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Family Law Week’s Budget Briefing 2015

Jan Ellis, chartered accountant, of Ellis Foster LLP, a firm which specialises in advising family lawyers on tax-related family law issues, explains the budget changes of most relevance to family lawyers.

Jan Ellis, chartered accountant, Ellis Foster LLP

Jan Ellis, Chartered Accountant and Partner, Ellis Foster LLP

The 2015 budget comes in an election year.  Be aware that some of what has been announced will not be in the first Finance Bill for the year (which will be passed between 6 April and the election) and may therefore not come into effect at all if there is a change of government; and that at this point other new things may be introduced.

Having said that, following the trends of earlier years, certain things have been pre-announced, either in the Autumn Statement or in draft legislation published before-hand, or in changes announced last year which come into effect this year. 

Income tax
There is no change in the main basic and higher rates of income tax.  Personal allowances go up to £10,600 in 2015/16 and the basic rate band is £31,785 (with both due to increase modestly in each of the next two years).  The top-rate of income tax remains at 45%.  As in previous years, personal allowances are lost when income reaches £100,000. 

Basic-rate married couples and civil partners to transfer up to 10% (£1,060 in 2015/16) of their personal allowances to each other, with effect from April 2105.

Capital gains tax
There are no changes in the rates of CGT: these are 10% with entrepreneurs' relief (up to a lifetime total of £10m-worth of gains); 18% for gains made by a basic-rate taxpayer; and 28% for a higher or top-rate taxpayer, or who is brought into higher rates when taxable income and gains are aggregated.  The CGT annual exemption goes up from £11,000 to £11,100 for 2015/16. 

Remember that assets transferred between husband and wife or civil partners are on a no gain/ no loss basis while married and in the tax year of separation, and are deemed to be at market value after this.

A person's "main residence" is exempt from CGT on sale.  Married couples are allowed one tax-free main residence between them.  If a person changes their main residence, the last 18 months of ownership of property 1 continues to be tax-free, after the purchase of property 2, even if property 1 is not then occupied as the person's main residence. 

Under s225B TCGA (formerly ESC D6), a divorcing spouse or civil partner (but not unmarried separating couples) can continue to claim main residence relief on a property he owned himself or jointly with the other spouse, who continues to occupy it after he moved out, provided the spouse who leaves the property does not elect for a second property to be his tax-free residence.  This is potentially particularly relevant where properties are dealt with under Martin orders or Mesher orders.

This means that if the sale of the FMH is not anticipated in the short-term, and the spouse moving out has bought a new property, you need to "do the maths" (and try and predict the local housing market) for clients not occupying the FMH to decide whether to elect for the FMH or the new home as the tax-free residence. 

For international clients, note the additional comments on property below.

Inheritance tax
No change in the rates of the nil rate band, which remains at £325,000.  Remember that for IHT purposes you are treated as married until the date of the decree absolute. 

Assets transferred between spouses or civil partners are not PETs for IHT purposes, provided that both partners are UK domiciled or deemed domiciled, or neither partner is.  From April 2013, where there is a domicile "mis-match" the amount of tax-free gift permitted by a UK spouse to a non-UK spouse is capped at £325,000, or the non-UK domiciled recipient may elect to be treated as UK domiciled (so that they can receive their spouse's estate tax-free on "first death" but a full UK IHT charge then arises on "second death"). 

We are threatened with a consultation on restricting deeds of variation.

The top corporation tax rate aligns with the small companies' rate at 20% from April 2015. 

Property taxes
There were major changes in stamp duty land tax introduced in December 2014.

Instead of paying one rate, based on the total property value, SDLT is now charged at varying rates, as set out below.  NOTE that following the Scottish referendum, different (generally higher) rates will apply in Scotland with effect from April.  The new rates for residential property not bought though a company are as follows:









0% on first £125,000 of price


0% on first £145,000



2% on next £125,000 ie to £250,000


2% on next £105,000 ie to £250,000



5% on next £675,000 ie to £925,000


5% on next £75,000   ie to £325,000



10% on next £575,000 ie to £1.5m


10% on next £425,000 ie to £750,000



12% on any excess over £1.5m


12% on any excess over £750,000



A flat 15% rate of SDLT and an annual property tax were introduced in previous years on "non-natural persons" owning "high value" residential property.  Originally introduced for property valued at more than £2m, this threshold dropped to £1m in 2014 and reduces further to a relatively modest £500,000 in April 2015.  These rules are complex and do not apply to rented property or development property, but may be relevant where a non-UK father/ husband provides UK property via a non-UK company.  Specialist advice will be essential here.

Further changes to property taxes have also been introduced and are of potential relevance:

Child benefits and childcare
From 7 January 2013, child benefit was effectively withdrawn for households where an earner has income of £60,000 or more and starts to be withdrawn if their income is over £50,000.  This rule applies to married couples and civil partners, but also – importantly – unmarried couples living together.  Child benefit is usually paid to the mother; if she continues to claim it but her husband earns more than £60,000, she receives the benefit but he pays additional tax so that it is clawed-back.   This gives the potential for added difficulty on divorce.  If the mother moves in with a new partner, she should stop claiming the benefit if she knows that his earnings are more than £60,000, otherwise he will face the tax claw-back.  If parents live apart, the benefit will usually be paid to the parent where the child lives, but may be paid to the parent who supports the child.

A measure announced in 2013 comes into effect in autumn 2015, under which working families will receive up to £2,000pa per child towards childcare costs for children under 12 (or disabled children under 16) in a new initiative (up from £1,200 when first announced last year).  This will operate as a voucher scheme, whereby the family opens an on-line "voucher account" and for every 80p they put in the Government adds 20p.  To be eligible "all parents in the household must be working, not receiving tax credits or universal credit, and neither earning over £150,000pa".  This has already faced heavy criticism in the press for not being available for stay-at-home mothers and hence anti-traditional family.

Anti-avoidance rules
The much-heralded "general anti-abuse rule" ("GAAR") took effect in 2013 effect in an attempt to reduce "aggressive" but legal tax avoidance, but there has been no case law yet on its operation. 

Changes to block perceived loopholes this year are at a lower level than in the past – partly because of the measures now in place under the GAAR and under the rules introduced last year which require people who have bought packaged tax schemes to pay the tax anyway and receive a refund if the scheme is found by the court to work, rather than get the tax relief up front and then repay it when the scheme fails.

One change, announced in December, was to stop sole traders, partners and LLPs incorporating and making a gain (with a 10% tax charge) on the value of goodwill and the new company claiming tax relief on the amortisation of that goodwill.  A couple of minor further amendments to entrepreneurs' relief announced today reduce relief in respect of certain "associated disposals" and joint venture structures; and various other anti-avoidance measures are introduced.

Sin taxes
Not much this time in the budget speech, with modest reductions in the price of beer, cider and spirits and freezing of duty on wine.   Tobacco duties increase by the amount noted in 2014 of 2% + RPI.  Fuel duty increases scheduled for September are cancelled.

Savings and pensions
The new ISA limit increases from £15,000 to £15,240.  Married couples and civil partners are now able to retain the tax benefits of an ISA when their spouse dies and ISAs are to be made more flexible.

From April 2016, the first £1000 of savings income for basic rate taxpayers / £500 for higher rate taxpayers will be tax-free.  In theory this will be done via PAYE codes; but in practice it is likely that huge numbers of retired people with modest incomes who don't pay tax through PAYE will need to submit repayment claims.

The simplification of money-purchase pension schemes introduced last year takes effect from April 2015.  These broadly eliminate the requirement to buy an annuity and simplify the draw-down rules for those not wanting an annuity.  People who have already bought an annuity will be able to assign it, with effect from April 2016, to a third party and receive a lump-sum or "alternative retirement product". IHT rules are also improved for pension pots not invested into an annuity when the holder dies. 

For those not yet retired, the pension lifetime allowance drops to £1.25m from April 2015 to £1m in April 2016 and then increases for inflation from April 2018.

The annual tax return is to be abolished "over the next parliament" and replaced with a "digital tax account".  This has generated an enormous amount of press coverage but there is no information yet as to how it will work.