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In our update last week we reported on the Chancellor’s headline Budget announcement regarding Capital Gains Tax (“CGT”) and the impact this may have on property investors. As well as the major changes to CGT, the Budget also introduced an important new type of ISA, changes to Income Tax bands and significant extensions to Entrepreneurs’ Relief.

Lifetime ISAs – A New Savings Vehicle

The Chancellor announced the introduction of a new Lifetime Savings Account (“LISA”) for those under the age of 40. The LISA will incorporate a Government annual bonus of 25% added to the amount placed by the individual in their account. This new LISA will be introduced from April 2017, with the Government hoping it will incentivise saving for the future.

So what are the parameters? Individuals aged between 18 and 40 can open a LISA and the annual bonus is paid on savings deposited before their 50th birthday. The LISA can take the form of a cash ISA or an investment ISA. For every £4 that an individual saves, the Government will contribute a £1 bonus which will significantly boost an individual’s savings.

The LISA has an annual savings limit of £4,000 a year. Those depositing £4,000 will increase their annual savings to £5,000 per year when the Government bonus of £1,000 is added. The bonus will be paid at the end of each tax year in proportion to the amount invested by the individual. Any interest or growth on the LISA will be accrued on the annual bonus from the point at which the bonus is awarded.

First Time Buyers

The LISA could be a useful tool for those looking to save for their first property. Funds can be used to purchase a first home within 12 months of opening the account. Although accounts are limited to one per person there is an added benefit where two individuals are buying their first house together. In these circumstances both purchasers can utilise their LISA and the Government bonus. However, clients should be aware that only properties up to a value of £450,000 can be purchased with a LISA.

Interaction with other savings accounts

LISAs can be held alongside other ISA accounts such as Help to Buy ISAs. Multiple ISAs can be held at the same time as long as the investor does not exceed the annual limit.

The annual limit for ISAs in 2016 is £15,420. It will increase to £20,000 in 2017/2018. Help to Buy ISAs will continue to be available until November 2019. Clients with Help to Buy ISAs will have the option of transferring their savings into a new LISA. Alternatively they can continue to save into their Help to Buy ISA. However, only one of these ISAs can be used to buy a first home. It occurs to us that it may be sensible for clients to open a Help to Buy ISA prior to the new LISA coming into place. This will allow individuals to start saving using a Help to Buy ISA, obtain the benefit of the Government’s 25% bonus and then transfer the sums held in the Help to Buy ISA to a LISA in April 2017.

In conjunction with the current ISA, the LISA will end on the death of the holder. There will not be any CGT or Income Tax to pay up to the date of death but the LISA will form part of the estate for Inheritance Tax purposes. The LISA will also provide the same benefits for the surviving spouse or civil partner on death as an ISA. Any remaining LISA allowance will transfer to the surviving spouse or civil partner to allow them to utilise their own annual limit as well as their spouse’s.

A step away from the traditional pension?

For those already on the property ladder, the LISA could also be a useful alternative to the traditional pension. Savers who leave funds in a LISA until their 60th Birthday can withdraw funds from the account with no tax charge. There is an option to withdraw funds prior to the age of 60, however there will be a charge of 5% on any withdrawals. The Government bonus is also forfeited.

While the LISA may perhaps provide greater flexibility and easier access to funds than a pension, the annual savings limit is significantly lower. There are certainly perks to both a LISA and a pension and the more preferable option will depend on an individual’s circumstances.

Clients should act now

At present, the Government is consulting on whether the scope of a LISA can be extended allowing funds in the LISA, including the Government bonus, to be withdrawn on other life events. Given that the outcome of the consultation is not yet known, we would suggest that all clients under 40 may wish to open a LISA as soon as they can, regardless of whether they have purchased their first property or are seeking an alternative to pension saving. By opening the LISA while they can, this will ensure that if the scope of the LISA is widened in future, these clients will have the opportunity to access these benefits. Better to act sooner and preserve the possibility, rather than leave it and find you are too late.

Income Tax changes

There is good news on the Income Tax front with the annual allowance increasing from £10,600 to £11,000 on 6 April 2016 and to £11,500 in 2017/2018. The Basic Rate limit will increase to £33,500 in 2017/2018. As a result of this, the Higher Rate threshold will increase from £42,385 to £43,000 in April 2016 and up to £45,000 in 2017/2018.

It must be remembered, however, that the introduction of the Scottish Rate of Income Tax from 6 April 2016 means that the personal allowance may soon differ across the border. This seems likely given that the First Minister has indicated that should her party be re-elected in May, she will freeze the Basic, Higher and Additional rates at their current level. The higher rate will be increased only in line with CPI inflation in 2017/2018. This is in contrast to the Chancellor’s plan to increase the threshold for Higher Rate taxpayers to £45,000 in 2017/2018 meaning that Scottish taxpayers are likely to pay more Income Tax overall in 2017/2018. We watch these developments with interest and wonder how sustainable it would be to have different tax rates for higher earners north and south of the border.

Extension of entrepreneurs’ relief

In conjunction with the reduction in the rate of CGT for higher-rate tax payers being reduced from 28% to 20% and for basic rate tax payers from 18% to 10%, the Chancellor has also extended the remit of Entrepreneurs’ Relief (“ER”) on CGT.

Investors’ relief

Currently, ER is available in connection with certain disposals of a business. The Budget extends the scope of ER to introduce a new relief available to long term investors in unlisted companies known as Investors’ Relief.

From 6 April 2016, any long-term investor not employed by a company will now qualify for ER and pay CGT at 10% on the disposal of shares in the company. The relief is limited to the purchase of ordinary shares on or after 17 March 2016 in an unlisted company.

In order to qualify for the relief, the shares must be held for at least three years. For the purpose of anti-avoidance, the shares must be purchased for genuine commercial considerations. ER in this area only extends to the issue and allotment of new ordinary shares and will not apply where shares are transferred. This extension of the relief will allow individuals who finance a company but do not work for the company to obtain ER.

It is expected that this relief will receive its own £10 million lifetime limit which will be separate to the ER limit, however this is yet to be confirmed. Whilst draft legislation is expected to clarify the exact details of the relief, it does appear that employees and directors who hold less than a 5% shareholding could miss out on both strands of the relief.

ER and goodwill on incorporation

Following the 2014 Autumn Statement, partners who transferred a business to a close company were unable to claim ER on the goodwill of the business. The Chancellor has now announced that ER will be available to those former partners on gains on goodwill where they transfer the business to a company controlled by 5 or fewer persons, or which is controlled by its directors. To qualify, the partner must receive less than 5% of the shares and voting rights in the new company. This change will be backdated to 3 December 2014.

ER and associated disposals

ER is now to be available where an individual is disposing of a privately owned business asset to a family member. This welcome change will affect many business owning clients and will be particularly relevant where families are planning for retirement. This relief is to be backdated to 18 March 2015.

ER and Joint Ventures and Partnerships

To claim ER, shares must be held in a trading company. In meeting this test, for disposals on or after 18 March 2015, it was not possible to look at the activities of a partnership or joint venture company which the company was part of. If the company itself did not carry on a trade, relief was denied.

The Budget confirmed that this restriction is being partially removed. Relief will now be available to those that hold a 5% shareholding in the trading joint venture company, whether directly or indirectly. These changes are backdated to 18 March 2015.

Deemed domicile

There are some major changes being made to the rules on non-domicile. For a more detailed commentary on these changes see our previous Briefing Note on: Tax Changes for Expats and Non-Doms. The Budget confirmed that these changes to the rules on non-domicile will be introduced from April 2017. It further confirmed that any individuals who become deemed domiciled on the introduction of the new rules can use the market value of their non-UK assets as at April 2017 as their base cost going forward.

While the CGT changes, “sugar tax” and the now scrapped reduction in disability benefits may have grabbed the headlines, the above measures are significant and must not be overlooked. These changes are likely to affect many clients, whether business investors, those looking to purchase their first home or clients in need of an alternative to pensions.

If you or any of your clients have any questions, please do not hesitate to contact any member of Stronachs’ Private Client Team.

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