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Family Law Week’s Budget Briefing. March 2016

Matt Boggis of Creaseys Chartered Accountants and tax advisers explains the Budget changes of most relevance to family lawyers.

Matt Boggis, Creaseys Accountants

This is the Chancellor's eighth Budget which he claimed was aimed at "putting the next generation first".

Income Tax and National Insurance
The Chancellor announced a further increase in the tax-free personal allowance which will rise to £11,500 in April 2017. This is a further step towards the Government's promise of a personal allowance set at £12,500 by the end of this Parliament.

The abatement of the personal allowance will continue at £1 for every £2 of an individual's income above £100,000 and taxpayers will then begin to suffer an effective marginal income tax rate of 60%.

Whilst the rates of income tax remain unchanged, the point at which individuals will begin paying income tax at the higher rate (40%) will rise in April 2017 from the current level of £42,385 to £45,000.

From April 2017, two new £1,000 allowances are also being introduced which will prevent individuals with property or trading income below £1,000 being required to declare or pay tax on that income. Those with relevant incomes above £1,000 can choose to deduct the allowance instead of calculating the exact expense.

Self-employed individuals will also be pleased to hear that Class 2 National Insurance will be abolished from 2018 – this removes the administrative burden for many, in addition to a tax cut of £145 per year (based on current rates), though it is worth bearing in mind that the reform of Class 4 National Insurance from April 2018 could reverse this.

Capital Gains Tax . . . relaxations . . . for some
In a surprise move, the Chancellor announced that Capital Gains Tax will be cut from 18% to 10% for basic-rate taxpayers, with the higher rate of 28% reducing to 20%, from 6 April 2016. However, these lower rates will not apply to capital gains realised on residential property and carried interest.

This is a further blow for landlords and second home owners who may also be affected by the increased stamp duty rates announced in last year's Autumn Statement and the restriction on relief for interest paid on borrowings relating to property letting.

Those anticipating selling or giving away qualifying assets would be well advised to delay executing these transactions until after 5 April 2016. This reduction could significantly affect a decision to gift assets to family members.

Additionally, Capital Gains Tax Entrepreneurs' Relief will be extended to benefit external investors in unlisted trading companies. 

Currently only shareholders who work for and own at least 5% of the ordinary share capital of a company are able to benefit from this 10% Capital Gains Tax rate.  The new Investors' Relief will extend this 10% rate to gains realised by all individuals on the disposal of shares in unlisted trading companies, provided the shares were newly issued and acquired on or after 17 March 2016 and are held for at least 3 years from 6 April 2016. 

As with the current rules for Entrepreneurs' Relief, this new Investors' relief will be subject to a lifetime cap of £10 million.

Of course, spouses and civil partners continue to be treated as separate individuals for Capital Gains Tax purposes and any transfer of an asset between the two is treated as a no gain/no loss disposal.

For couples separating, any disposals made in the year of separation are treated as a no gain/no loss transaction. Disposal made in subsequent years following separation are deemed as made at market value and Capital Gains Tax becomes an issue. 

Inheritance Tax
It is "as you were" as far as Inheritance Tax is concerned with no further changes announced by the Chancellor.

Despite this, estate planning remains crucial for families looking to mitigate Inheritance Tax and it is vital that individuals take steps to ensure that their wills are not only in line with their wishes but also tax effective. 

Major changes were announced in last year's Autumn Statement with potentially less inheritance tax to pay on the family home provided this is left to children or grandchildren. 

The Chancellor announced a further increase in the ISA annual savings allowance from £15,240 to £20,000 from April 2017. This provides further opportunities for individuals looking to make tax-free savings.

In addition, a new "Lifetime ISA" will be introduced for those aged under 40 – this enables an individual to save £4,000 a year with the Government providing a 25% boost, i.e. a top up of £1 for every £4 saved.

This bonus is conditional depending on how the savings are used. If the money is used to fund retirement (provided the individual is aged 60 or over) or to purchase a home the full value of the bonus is available. The bonus element must be returned to the Government, in addition to a 5% charge, should the funds be withdrawn for other purposes before reaching 60.

For basic-rate taxpayers, this bonus is equal to the tax relief on pension contributions and the Lifetime ISA may be an attractive alternative to a pension for many younger people.

The Chancellor has announced a further reduction in the Corporation Tax rate on company profits, with the rate set to fall to 17% by 2020. Further good news for businesses following the initial reductions announced in last year's Autumn Statement.

Business Rates
The annual threshold for small business tax relief will be increased from £6,000 to £15,000 – exempting thousands of businesses. Around 600,000 commercial properties will be removed from taxation permanently.

Changes to Stamp Duty Land Tax on commercial property were also announced with a zero rate band introduced for purchases up to £150,000, a 2% rate on the next £100,000 and a 5% top rate on amounts above £250,000. This change will be effective from midnight and it is anticipated that around 90% of small businesses will see their tax bills on acquiring property fall as a result.

The Government continued its clampdown on tax avoidance with changes announced surrounding the taxation of termination payments with amounts over £30,000 to attract employer national insurance charges from 2018. This and the many other measures to tackle tax avoidance are forecast to raise £12 billion over this Parliament.