General economic overview
We were probably not expecting too much from a pre-election budget - after all, if we have a change of government, it may not make it through to law. So, how will yesterday’s announcements impact on firms of solicitors?
Perhaps the first thing to cover is something that is likely to impact all firms with a private client department.
George Osborne announced they will be consulting on whether to prevent people from undertaking a Deed of Variation in order to save inheritance tax. On first reflection this could mean less work for private client lawyers; however, it’s actually a good opportunity for firms to get their clients to review and update their wills, because relying on a Deed of Variation, for tax purposes, may cease to be an option soon.
Other announcements that may affect your business
- The abolition of class 2 national insurance contributions (NIC). Class 2 NIC is paid by direct debit and only amounts to £143 a year per partner so may be more of an administrative positive as much as a financial one.
- Perhaps of more interest is the abolition of the annual personal tax return, to be replaced by a ‘digital account’ into which your tax return information will be entered, together with a more flexible way of paying your tax as opposed to the current January and July payment dates. Further details on how this will work will be announced later in the year.
- If you operate through a company, or are considering doing so, corporation tax will be reduced to 20% from April and you can no longer sell your goodwill to your company and pay 10% capital gains tax (CGT) on doing so. Whilst we already knew this was to be the case, it’s worth a mention when you consider that firms operating outside of a corporate body are likely to be paying income tax and NIC at a rate of 42%, possibly more
- The 10% CGT rate will no longer be available on sale or liquidation of a company where that company doesn’t have a trade in its own right. This will impact firms with a corporate partner.
On the personal side
- The 40% tax threshold and the personal allowance will be increased.
- There has been no reduction of tax relief on personal pension payments, as was widely predicted, except to say that the lifetime allowance will be reduced from £1.25m to £1m from 6 April 2016. The £1 million limit will, however, increase in line with CPI from 2018. The annual limit of £40,000 remains.
- ISAs will become more flexible. Currently, if you withdraw money from your ISA, for example to pay your 31 January tax bill, you can only put back an amount up to the annual subscription limit. Measures announced today will mean that you aren’t limited to the annual subscription limit, thus making saving more tax efficient.
In summary, it’s a wait-and-see budget, subject to the outcome of the general election. However, Deeds of Variation for IHT purposes may be about to end, as might tax returns and class 2 NIC. The maximum amount you can put into your pension could be reduced, and running your firm through a limited company is likely to remain a more tax efficient way to run your business. Lastly, if you enjoy a post-work tipple, there is a small duty reduction on beer, cider and spirits, but not wine.