference number, and will need to submit a further online application in July in order to get a permanent reference number. The lifetime allowance will be indexed annually in line with CPI from 6 April 2018.

To find out how we can support your business visit Newaviva.co.uk/adviser/building-your-business legislation will also allow a serious ill-health lump sum to be paid from crystallised funds. In addition, where the individual is over age 75 the

Financial Planning Bulletin

Dependant Flexi-Access Drawdown Under the current rules if a dependant child is in receipt of a drawdown pension prior to age 23 the pension must stop on rd their 23 birthday. New legislation will allow dependant’s drawdown to be converted to nominee drawdown at age 23. This means that the drawdown can remain in place and avoids the dependant having to take all of the money out rd prior to their 23 birthday. Serious Ill-health A serious ill-health lump sum can be paid at any age where an individual has a life expectancy of less than 12 months. Subject to the lifetime allowance, the lump sum is paid taxfree if the individual is under age 75. Existing rules limit the payment of a serious ill-health lump sum to uncrystallised funds only. New legislation will also allow a serious ill-health lump sum to be paid from crystallised funds. In addition, where the individual is over age 75 the payment will be taxed at their marginal rate rather than at 45%. This re-aligns the tax treatment of serious ill-health lump sums with lump sum death benefits. Trivial Commutation Lump Sum

present an opportunity for many to increase their pension beyond the normal annual allowance of £40,000, and this may be particularly important for those caught by the new tapered annual allowance.

National Insurance Contributions As previously announced the NICs rates for 2016/17 are as follows –  The lower earnings limit (£112 per week), primary threshold (£155 per week) and secondary threshold (£156 per week) will remain unchanged  The upper earnings limit will increase from £815 per week currently to £827 per week This means that many will pay more in NICs because the starting point has not increased, and the band at which employees pay at the rate of 12% has increased. The self-employed currently pay Class 2 NICs (a flat rate of £2.80 per week) and Class 4 NICs (a percentage of profits). Class 2 NICs will be abolished from April 2018, and Class 4 NICs will be reformed so that the self-employed can continue to build entitlement to State Pension and other contributory benefits.

Under current rules trivial commutation is not available on money purchased funds. However, where a scheme pension is paid from a money purchase arrangement, it will now be possible to commute the scheme pension for a trivial commutation lump sum. The limit of £30,000 will remain.

There is also a change to the treatment of redundancy payments in respect of NICs. Currently the first £30,000 can be paid free of both income tax and NICs. Any payment in excess of £30,000 is subject to income tax, but not NICs. From April 2018 redundancy payments will be unchanged for the first £30,000, but payments in excess of £30,000 will be subject to employer NICs.

Pension Dashboard

Next Steps

A pension dashboard is a digital interface where an individual can view all of their retirement savings in one place. The government will require the industry to design, fund and launch a pensions dashboard by 2019.

The Government has reiterated that they remain concerned about the growth of salary sacrifice schemes. They have, however, stated that this concern is about the range of benefits provided and that salary sacrifice arrangements should continue for pension saving.

Pensions and IHT As previously announced in the Autumn Statement, the Government will legislate to ensure that a charge to IHT does not arise where a pension scheme member designates funds for drawdown but does not draw all of the funds before death. This was an unintended consequence of the interaction of pensions and IHT legislation and will be backdated to apply to all deaths on or after 6 April 2011. Next Steps A period of stability in pensions will be welcomed by many with only minor amendments to current legislation announced in the Budget. Pensions continue to be an attractive option for retirement savings and there was a clear message in Mr Osborne’s speech that tax free cash will not be abolished. The transitional rules for pension input periods in 2015/16

The increase in the upper earnings limit means an increase in NICs for higher earners with an extra £624 pa suffering NICs at 12% rather than 2%.Salary sacrifice continues to be a very tax efficient way of arranging contributions to a pension scheme and could be used by some clients to avoid this small increase.

Income Tax For tax year 2016/17 the personal allowance will increase to £11,000 and for 2017/18 it will increase to £11,500. This means that the age allowance is no longer relevant. For tax year 2016/17 the higher rate threshold, the level after which taxpayers begin to pay 40% tax will increase to £43,000 and for 2017/18 it will increase to £45,000. The higher threshold is expected to reduce the numbers of higher rate taxpayers.

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Dividend tax credit will be abolished from 6 April 2016 and replaced with a new dividend allowance of £5,000 per annum. The new rates of tax on dividend income above the allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

Next Steps

A new personal savings allowance will also be introduced on 6 April 2016. This means that up to £1,000 of interest will be free of tax for basic rate taxpayers, and £500 for higher rate taxpayers. Additional rate taxpayers will not receive an allowance. As previously announced, banks and building societies will pay interest without the deduction of tax from 6 April 2016.

Inheritance Tax

The government has also announced that from April 2017 they will change the tax rules so that interest from OEICs, authorised unit trusts, investment trust companies and peer to peer loans may be paid without the deduction of income tax. Next Steps The increase in the higher rate threshold for this year is welcomed. However, the number of higher rate taxpayers has grown substantially over recent years and consequently many will require advice on planning strategies to keep tax to a minimum. The most widely applicable strategies include: 

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Making individual pension contributions or charitable donations in order to extend the basic and higher rate tax thresholds and reduce the amount of income being taxed at the higher rates. Adopting these strategies also gives the opportunity to reduce tax on investment bond chargeable event gains and taxable capital gains. Ensuring that the new dividend allowance and personal savings allowance are both utilised. Married couples may consider ensuring that they split their investments between themselves to ensure maximum use of their allowances and lower tax rates.

Capital Gains Tax For disposals on or after 6 April 2016 the highest rate of capital gains tax for individuals will reduce from 28% to 20%, and the basic rate will be reduced from 18% to 10%. Capital gains tax paid by trustees will also reduce from 28% to 20%. Chargeable gains on residential property that does not qualify for Private Residence Relief will continue to be taxed at 28% and 18%. Individuals involved in investment management for private equity or other investment funds who receive “carried interest” will also continue to be taxed at 28% and 18%. In addition, entrepreneurs’ relief will be extended to long term investors in unlisted companies. This will provide a 10% rate of CGT for gains on newly issued shares in unlisted companies purchased on or after the 17 March 2016, providing they are held for a minimum of three years from 6 April 2016, and are subject to a separate lifetime limit of £10million of gains.

The reduction in the rate of capital gains tax is welcomed. For many investors careful planning and regular use of the annual exempt amount (£11,100 for 2016/17) should deliver long term tax efficiency for both individuals and trustees.

The current nil rate band of £325,000 will remain frozen at this level until April 2021. As announced in the Summer Budget from April 2017 an additional nil rate band will apply where a residence is passed on death to a direct descendant. The Government has confirmed that they will legislate to ensure that the residence nil rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 where assets are passed on death to direct descendants. Non-Domiciled taxation The Government is undertaking a major reform to non-domicile taxation. As announced at Summer Budget 2015, from April 2017 non-UK domiciled individuals (nondoms) will be deemed UK domiciled for all tax purposes after they have been UK resident for 15 of the past 20 tax years. Additionally, individuals who were born in the UK and who have a UK domicile of origin will revert to their UK domiciled status for tax purposes whilst resident in the UK. The government will also legislate to charge inheritance tax on all UK residential property indirectly held through an offshore structure from 6 April 2017. As set out at Summer Budget 2015, non-doms who have a non-UK resident trust set up before becoming deemed domiciled in the UK will not be taxed on income and gains retained in the trust. The government will legislate all non-dom reforms in Finance Bill 2017. Budget 2016 confirms that non-doms who become deemeddomiciled in April 2017 can treat the cost base of their nonUK based assets as being the market value of that asset on 6 April 2017. Individuals who expect to become deemed UK domicile under the 15 out of 20 year rule will be subject to transitional provision with regards to offshore funds to provide certainty on how amounts remitted to the UK will be taxed. Next Steps From a planning perspective the freezing of the nil rate band makes it important to review nil rate band/transferable nil rate strategies. It cannot be assumed that all couples will have already put in place and updated their estate destination and Inheritance Tax reduction plans. Reviewing existing Wills also gives the opportunity to consider bequests to charity with a view of benefiting from a reduced rate of inheritance tax. For those clients that cannot afford to make outright lifetime gifts of capital, insurance based solutions such as Discounted Gift Trusts or Loan Trusts maybe appropriate.



Lifetime ISA A new Lifetime ISA will be available from April 2017 for adults under the age of 40. They will be able to contribute up to £4,000 per year, and receive a 25% bonus from the Government. Funds, including the Government bonus, from the Lifetime ISA can be used to buy a first home at any time from 12 months after the account opening, and be withdrawn from age 60. The main features of the new Lifetime ISA can be summarised as follows:      

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For investors aged 18 to 40 25% Government bonus earned on savings made before age 50 No maximum monthly contribution limit as little or as much as can be afforded each month, up to the overall limit of £4,000 a year The total subscription limit for all ISAs will be increased from £15,240 to £20,000 from April 2017. This figure includes the £4,000 Lifetime ISA allowance. Savings and the Government bonus can be used towards a deposit on a first home worth up to £450,000. Existing Help to Buy ISAs can be transferred into a Lifetime ISA in 2017. It will be possible to save into both but the Government bonus from one can only be used for house purchase. After age 60 all proceeds will be available tax free. Proceeds can be accessed before age 60 but the Government bonus and the associated interest and growth will be lost and there will be a 5% penalty charge.

The Government plans to explore with the industry whether there should be the flexibility to borrow funds from the Lifetime ISA without incurring any charge providing the borrowed funds are fully repaid. Further details will be available after the Government has engaged with Providers and brings forward legislation in the autumn.

residential properties from 1 April 2016. The higher rates will be 3 percentage points above the current SDLT rates. Following consultation, there will be no exemption from the higher rates for significant investors. Purchasers will have 36 months rather than 18 months to claim a refund of the higher rates if they buy a new main residence before disposing of their previous main residence. Purchasers will also have 36 months between selling a main residence and replacing it with another without having to pay the higher rates. SDLT on commercial property The government will reform SDLT on non-residential property transactions. This will cut the tax for many businesses purchasing property. Currently, SDLT rates on freehold and lease premium transactions operate on a slab system, where one tax rate is due on the entire transaction value. This creates distortions in the market and leads to large increases in SDLT as transactions move into higher tax bands. A small business buying a property for £250,000 pays £2,500 in SDLT. If the price is just £1 higher, their tax bill is trebled. This Budget announces that these rates will be reformed to a slice system, so that SDLT is payable on the portion of the transaction value which falls within each tax band. The new rates will be 0% for the portion of the transaction value between £0 and £150,000; 2% between £150,001 and £250,000; and 5% above £250,000. This means that all freehold and lease premium transactions below £1.05 million will pay the same or less in SDLT. The government will also introduce a new 2% rate for leasehold rent transactions where the net present value is above £5 million. These transactions are already taxed on a slice basis. All leasehold rent transactions up to £5 million will remain unaffected. These changes will take effect on and after 17 March 2016. Next Steps

Next Steps Choice and flexibility for savers is a good thing and people under age 40 saving for their first home may welcome the Lifetime ISA. Workplace pensions will remain an attractive choice when saving for retirement as they enjoy the boost of the employer contribution. However, for those who have optimized their work place pension they will now have the additional option of the Lifetime ISA to complement their long term savings. From a tax perspective the Lifetime ISA looks attractive for basic rate taxpayers. Tax relief and Government bonus equating to the same on contributions but the Lifetime ISA being tax free in retirement compared with 75% taxable with the pension.

Property Tax Stamp Duty Land Tax (SDLT) additional residential properties As announced in the Autumn Statement the Government will introduce higher rates of SDLT on purchases of additional

The increased costs of purchasing additional properties together with the tax deductibility of relevant expenditure must be fully understood when considering the viability of any buy to let investment opportunity. The changes to SDLT on commercial property is to be welcomed as it will reduce the tax that many businesses pay when purchasing non-residential property, whilst ensuring those purchasing the most expensive non-residential properties will make an important contribution to tackling the deficit.

Life Insurance Taxation The Government has announced it will change the current tax rules for part surrenders and part assignments of life insurance bonds to prevent excessive tax charges arising when large partial withdrawals are taken in excess of the accumulated 5% allowance. The Government will consult later this year on alternatives to the current rules with a view to legislating in Finance Bill 2017.



The Government has also announced a review of the assets permissible for offshore personalised portfolio bonds without giving rise to the annual tax charge under the Personal Portfolio Bond legislation. Next Steps After a number of high profile court cases the Government has decided to overhaul the taxation of investment bond withdrawals so that is not possible to inadvertently generate large artificial gains (and an associated tax liability) when making partial withdrawals across all policy segments.

Corporation Tax The current rate of corporation tax is 20% and it has been previously announced that this will reduce to 19% in 2017 and 18% in 2020. The chancellor has announced in the Budget that the rate of corporation tax will be cut further so that the rate will now fall to 17% in 2020. Next Steps Giving consideration to corporation tax rates is essential when advising companies on tax planning. Especially where the planning incorporates tax deductible pension contributions and tax efficient profit extraction for the business owners. In this respect, the Budget announces an increase in the rate of tax payable by close companies under the loan to participators rules so that it continues to mirror the higher rate of dividend tax. The loans to participators tax rate will be increased from 25% to 32.5% in April, with effect for loan advances made on or after 6 April 2016.

This information has not been approved for use with customers and is based on Aviva’s interpretation of the 2016 Budget proposals issued on the 16 March 2016 together with our understanding of current law and legislation, and our understanding of HM Revenue & Customs (HMRC) practice as at 16 March 2016. It is provided for general information purposes only and should not be relied upon in place of legal or other professional advice. Both the law and HMRC practice will change from time to time and our interpretation may be subject to challenge by HMRC or other regulatory body. Aviva cannot act as legal adviser for you or your clients. You should always seek appropriate legal or other professional advice.

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