Individuals will shortly be able to pass up to £1m to their children or grandchildren on death, without paying inheritance tax, saving up to £140,000.
To achieve this, the Government will introduce an additional allowance of up to £175,000 per individual, on top of the current £325,000. This will also be transferrable to their spouse or civil partner meaning that a total of £1m of assets could be passed on without tax. As you might expect though, this is not quite as straight forward as it first seems.
The additional allowance will only be available where the family home is passed through the generations, so anyone without children or grandchildren will not be able to benefit from the additional allowance. Also where the total net estate is more than £2m individuals will begin to see their property nil rate band, as it is being called, reduce until it is completely lost where the estate is over £2.2m (2017/18), £2.25m (2018/19), £2.3m (2019/20) or £2.35m (2020/21).
The full £175,000 won’t be available until April 2020, but will start at £100,000 from April 2017 rising by £25,000pa until reaching £175,000 April 2020. It will then increase inline with the Consumer Prices Index.
Pension tax relief for those earning over £150,000 per annum will be restricted. The maximum allowable contribution will reduce from £40,000 to £10,000 on a sliding scale meaning that by the time someone earns £210,000 or more, they will only be allowed to contribute up to £10,000 per annum.
This will come into force from April 2016 and will mean a potential loss of £13,500 in tax.
The Government has launched a fundamental review of the pension tax framework and the consultation around this ends 30 September, so we can expect further changes in the near future.
Dividend tax credits will be abolished from April 2016 to be replaced by a new tax-free dividend allowance of £5,000. Dividends in excess of this will be taxed at a rate of 7.5%, 32.5% or 38.1% depending on whether you are basic rate, higher rate or additional rate tax payer. While this might have little impact on savers, it will likely mean that business owners, who take part of their remuneration as dividends, will need to review their remuneration strategies with their accountants.
Individual tax allowances were tweaked meaning that a basic rate tax payer will be better off by £80 and higher rate tax payer by £203 from April 2016, with a further £40 and £160 respectively from April 2017.
The Chancellor confirmed that a capital withdrawal from an individual’s ISA can be replaced within the same tax year and it will not affect their ISA allowance for that tax year. This starts from April 2016.
Finally, the announcement in the March budget on the possibility of a second hand annuity market has been delayed until 2017 to allow further consultation to take place.
Mark Christie is Carbon’s Corporate Director and a Chartered Financial Planner. He specialises in working with business owners and their accountants on how best to extract hard-earned profits from their businesses in the most tax-efficient way, then protecting the value of their money once it’s out of the company or setting it to work hard for them again. View Mark’s profile here.
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