Contrary to the expectation of many commentators there were a number of quite significant announcements in the 2016 budget. Several of these were particularly relevant to us as financial advisers and to our clients, particularly those who are small business owners.
The new ISA lookalike pension which everyone has been talking about over the past few months, or rather the pension lookalike ISA that has replaced this, is now with us. This took many people by surprise, as they believed the Chancellor had shelved this idea completely. But it is now intended to supplement rather than completely replace pensions.
Tax relief on contributions into the Lifetime ISA will be the same for Basic Rate taxpayers as the relief on pension contributions – 20% of the gross contribution including the relief. Higher Rate and Additional Rate taxpayers will still only get the 20% relief rather than the marginal rate relieve they get on contributions into their pensions. There is an annual limit, though, of £4,000 net (£5,000 gross).
As with pensions, and as with other ISAs, the Lifetime ISA will grow free of tax (unless your clients have foreign investments within it attracting withholding tax).
Unlike pensions, your clients will be able to take out every penny completely free of tax after 12 months, either when they do so to buy their first home (up to a value of £450,000) or for any purpose at all when they reach 60.
This is going to be a kind of “buy now while stocks last” product. When the Lifetime ISA is released in April 2017 it will be available to all of your clients who are still under 40. Once they have set up their Lifetime ISA they will be able to continue contributing into it until they are 50. But if they fail to take action before they are 40 they will lose this opportunity. You will therefore want to be speaking to your clients in their late 30s about setting up a Lifetime ISA purely to reserve the opportunity for tax efficient saving, even if they are not yet in a position to make serious investments into it.
The real opportunity to talk with our clients is not quite with us yet, although you may well use this as a reason to meet with them and prepare the ground. But when it does arise, make sure you do not allow any of your clients approaching 40 to miss this opportunity. You may also want to talk with older clients about setting their children and/or grandchildren up with Lifetime ISAs.
You may even decide to focus on marketing to clients who will turn 40 in April 2017 or shortly after, attracting them with references to a once in a lifetime investment opportunity.
As previously announced, from 6th April 2016 basic rate taxpayers will have a tax free savings allowance of £1,000. This is reduced to £500 for higher rate taxpayers and additional rate taxpayers will not be entitled to it at all.
Capital Gains Tax
Capital Gains Tax will be reduced from 18% to 10% for basic rate taxpayers from 6th April 2016. For higher rate and additional rate taxpayers it will be reduced from 28% to 20%. These reductions do not apply to any taxable gains on residential properties, or to the “carried interest” charged by a general partner in a private equity fund.
The restrictions will affect any clients who have buy-to-let properties they intend to sell at some point, as well as any who rent out their private residence for longer periods than allowed under the principle private residence rules.
Entrepreneurs Relief will now apply to any investments in unlisted companies provided they are held for at least 3 years and subject to the £10 million lifetime limit.
The previously announced 3% additional Stamp Duty Land Tax on additional residential properties will now apply to everyone, whether or not they are significant investors and whether or not they buy the properties within a company. There will be a 36 month exemption from this additional tax where a private individual buys a new private residence before selling the old one; previously this was limited to 18 months.
The Stamp Duty Land Tax on commercial properties will no longer suddenly jump when the sale price moves into a higher band. Instead, it will work in a similar way to the Income Tax system, with the higher rates only applying to the “slice” of the property value in the higher bands. The rates will be 0% up to £150,000, 2% up to £250,000 and 5% on any further excess.
Good news for our SME clients is that the temporary increase of the Small Business Rate Relief from 50% to 100% is now permanent. The limit for this has also doubled, so it now applies in full to all business properties with a rateable value below £12,000 and on a tapered basis for rateable values between £12,000 and £15,000.
Even businesses with higher rateable value properties will benefit as long as they are below £51,000, which is the new threshold from which standard business rates apply.
Class 2 National Insurance, the basic level of National Insurance paid by our self-employed clients, is to be abolished. This will leave them only paying National Insurance when earnings from their business reach the primary earnings threshold.
This change is not coming into immediate effect, but is planned for the 2018-19 tax year.
This proposed change needs to be taken into account by any of your smaller business clients reviewing whether to incorporate their business.
On 6th April 2016 the previously announced increase in the Employment Allowance from £2,000 to £3,000 will take effect. This will allow your business clients to reduce the annual National Insurance bill of their business by £3,000 (or eliminate it completely if it is lower than this).
Make sure, though, that your smaller business clients are aware of the sting in the tail in the change in the Employment Allowance. As well as increasing the Allowance, the Treasury has slipped in a limitation which may well catch those clients out. The Employment Allowance will now only apply if the business has more than one employee with a salary above £5,824. If your client has no other employees, instead of benefitting from the increase in the Employment Allowance he or she will find there is suddenly a National Insurance liability which was not there before. Now might be the time to bite the bullet and take on another member of staff, which is no doubt the result the Treasury intended with this limitation.
From April 2018 there will be a National Insurance charge on termination payments over £30,000.
There is no change in Corporation Tax in 2016, but changes in future years have been announced.
As already announced, the rate will be 19% in 2017, but will be reduced to 17% rather than 18% in 2020.
Additionally, in 2017 there will be a significant change in the rules on Corporation Tax losses. Currently your clients can only carry the loss forward against profits in the same trade, and they cannot normally offset the loss against profits in different companies within the same group. From 2017 these rules will be relaxed and your clients will be able to transfer their losses much easier.
Larger businesses will also find another sting in the tail though. They will only be able to offset losses against 50% of their taxable profits, which means they will no longer be able to make large profits but pay no tax because of previous losses. This will apply to companies with profits in excess of £5 million.
As previously announced, from April 2016 the notional tax credit on dividends will disappear. Instead, the first £5,000 of dividend income will be tax free. Anything over this will be taxed at 7.5% if your client is a basic rate taxpayer, 32.5% for a higher rate taxpayer, and 38.1% for an additional rate taxpayer.
Some clients who use a high dividend remuneration strategy may wish to consider declaring a larger than intended dividend before 6th April 2016 and crediting this to their director’s loan account. They can then draw this down as required in 2016-17 without paying further tax.
Both this dividend tax change and the significant increase in the Employment Allowance will impact on the calculations of the relative benefits of dividends or salary/bonuses as a remuneration strategy. Now might be a good time to re-visit this with your clients.
Other Business Measures
From 6th April 2016 the tax on loans to participators will increase from 25% to 32.5%.
If you have any clients who run a very small trading or property rental business as a side line they may benefit from the new £1,000 tax free allowance. There is a separate £1,000 allowance for trading and for property rental, and both can be claimed. This is instead of, rather than in addition to, the ability to deduct expenses from the income. Clients with trading or rental income just above this may still choose to take advantage of the tax free allowances, if they find deducting these from their income results in lower taxable profits than if they deduct their expenses instead.