Budget: Tax changes
Much to savour from Chancellor’s tax breaks
Now on his eighth Budget, it was ‘old hat’ to the Chancellor standing up to deliver his speech on Wednesday. Whilst tax changes have come and gone in that time, one Budget message from the Chancellor that has remained constant is that the UK ‘must live within its means’.
Against this backdrop, it was with surprise that individuals and businesses walked away with so many tax breaks in the Budget given that economic ‘storm clouds are gathering’ and all parties are wondering how ‘UK PLC’s’ books still appear to be balancing.
Individuals have much to rejoice from the announcements. An increase to the personal allowance by £500 to £11,500 of ‘tax free’ income from 6 April 2017 and an extension to the basic rate band of £1,500 resulting in the higher rate threshold at which you pay 40% income tax, not being breached until income is in excess of £45,000 from 6 April 2017.
It should be borne that the Scottish Government will be able to set tax rates and bands under new devolved powers and it may be that the higher rate threshold will not be implemented in Scotland following the Scottish Budget later this year.
Savers finally got further recognition, both the seasoned saver in the form of reductions to the CGT rates and the new generation of savers through the creation of a Lifetime ISA.
Firstly, the Chancellor announced that CGT rates will reduce on sales of assets which will be greeted with cheers amongst those who have kept to the old adage of ‘live within your means’.
From 6 April 2016 CGT rates reduce to 10% (currently 18%) for gains in excess of the available basic rate band, and to 20% (currently 28%) for gains in excess of the basic rate band for income tax.
Those selling residential property get no such reprieve and the old CGT rates will stick, unless disposing of a main residence which in most cases doesn’t suffer any CGT.
If looking to dispose of assets at this time, prior to the end of the tax year (5 April) and gains are likely to be in excess of the annual exemption, then care should be taken as it may be more tax efficient to delay the disposals in all or in part until after the 5 April when the new lower CGT rates will apply in most cases.
A further bonus for savers was announced in the form of an extension to Entrepreneurs’ Relief. Provided shares are subscribed for in unquoted trading companies and held for at least 3 years from 6 April 2016 then a 10% CGT rate can be obtained on lifetime gains of £10 million.
This is a welcome boost to savers who otherwise struggled to lock into this low CGT rate unless they were themselves operating a business. For the entrepreneur it provides them with an alternative funder to the bank and the Chancellor has hopefully swelled the band of ‘business angels’.
Finally, the younger generation (those under 40, apparently!), had their moment in the spotlight in the form of the Lifetime ISA. From 6 April 2017, under 40’s can contribute to the Lifetime ISA up to £4,000 per annum and receive a ‘top up’ from the Government of 25% on the annual funds invested up to a maximum of £1,000.
The funds can be used to acquire a first home up to a value of £450,000. Otherwise the funds can be withdrawn without restriction and free of tax from the age of 60 onwards.
Whilst there were sprinklings of tax breaks in this Budget for the individual investor, there is still a long way to go to get the shareholders of UK PLC saving again.
Continual changes to the pensions’ regime has undoubtedly done much damage, particularly to a generation who have known only change in this sector. With life expectancy increasing, as a country we must put provisions in place to encourage savings, or in the Chancellor’s own words, ‘we must act now or pay later’.
Alex Docherty is a Private Client Tax Partner at Johnston Carmichael