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Private Client Section

Seeing red

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This year, the chancellor’s red briefcase held a number of changes for private clients, most notably around pensions. Tina Riches explains

This year’s Budget, announced on 19 March, included a number of changes of relevance to private clients, including to ISAs, inheritance tax (IHT), income tax and pensions. A range of measures were introduced to benefit savers, including a useful change in the rules and an increase in the ISA threshold to £15,000 per annum. This increase will take effect from 1 July 2014, which, of course, means that the full £15,000 for the 2014/15 year will not be available until then. Additionally, the amount that can be placed into cash and stocks and shares ISAs will be the same, and transfers can be made between cash and stocks and shares, and vice versa. Cash ISA interest rates are at historically low levels at the moment, so it is of little surprise that their upper limits have been increased. With interest rates of around 2%, this will represent circa £300 per annum tax-free.

Inheritance tax freeze

In a move that was previously announced in the 2013 Budget, the nil-rate band threshold for IHT is due to be frozen at £325,000 until 2017/18. The impact of this freeze can already be felt in the increased IHT yield, which is likely to continue in line with the rising property prices that are seeing no signs of slowing, particularly in the south-east.

Income tax rates and thresholds

The rise in personal allowance to £10,000 has been mooted since the 2013 Budget, and formed a central aim of the coalition government. Although the increases to the personal allowances and the effective higher rate band are welcome, it is worth noting that the slight decrease in the actual higher rate band means that those earning over £120,000 in 2014/15 and £121,000 in 2015/16 will experience a small increase in their tax burden, as their personal allowance is abated.

Principal private residence relief

A property that qualifies for main residence relief at some time during the ownership is deemed to continue to do so during the final period of ownership. However, from 6 April 2014, the final period exemption will be reduced from 36 to 18 months. This reduction was first announced in the 2013 autumn statement, although, since then, additional detail has been released to state that although the date of exchange remains key in determining whether the 36-month or 18-month final period applies, anti-avoidance rules will be included to prevent taxpayers from exchanging contracts before 5 April 2014 but not completing until after 6 April 2015.

Pensions

This year’s Budget implemented huge changes to the pensions system. These included a reduction in the lifetime allowance from £1.5m to £1.25m, which will mostly be felt by high earners. In addition, relaxed limits on capped and flexible drawdown, as well as more flexible rules around trivial commutation, should help pension provider administration, and result in better outcomes for the pension investor.

A consultation has also been announced on allowing greater access to defined contribution pension plans from April 2015. The intention is to replace the existing rules, so that individuals will be able to access their defined contribution pension savings as they wish from the point of retirement.

It is, however, hoped that some protection is built into this new, more flexible system, to help those who are not financially literate and may not understand the implications.

Tax avoidance powers

The chancellor announced strong measures to help cut out non-compliance generally, and extra funds will be given to HM Revenue and Customs (HMRC) to support this area. Individuals and businesses who are deemed to be avoiding tax or have outstanding tax bills will undoubtedly catch the attention of the tax authorities. It is proposed that HMRC should be given powers to take money from the bank and building society accounts, including ISAs, of those taxpayers who HMRC thinks owe tax, but have chosen not to pay. This direct recovery will focus on debtors whom HMRC has tried to contact multiple times to arrange payment, although there is a concern around the veracity of HMRC’s records and a real risk that if HMRC has the wrong or prior address for a taxpayer, then multiple letters to seek payment might not have reached the taxpayer, resulting in sums being taken with no warning of a debt being outstanding or a chance to arrange settlement.

A minimum aggregate balance of £5,000 will be left across all accounts of the taxpayer after the debt has been removed. While tax evasion and the abuse of tax rules should be prevented, it is vitally important that taxpayers who are keen to pay their fair share, but who are inadvertently caught up in this changing tax environment, can rely on a fair justice system.

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