Following various dire predictions about possible reductions in the amount that can be contributed to pensions and an overhaul of the inheritance tax (IHT) and capital gains tax (CGT) regimes, the Budget delivered by Chancellor of the Exchequer Philip Hammond (pictured) on 29 October 2018 turned out to be fairly benign from a financial planning perspective.
The Budget did not target any big single extra source of revenue (even the new digital services tax is expected only to raise £270 million in its first year of operation, rising to £440 million in 2022-23 – a drop in the ocean compared to Theresa May’s pledge to fund the NHS by an extra £20bn per year by 2023). Instead it tightened up the definitions and eligibility for a range of different personal, property and business tax reliefs.
Below is a round-up of the main issues of which to be aware.
The Chancellor announced that from 6 April 2019 standard personal allowance on which no income tax is due would increase to £12,500 the higher rate threshold would, for most people, rise to £50,000. This will deliver a manifesto commitment a year early, saving a basic rate taxpayer £130 per year compared to 2018/19 and an average higher rate taxpayer earning between £50,000 and £100,000 a total of £1,590 per year.
The lifetime allowance for total pension fund size will increase in line with inflation to £1.055 million from 6 April 2019. Other than that the regime remains the same.
Because the higher rate income tax threshold is to increase substantially next year, individuals who earn just under £50,000 per year may be better off maximising any additional pension contributions before 5 April 2019 in order to benefit from as much higher rate tax relief as possible. This is a complex calculation with a number of variables so please speak to a financial planner before making any decisions.
ISAs and Child Trust Funds
The annual subscription limit for new ISA investments will remain at its current level of £20,000 per individual (£40,000 per couple) per year. The annual subscription limits for Child Trust Funds and Junior ISAs will increase from £4,260 to £4,368 from 6 April 2019.
The first Child Trust Funds will begin to mature on 1 January 2018, as their beneficiaries reach the age of 18, and the first cohort of 16-year-old children have already been granted control over the investment of their funds. The Government used the Budget to announce a forthcoming consultation on draft regulations to govern what happens to these funds as they mature.
CGT on residential property
“Lettings relief” enables people who have let out a property that was previously their principal private residence to enjoy private residence relief from CGT on some or all of any gain in value that occurred while the property was being let out. The Budget announced that from April 2020 this relief will only be available for periods during which the property owner has been in shared occupancy with the tenant.
The period preceding a sale, during which the property is let out, for which the property benefits from full private residence relief (the “final period exemption”) will also be reduced from 18 months to nine months. The current 36-month final period exemption available to disabled people or those in a care home will remain unchanged.
These changes will have a big impact on their target demographic: people who buy a house, live in it briefly while they renovate it, then let it out for a number of years before selling. The reforms will also, however, potentially hit “accidental landlords” who are unable to sell their first property before purchasing a second – perhaps because of relocation for work.
Entrepreneurs relief reduces the CGT payable upon the sale of certain shares in trading businesses to ten per cent on the first £10 million of gains made over an individual’s lifetime. The Budget doubled (from April 2019) the period for which any qualifying shares will have to have been held from 12 months to two years and stipulated that, with immediate effect, qualifying shareholders must be entitled to at least five per cent of the distributable profits and net assets of a company.
These changes will not affect many owner-managers but the increase in the minimum holding period could be an issue for the happily married owner of a business worth more than £10 million who has not yet granted a share of that business to his or her spouse and is considering selling up in the foreseeable future. In such instances it would be worth consulting a financial planner, accountant and solicitor to determine the best course of action.
The Budget confirmed that the government still intends to publish a consultation on the taxation of trusts at some point. This will, the Treasury says, “make the taxation of trusts simpler, fairer and more transparent”. We can be fairly confident that this does not mean “lower”.
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