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Summer budget: Private client summary

The Chancellor of the Exchequer, George Osborne, delivered his emergency summer budget to the House of Commons today (Wednesday). Here we go through all the announcements relevant to private clients and their advisers

8 July 2015

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Inheritance tax

An extra £175,000 inheritance tax allowance on the family home will be phased in from April 2017, which will combine with the current £325,000 to give individuals a £500,000 allowance on their family home.

This will give married couples and those in a civil partnership a potential inheritance tax allowance of £1m on their home and can be transferred between partners.

This will be fixed until the end of 2020-21.

Hugo Smith, a partner at Bircham Dyson Bell, welcomed the changes, but said they both cohabiting couples at an even greater disadvantage.

'The proposal to increase the IHT threshold on family homes will be welcomed by middle England, particularly those affected by rising house prices.

'It provides little benefit to cohabiting or unmarried couples, however, and puts them at an even greater disadvantage to married couples.'

The increase will not be extended to estates worth more than £2m.

Tax-free allowance thresholds

George Osborne offered a paltry increase in the higher tax-free personal allowance of £615, rising from £42,385 to £43,000.

The Tories pledged to increase this to £50,000 by the end of this parliament during the campaign trail.

The lower tax-free threshold has risen to £11,000, and was promised to reach £12,500 by the end of this parliament. Both increases will take effect on 5 April 2016.

Meanwhile, Lucy Brennan, a partner in the private wealth group at Saffery Champness, points out that increases to national minimum wage will actually result increased tax revenue for the government.

'In a crafty move, implementing the national living wage could actually be a tax raiser for the government.

'Not only will employers have to pay more National Insurance tax, but those working full time will now have more of their salary subject to income tax.'

Non-doms

The chancellor abolished permanent non-domiciled (non-dom) tax status for UK residents, taking effect from April 2017.

He told the Commons: 'Anyone resident in the UK for more than 15 of the past 20 years will now pay full British taxes on all worldwide income and gains.'

George Osborne also confirmed that non-doms will no longer be able to purchase property in the UK and avoid inheritance tax by placing it in an offshore company.

The government will consult on the details of the changes, but Osborne said that they will raise £1.5bn during the course of this parliament.

Camilla Wallace, partner at London law firm Wedlake Bell, said that the changes come as no surprise.

She commented: 'Non-doms are already familiar with the concept of effectively losing their non-dom status for Inheritance Tax purposes after 17 years in the UK.

'This measure essentially extends that treatment to capital gains tax and income tax and comes as no surprise.'

Tax evasion

A clampdown on 'tax evasion, avoidance and aggrieve tax planning' will bring in a further £5bn, the chancellor told the Commons.

HMRC's capacity to investigate and prosecute will be supported with a £750m investment.

The authority will now be able to pursue 'tax fraud, offshore trusts and the businesses of the hidden economy [will triple] the number of wealthy evaders they pursue for prosecution, raising £7.2bn in extra tax'.

This will come as very little surprise to advisers and accountants. James Hender, partner and head of the private wealth group at Saffery Champness, feels that advisers will be more interested in the outcome of anti-avoidance measures already in place.

He commented: 'Despite the rhetoric today, most advisers are looking to see what happens when the first cases are heard under GAAR [general anti-abuse rule], which is actually very comprehensive.'

Buy to let

Mortgage interest relief for buy-to-let properties will be restricted to the basic rate of income tax. The change will take place over a period of four years, commencing in April 2017.

Buy-to-let mortgages account for 15 per cent of all new mortgages and the Bank of England recently warned that this could create instability for the economy.

David Cox, managing director of the Association of Residential Lettings Agents, suggests that this will have an unwanted knock-on effect for people wanting to rent a home.

‘The unintended consequence of this and the reduction in income tax is that landlords will seek to recoup their costs by hiking up rents. As a result, tenants will have to save for longer to be able to afford a deposit for a house, as more of their income will be eaten up by rent.

‘This creates a vicious circle where tenants are renting for longer because the hope of owning a home becomes less achievable’.

Dividend tax credit

The dividend tax credit will be simplified and replaced with a tax-free allowance of £5,000 of dividend income for all tax payers.

The rates of dividend tax will be set at 7.5 per cent, 32.5 per cent and 38.1 per cent. Dividens paid into pensions and ISAs will remain tax-free and unaffected by the changes.

The tax simplicity this will bring for entrepreneurs is very likely to be welcomed on all fronts. 

Further pension changes

The chancellor announced plans to treat pensions savings in the same way that ISAs are currently taxed.

He said: ‘You pay in [to your pension] from taxed income and its tax free when you take it out. And in-between, it receives a top-up from the government’.

Osborne added: ‘This idea, and others like it, need careful and public consideration before we take any steps. So I am today publishing a Green Paper that asks questions, invites views, and takes care not to pre-judge the answer.’

Head of private wealth at law firm Bond Dickinson, David Dale, said the changes might encourage younger people to save, but given recent reforms, could cause even greater confusion in the pensions industry.

‘There is a danger that more significant change to the pensions landscape will create further confusion among the public.

‘The recent past has seen many changes to pensions, which have contributed to additional complexity and a sense that pensions are generally poorly understood and are insufficiently consistent in their relative advantages and disadvantages across governments, to be relied on by an individual when looking towards retirement. 

The chancellor also took steps to limit the pensions tax relief available to those earning £150,000 or more, from April 2016.

Chief executive of the National Association of Pension Funds, Joanne Segars, said that constant tinkering with the tax treatment of pensions from one budget to the next will reduce confidence, and may discourage people from saving.

She commented:  ‘It’s deeply disappointing to see politicians once again syphoning cash from tomorrow’s pensioners to pay the bill for today’s political priorities. Pension saving shouldn’t be treated as a secret ATM for Government finances.

‘Tinkering with the tax treatment of pensions from one Budget to the next does absolutely nothing to build confidence in them, and constant change may even discourage people from saving for retirement.’

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Tax & Wealth structuring