Perhaps the most interesting announcement from a tax perspective concerned inheritance tax and a tapering of annual allowances for pension contributions which will affect higher earners.
The nil rate band has been frozen at £325,000 since 2009 to 2010 bringing more and more people within the IHT net and so it could be argued that some change in this area was long overdue.
Today’s announcement confirmed plans outlined in the Conservative manifesto to increase the effective IHT threshold for married couples and civil partners to £1m from April 2017.
This will work by introducing a new £175,000 transferable allowance per person for main residences when they are passed to children or grandchildren.
For many couples, this will give a total allowance of £1m (£325,000 plus £175,000 each). The intention is that this new allowance will be tapered away from those leaving more than £2m with the aim that those leaving more than £2.35m will not benefit from the new allowance. It is estimated that this policy would involve a tax giveaway of about £1bn.
This may, of course have some behavioural consequences as the legislation will favour owning bricks and mortar as opposed to other investments. In reality, it is also likely to help very few families. Figures verified by the Office of Budget Responsibility suggest that less than 10 per cent of the estates that would be subject to IHT in 2015 to 2016 will be taken out of the IHT net.
In order to recoup this shortfall, the annual allowance for pension contributions is to be tapered away from £40,000 for those with incomes over £150,000, down to £10,000 when an individual’s income reaches £210,000.
The change means anyone with an income of up to £150,000 can continue to put £40,000 a year tax-free into a pension, but those on higher incomes can put in much less.
In a couple of other house–related measures, mortgage interest relief for buy to let properties is to be restricted to basic rate tax only and rent a room relief will increase to £7,500 from April 2016.
There has been a lot of tightening of the regime for UK resident but non-domiciled persons in recent years, but now the chancellor is going further. From April 2017, any person who has been resident in the UK for 15 out of the last 20 tax years will be treated as UK domicile for all purposes. Whether this causes a large number of such people to leave the UK in two years’ time of course remains to be seen.
Corporation tax will be reduced further over the next few years to 19% from 2017 and 18 per cent from 2020, and there will be a review of dividend taxation which will mean that up to £5,000 of dividends can be received tax-free.
Furthermore, the government is progressing to having a personal allowance of £12,500 and a higher rate threshold of £50,000 by the end of this Parliament.
Accordingly, the personal allowance will rise to £11,000 from April 2016 with a corresponding increase to the higher rate threshold of £43,000. In addition to this, a national living wage will be introduced next year which will rise to £9 per hour from 2020.
Brian Murphy, financial planning manager at Axa Wealth
