Delivered against a backdrop of stock market turmoil and a deepening coronavirus crisis, Chancellor of the Exchequer Rushi Sunak’s first Budget could not have been more dramatic.
The Bank of England announced an emergency rate cut just hours before Mr Sunak promised to do “whatever it takes” to protect the UK economy from the coronavirus pandemic. In an act of support, lenders pledged to offer forbearance to business and homeowners struggling to balance their budgets.
Although high earners had been braced for expensive tax rises in the first UK Budget for nearly 18 months, Mr Sunak’s had some surprising tax concessions to announce but of course alongside the good news there were also some “nasties”.
Top of the hit list was, as predicted, a cut to entrepreneurs’ relief. Although the Government stopped short of scrapping the relief all together but the allowance has now been significantly curtailed.
However, it could have been a lot worse. Rumours of a potential attack on Inheritance Tax and pensions reliefs turned out to be unfounded; at least for the time being.
There has already been the much press coverage about the various measures in the Budget and this short commentary is intended to cover the issues that are likely to be of interest to our clients from a tax planning point of view.
Changes to the tapering of pensions annual allowance
The Budget removed the threat of the annual allowance taper for anyone earning over £110,000 per annum. Most people are allowed to save up to £40,000 a year tax free into a pension but in April 2016, restrictions were introduced which put those people with an annual income over £110,000 at risk of seeing their annual allowance gradually tapered to only £10,000 per annum.
From April 6, the income limits used in calculating the tapered annual allowance will be increased as follows:
(a) The threshold income, which is broadly net income before tax (excluding pension contributions), is increased from £110,000 to £200,000.
(b) The adjusted income, which is broadly net income plus the value of any employer pension contribution, is increased from £150,000 to £240,000.
Under the new measures anyone with a threshold income of less than £200,000 will now be able to invest £40,000 gross into a pension, plus any unused allowance from the three previous tax years, with full tax relief at their marginal tax rate.
This allowance will only start to be tapered when the adjusted income exceeds £240,000; but the sting in the tail is that the new “floor” is now £4,000 not £10,000 as previously.
The changes mean that high earners will be able to save significantly more into pensions without incurring a tax penalty.
With effect from March 11, 2020 the lifetime limit on any gains qualifying for Entrepreneurs’s Relief has been cut from £10million to £1million.
Entrepreneurs’s relief allows a taxpayer to pay capital gains tax at a rate of 10% on the sale of certain business assets, shares in a personal trading company or EMI shares.
This revision will increase the Capital Gains Tax exposure on future chargeable disposals by up to £900,000 per individual.
A change to Entrepreneurs’ Relief was widely predicted before the Budget with some commentary even suggesting the full abolition of the relief.
Whilst a reduction in the lifetime allowance to £1million of gains will mean most taxpayers can continue to claim ER on their full proceeds, the restriction will clearly have an impact on serial entrepreneurs.
Pre-business sale, and post-business sale, tax planning is therefore more essential than ever before.
Changes to Top-Slicing Relief on Life Assurance Policy Gains
Gains on certain life assurance policies, commonly referred to as investment bonds, are subject to income tax when withdrawals are made or all or part of the policy is surrendered. Top slicing relief exists to recognise that such gains are the product of many years of investment and should not suffer higher rates of tax simply because the gain is being all taxed in one particular year.
Top slicing currently provides relief from the higher and additional rates of tax by dividing the gain by the number of years over which it has accrued and seeing, when added to the taxpayer’s other income, what rate of tax would be payable on that smaller amount.
For the purpose of calculating entitlement to the personal allowance for income tax purposes the full amount of the gain before top slicing is currently used, which if that causes the taxpayer’s total income to exceed £100k will cause them to lose part or all of their personal allowance.
However, with effect from March 11, 2020 that calculation will ensure that the relief also compensates taxpayers for any loss of personal allowance caused by the full policy gains being taxed all in one particular tax year. In other it is only the annualised gain which is taken into account when calculating any restriction to the taxpayers’ personal allowance.
This change although relatively minor makes the use of both onshore and offshore investment bonds even more attractive from a tax planning point of view.
Inheritance Tax Reforms
It was predicted by many that a reform of Inheritance Tax would form a major part of the Budget. It is widely accepted that the tax is too complicated and allows too many reliefs. As covered in an earlier edition of The Clarion, a recent review had been carried out by the Office of Tax Simplification which recommended a number of changes particularly a simplification of the lifetime gift rules.
Inheritance Tax was, however, not mentioned in the Chancellor’s address and is also absent in HMRC’s post budget announcements.
It is likely that reforms have been shelved for the time being but a reform of inheritance tax remains very much on the agenda for future budgets.
Anyone who is contemplating lifetime gifts, particularly using discretionary trusts, should be advised to discuss the options sooner rather than later.
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