Tax changes for family lawyers

Family analysis: As fuller details of the headline announcements in the Chancellor's Budget 2016 become available, Sarah Deeks, tax editor for Butterworths Family Law Service, summarises the key changes family lawyers need to be aware of and provides a reminder of tax provisions included in previous Budgets that will come into effect on 6 April 2016.

Original news

Budget 2016

The Chancellor of the Exchequer, George Osborne gave his eighth Budget on 16 March 2016. The Budget contains a number of tax announcements of relevance to family lawyers on capital gains tax and Stamp Duty Land Tax (SDLT). Of greater significance are the numerous tax changes announced in previous Budgets that come into effect on 6 April 2016, particularly those regarding the tax treatment of savings income and pensions.

What are the key changes regarding income tax?

Income tax rates and thresholds

The rates of income tax for the duration of the Parliament in England, Wales and Northern Ireland are a basic rate of 20%, higher rate of 40% and an additional rate of 45%. In 2016/17 the basic rate threshold is £32,000. In 2017/18 it will be £33,500 and not £32,400 as announced in Summer Budget 2015.

From 6 April 2016 taxpayers whose main residence is in Scotland pay a reduced rate of UK income tax on earned income and pensions plus Scottish income tax. For 2016/17 the combination of the UK and Scottish rates results in taxpayers paying the same basic, higher and additional rates as the rest of the UK. From 6 April 2017 the main rates of income tax will be separated into three categories so that the ‘English Votes for English Laws’ (EVEL) procedure precludes Scottish MPs from voting on the main UK tax rate.

Dividends

From 6 April 2016, a dividend nil rate set at £5,000 in 2016/17 replaces the previous system of dividend tax credits. It enables all individuals to receive up to £5,000 of dividend income tax-free. Where dividend income exceeds the dividend nil rate the rates of tax are 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for individuals paying additional rate tax.

Savings interest

A personal savings allowance and savings nil rate come into effect on 6 April 2016 to remove the tax charge on the first £1,000 of savings income for basic rate taxpayers and up to £500 for higher rate taxpayers. Additional rate taxpayers pay income tax on all interest received. The 0% starting rate for savings threshold is retained for low earners. This means that where an individual’s earned and pension income is less than £5,000, the first £5,000 of their savings income suffers no tax. To prevent many small tax refund claims, the requirement for banks and building societies to deduct basic rate tax from interest is removed from 6 April 2016. From 6 April 2017, this is extended to interest distributed from open-ended investment companies, authorised unit trusts, investment trust companies and peer-to-peer loans.

Trusts

The trust rates for 2016/17 remain at 45% for income other than dividends. The dividend trust rate increases to 38.1% bringing it into line with the rate for non-trust dividend income. The first £1,000 of trust income continues to be taxable at rates up to 20% depending on the nature of the income.

Personal allowances

From 2016/17 there is only one personal allowance regardless of an individual’s date of birth set at £11,000. It increases to £11,500 in 2017/18 instead of the previously announced figure of £11,200. This means that no one will pay higher rate tax unless their income is above £43,000 in 2016/17 and £45,000 in 2017/18. An individual working for 30 hours a week earning the National Minimum Wage will therefore pay no income tax in 2017/18. Where income exceeds £100,000 the allowance is tapered so that no allowance is available to those with income above £122,000 (2016/17) and £123,000 (2017/18). The allowance for married couples and civil partners born before 6 April 1935 is frozen at £8,355 subject to a minimum of £3,220. The allowance for sight-impaired people remains at £2,290. The transferable tax allowance available to certain lower-earning married couples and civil partners is 10% of the personal allowance making it £1,100 in 2016/17 and £1,150 in 2017/18.

Maintenance relief

The limit for the tax reduction for maintenance payments for taxpayers born before 6 April 1935 is frozen at £3,220 for 2016/17.

What are the government's plans for digital accounts and tax assessment?

Digital tax accounts

In preparation for the move to online reporting HMRC will publish the results of a number of consultations later in 2016 with a view to draft legislation being included in Finance Bill 2017. From 2018, businesses, self-employed people and landlords who keep their records digitally and provide HMRC with regular updates will have the option to pay their tax on a ‘pay-as-you-go’ basis so that they can arrange their tax payments to suit their business and cash flow. The government is backing the digital roll-out by investing £71m to enable HMRC to provide improved services seven days a week.

‘Simple assessment’

Effective from Royal Assent to Finance Bill 2016, HMRC will be able to assess a person’s income tax or capital gains tax without them first being required to complete a self-assessment return. HMRC must have sufficient information about the individual to be able to make the assessment and individuals will have 60 days to dispute it.

What's changing in relation to pensions and insurance?

Pensions’ tax

The lifetime allowance for 2016/17 falls from £1.25m to £1m subject to transitional and lifetime protection. The annual allowance remains at £40,000, but from 6 April 2016 where an individual’s annual income is over £150,000 (including pension contributions), or £110,000 (excluding pension contributions), the annual allowance is tapered by up to £30,000 to a minimum of £10,000. From the day after Royal Assent to Finance Bill 2016 individuals with a life-expectancy of 12 months or less who have accessed their pension will be able to take the remaining funds as a serious ill-health lump sum. Where it is paid to an individual who is aged 75 and over it will be taxable at the individual’s marginal tax rate rather than at a flat rate of 45%.

Life insurance

The government will consult on changes to the rules for the part assignment or part surrender of life insurance policies to prevent excessive tax charges arising on these products with the aim of legislation being included in Finance Bill 2017.

What developments are there regarding SDLT?

SDLT on purchases of commercial property and mixed transactions is reformed with effect from 17 March 2016. From that date it is charged on the portion of the value of the property above each threshold rather than at a single rate on the whole transaction value. This measure aligns the SDLT treatment of non-residential and residential property. The rates and thresholds for non-residential property are also amended with the introduction of a new 2% rate for leases over £5m subject to certain exceptions.

SDLT on residential property

The residential property rates are:

  • 0% on the first £125,000 of the transaction value
  • 2% where the price is between £125,001 and £250,000
  • 5% between £250,001 and £925,000
  • 10% between £925,001 and £1.5m
  • 12% for the proportion of the price over £1.5m

From 1 April 2016 the purchase of an additional residential property costing over £40,000 (excluding caravans, mobile homes and houseboats) attracts a premium making the rates 3%, 5%, 8%, 13% and 15%. Where a new property is acquired before the existing one is sold the purchaser has 36 months to reclaim the difference between the higher and lower rates. A small share in recently inherited property is excluded from the higher rates. An annual tax on enveloped dwellings (ATED) may be due where the consideration is over £500,000 (limit from 1 April 2016) with higher rates applying to properties over £1m.

SDLT on commercial property

SDLT on the purchase of freehold commercial property and the payment of lease premiums is charged at 0% on the first £150,000 of the transaction value, 2% where the price is between £150,000 and £250,000 and 5% where it exceeds £250,000. The rates charged on the net present value of a lease are: 0% on the first £150,000, 1% between £150,000 and £5m and 2% where it exceeds £5m.

What else should family lawyers be aware of?

Childcare payments

Tax-free childcare payments for children under 12 on hold since 2015 will be gradually rolled out from early 2017. The parents of younger children will be able to join the scheme first. As part of the transition process employer supported childcare schemes will remain open to new entrants until April 2018 with the tax reliefs continuing for as long as the employer offers the scheme.

Capital gains tax rates and thresholds

One of the principal changes announced in the Budget was a reduction in the rates of capital gains tax for 2016/17. The rate for capital gains up to the basic rate threshold falls to 10% (previously 18%). A 20% (previously 28%) rate applies to all other gains made by individuals and trustees subject to exceptions for gains on residential property not eligible for private residence relief where the rates remain at 18% and 28%. The capital gains tax annual exemption for 2016/17 is held at £11,100 for individuals and £5,550 for most trustees.

Entrepreneurs’ relief

A 10% rate of capital gains tax applies to gains that qualify for entrepreneurs’ relief, usually on the sale of unquoted shares in a personal trading company or the sale of the whole or a part of an unincorporated business, subject to a lifetime limit of £10m. A new form of entrepreneurs’ relief for external investors is introduced for gains arising on the disposal of ordinary shares held by individuals in an unlisted trading company or holding company of a trading group. To qualify the shares must be issued by the company on or after 17 March 2016 and held by the individual for at least three years starting from 6 April 2016. The transaction must be undertaken for genuine commercial reasons (such as raising capital for a specific purpose) and not for tax avoidance. The qualifying gains are subject to a separate lifetime limit of £10m.

Inheritance tax

The inheritance tax rates remain unchanged at 40% on death, 36% where 10% or more of the estate is left to charity and 20% for chargeable lifetime transfers. The nil rate band remains at £325,000. The residence nil rate band will be phased in from 2017/18.

Tax credits

A four-year freeze in tax credits was announced in Summer Budget 2015 subject to up rating the disability elements in line with the Consumer Prices Index. No up rating has taken place and all rates and thresholds for 2016/17 remain unchanged with the exception of the amount disregarded when family income increases. In 2016/17 this limit is £2,500 instead of the previous limit of £5,000.

Sarah Deeks, LLB, is a Fellow of the Institute of Chartered Accountants in England and Wales and writes the tax chapters for Butterworths Family Law Service.

The views of our Legal Analysis interviewees are not necessarily those of the proprietor.

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