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Yesterday Chancellor Philip Hammond delivered his first and only Spring Budget.  Although, as anticipated, the Budget was relatively uneventful, a number of previously announced changes which may affect clients will come into effect from April. This Insight provides a summary of the key measures to look out for. 

Income Tax

As the Chancellor indicated in the previous Budget, the personal allowance will increase for 2017/2018 to £11,500.  The higher rate threshold was also increased to £45,000 south of the border.  While in February the Scottish Parliament voted to freeze the basic, higher and additional rates of tax, they have maintained the current higher rate threshold for the next tax year.  As such, Scottish taxpayers will continue to pay at the higher rate when their income exceeds £43,000. 

Taking a quick look to 2018, in an attempt to level the playing field between self-employed persons and employees, self-employed persons will be subject to an increased National Insurance contribution rate of 10%.  This will further increase to 11% in 2019.  By comparison, employees currently pay at a rate of 12%.  Self-employed people have historically paid less as they were entitled to claim fewer state benefits but now have equal access to the State Pension.  As such, Mr Hammond believes the difference can no longer be justified. 

April 2018 will also see a significant reduction of the dividend allowance from £5,000 to £2,000, an interesting move considering the allowance was only introduced last year.  This is another change introduced as part of the Chancellor’s focus on a fairer tax scheme.

Salary Sacrifice

The government has confirmed that the next Finance Act will have a negative impact on salary sacrifice schemes, although it appears that the draft Bill may be revised in this regard.  Tax and National Insurance advantages will be removed in relation to certain benefits, including health insurance and gym memberships.  At present, pensions, employer supported childcare, cycle to work schemes and ultra-low emission cars are excluded from the changes.

New Savings Accounts

Lifetime ISAs

The new Lifetime Savings Account (“LISA”), announced as part of our 2016 Budget coverage, is due to come into effect as of April this year. It is intended that the LISA will replace the present Help to Buy ISAs (which will cease to operate from November 2019). As with the Help to Buy ISA, the LISA will incorporate a Government annual bonus of 25% to the amount saved by the individual in their account. It is hoped that introduction of the LISA will incentivise saving for the future.

The account is available for those aged 18-40 and the annual bonus is paid on savings deposited by an individual before their 50th birthday. Unlike the Help to Buy ISA, the LISA can be either a cash or investment ISA.

The LISA restricts annual savings to £4,000. Any interest or growth on the LISA will be accrued on the annual bonus from the point at which the bonus is awarded.

The LISA can be used for first time buyers, with funds being accessible from 12 months of opening the account. The LISA can be used for properties up to a value of £450,000.

As was highlighted in our previous bulletin on the 2016 Budget, the LISA, like other ISAs, will end on the death of the holder. Although there is no Capital Gains Tax or Income Tax to pay up to the date of death, as the LISA will form part of the estate it may be subject to Inheritance Tax. The LISA will provide the same benefits for the surviving spouse or civil partner on the death as an ordinary ISA and any remaining LISA allowance will transfer to the surviving spouse or civil partner.

For those already on the property ladder, the LISA could be a useful alternative or addition to the traditional pension. Funds which are withdrawn after the account holder’s 60th birthday will not be subject to a tax charge.  Prior to this any withdraw will trigger a 5% charge. Clients should be reminded that given the annual limit of £4,000, personal circumstances will have to be considered when deciding whether a LISA should be opted for over and above a traditional pension or in combination.

NS&I Investment Bond

The government had previously advised that a new NS&I investment bond would soon be coming on the market.  The Chancellor has now confirmed that this bond will benefit from a market-leading rate of 2.2% over a term of 3 years. The Investment Bond will be available for 12 months from April 2017 and is open to everyone aged 16 or over. A minimum investment of £100 and a maximum investment limit of £3,000 will apply.

Inheritance Tax (IHT)

Main Residence Supplement to Nil Rate Band

Clients should be reminded that as of 6 April, the new Main Residence Supplement is being introduced to the IHT Nil Rate Band.  As previously reported, this significant change is being implemented in an attempt to remove many taxpayers from the IHT net on death.

For deaths from 6 April, an additional allowance of £100,000 is available when a property is left to a person’s direct descendants.  This allowance will gradually increase to £175,000 by 2020/21.  It should be noted, however, that tapering provisions apply so that the Main Residence Supplement will not be available to certain larger estates. 

As with the standard Nil Rate Band, any element of the allowance which is unused can be transferred to a surviving spouse or civil partner.  In the event that the entire estate is left to the surviving spouse or civil partner, this means that by the year 2020/21, subject to the tapering provisions mentioned above, there is a potential total combined Nil Rate Band of £1,000,000 for a couple who leave their property to their children or remoter descendants. 

Complex rules preserve the new IHT allowance if a property is sold when downsizing or moving into care. 

Deemed Domicile

There are some major changes coming into effect as of 6 April in respect of tax rules for non-domiciled individuals (“non-doms”).  Non-doms will now be deemed to be UK domiciled if they have been UK resident for 15 out of the last 20 tax years.  In addition, non-doms with a UK domicile of origin will be deemed UK domiciled for all tax purposes if they are UK resident.  

From an IHT perspective, UK residential property held indirectly by non-doms through an offshore structure will now be caught.  Thanks to lobbying by professional bodies, the Budget confirmed that the limit below which minor UK property interests will be disregarded has been increased to 5% of the non-dom’s total property interests. 

We will be issuing a future bulletin in due course detailing the changes to the regime for non-doms. In the meantime, if you or your clients have any questions, please get in touch.

English Probate

Probate is the English and Welsh equivalent of Confirmation in Scotland.  Significant increases to fees payable for obtaining Probate have been confirmed. Although Scottish Confirmation fees are not impacted, it will affect any clients who are based in England or Wales, or those who simply own property there.

The change in the feeing system from a flat rate to a tiered system could see estates being charged 10 times what they would previously have been charged. In light of recent property market improvements, the new system could result in families being subjected to significant charges.  While estates with a total value of below £50,000 will now pay no fee, estates worth over £2,000,000 will incur a £20,000 fee. 

Buy-to Let Properties

The buy-to-let market was hit in 2016 by the introduction of the Additional Dwelling Supplement tax and is likely to suffer further with the coming into effect of new restrictions on the landlord’s ability to claim tax relief on “finance costs”.  This will include relief on mortgage interest and fees as well as interest on loans taken to furnish the property. 

As of April 2017, relief will be restricted to 75% of the finance costs, with the remaining 25% being available as a basic rate deduction.  The restriction will gradually rise each year until 2020/21, where all finance costs will be given as a basic rate reduction only.  As many landlords have mortgage repayments of 60% or more of the rental income, this change may have a significant impact on buy-to-let profits for clients.   

Capital Gains Tax

Finally, the annual exemption is set to rise from the current £11,100 to £11,300 next month.  As always, the allowance for trusts will be half this figure.

Although the Budget itself was light on private client announcements, as you can see there are a number of significant changes which will come into effect next month.  If you have any questions in this regard, please do not hesitate to contact any member of Stronachs’ Private Client Team.

Chambers UK 2018

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