RegulationJul 16 2015

Finance Bill blocks route around annual allowance taper

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Finance Bill blocks route around annual allowance taper

The Finance Bill has stated individuals cannot enter into a salary sacrifice or flexible remuneration arrangement on or after 9 July 2015 in order to reduce their threshold income.

For those who did opt for salary sacrifice in a bid to maximise their pension, they will now find the amount of income given up is simply added back to their individual threshold income.

The clause, tucked away in the Finance Bill, which was published yesterday (16 July), dashed hopes that adviser’s high net worth clients could use salary sacrifice to get around the new annual allowance taper rules.

A taper has been introduced to the existing £40,000 annual allowance for those with incomes, including the amount of any pension savings, greater than £150,000.

This means that for each £2 of income above £150,000, an individual’s annual allowance would reduce by £1. Once an individual’s income reaches £210,000 or over, their annual allowance will be £10,000. This has effect from 6 April 2016.

The Finance Bill also contained the formula for calculating the reduction in the annual allowance if the individual is a high-income individual for the tax year.

Where this applies the individual’s annual allowance for that tax year, which for 2016 to 2017 would normally be £40,000, is reduced gradually to £10,000 based on the amount their adjusted income exceeds £150,000.

This means that for 2016 to 2017, a high-income individual will have their annual allowance reduced by £1 for every £2 by which their adjusted income exceeds £150,000.

Where the adjusted income is £210,000 or above, the individual’s annual allowance will be £10,000.

However the paper also clarified certain lump sum deaths benefits are excluded from the income definition.

The Finance Bill also confirmed multiple trusts will continue to benefit from multiple nil rate inheritance tax bands provided they are set up, and topped-up, on different days,

Rachael Griffin, financial planning expert at Old Mutual Wealth, said the confirmation contained in the Finance Bill stated if each trust is less than £325,000 then there is no inheritance tax to pay.

Ms Griffin said: “This clarity will be welcomed by the industry.”

At last year’s Autumn Statement, George Osborne U-turned on plans to apply a single nil-rate band for trusts to prevent ‘gaming of the system’ to avoid inheritance tax.

At the 2014 Budget new rules were proposed to prevent multiple trusts being set up on different days, each with its own nil rate band below the £325,000 inheritance tax limit.

The Finance Bill also included the detail outlined in the chancellor’s Summer Budget regarding the new £1m property inheritance tax allowance.

Ms Griffin said the calculations, exemptions and conditions will add an extra layer of complexity to people’s estate planning.

She said: “A far simpler and more robust approach would have been to increase the existing £325,000 inheritance tax allowance in line with house price inflation, and would have delivered a greater level of ‘real’ benefit over the longer term.”

To earn CPD and learn more about what was in the Summer Budget, and how it affects your clients, read FTAdviser’s Guide to Summer Budget 2015.

emma.hughes@ft.com