Jane Parry – lead tax partner at PM+M:
The Chancellor has put a lock on income tax, NIC and VAT rates for the length of this parliament, which sounds great in terms of creating certainty for tax payers. But it is important to note that the lock only applies to the rates. It doesn’t cover the thresholds at which various rates apply or the exemptions applying to those taxes. Accordingly, there is still plenty of scope for the Chancellor to tinker with those taxes. He also has full freedom to amend capital gains tax, inheritance tax, corporation tax and stamp taxes rates if he chooses.
The Chancellor’s £1m inheritance tax allowance for married couples has been much talked about and was a key selling point in the Conservative election manifesto. In theory, it’s a great idea and will mean that the vast majority of estates will escape inheritance tax. The freeze on the inheritance tax nil rate band at £325,000, that has been in place since 2009, is set to last until 2019. That, combined with house price inflation, has meant that more and more estates have fallen into the inheritance tax net. In 2010, only 2.6% of estates paid inheritance tax. In 2014/15, that rose to 6.5% and estimates suggest that the figure will be 11.6% by 2019.
In terms of the details, there won’t be a £500,000 nil rate band; instead each individual will keep their £325,000 nil rate band and from April 2017 will have a separate “family home allowance” on top of that of £175,000. There will be restrictions on how it can be used – basically to ensure it is only available against the value of family homes passed down the family. We will be paying close attention to the details of the new legislation as they emerge to see how they will affect people who downsize or who perhaps have chosen to keep their home but release equity from it.
In all of the publicity surrounding these changes it is perhaps worth reminding ourselves that inheritance tax is only a tiny part of the overall tax take. Compared to £165billion raised from income tax last year, only £3.8billion was raised from inheritance tax. Therefore, these changes won’t make a massive difference to national finances – although they will be welcomed by many families.
The Annual Investment Allowance is currently set at £500,000 to allow immediate tax relief for capital investment by businesses. It is set to drop to £25,000 on 1 January 2016. In the Spring Budget the chancellor stayed on the fence and would not commit to announcing a new rate to apply from 1 January. The chancellor has now nailed his colours to the mast and announced that the annual investment allowance will be £200,000.
For some years, the Chancellor has been aware of the ability of people who own companies to take their income in the form of dividends which means less tax than employees. He’s finally decided to bite the bullet and do something about it. It’s heralded as a simplification but in reality it’s a complex change that will take a lot of thought as it will be individual in every single case. It will also create a lot of uncertainty amongst business owners.
It was a surprise that CT is going to be reduced to 18% by 2020 from a rate that it also the joint lowest in the G20. There are two main reasons for it: to soften the blow following the news on dividends as well as the new national living wage.
National Living Wage
For businesses, it means higher wage bills but in reality the benefits to the wider economy will be positive so should be welcomed.
The announcements around buy to let properties were a shock and will affect many people across the country. We are going to see a phased reduction in the tax relief for mortgage interest payments, and landlords with social housing properties will see real reductions in rental income over the next four years. Comparing buy to let investors and homeowners is slightly disingenuous as one is a business and should be taxed accordingly with suitable deductions for expenditure.
Tony Brierley – managing director of PM+M Wealth Management:
More tinkering to pensions wasn’t a surprise – the Chancellor can’t resist. It was widely predicted that tax relief at higher rates on pension contributions for people earning more than £150,000 would be restricted. This will be achieved by gradually reducing the annual allowance, currently a maximum of £40,000, by £1 for every additional £2 of income above £150,000 to a minimum of £10,000 a year. This means that individuals with an income of £210,000 or more will only be entitled to an allowance of £10,000. Contributions above the limit will attract a tax charge at the marginal rate effectively withdrawing tax relief on the excess contribution. This change will impact high earners in final salary arrangements as well as those with personal pensions.
The Chancellor is also considering much more radical changes akin to an ISA. We’ll be looking closely at the proposals and consultation.
David Gorton – head of corporate services at PM+M:
The non-dom rules are complicated and made no sense for many years. Every step to changing them is an improvement. There is a lot of scaremongering that many wealthy people will leave the UK, but I don’t see this as being a real issue. This new regime of making non-dom status temporary and preventing people born in the UK from claiming this preferential tax status should mean we have a level playing field for businesses owners in the UK moving forward.
No-one wants the government to be borrowing excessive amounts. I have a concern that the benefit caps will lead to reduced consumer spending – primarily in the North of England – which could well slow the pace of economic recovery.