This week I continue my look at the draft clauses in the Finance Bill 2016 that are most relevant to the financial advice sector. I will break my consideration down into the headings used in the HM Revenue and Customs overview of the draft legislation for consultation.
Dividend taxation and repeal of dividend tax credit
Perhaps one of the least expected but most important changes for those giving advice on investments, as well as for platforms and institutions providing investment products and wraps, is that in relation to dividend taxation.
As announced at Summer Budget 2015, legislation will be introduced in the Finance Bill 2016 to repeal dividend tax credit and introduce a new dividend allowance and new rates of income tax on dividends.
Individuals will pay no tax on the first £5,000 of dividend income. The rates of income tax on dividends received above the allowance will be changed to:
- 7.5 per cent for dividends taxed in the basic rate band
- 32.5 per cent for dividends taxed in the higher rate band
- 38.1 per cent for dividends taxed in the additional rate band.
These new rates do not actually appear in the draft clauses. HMRC has confirmed that this is deliberate as they are straightforward (the rates that is) and there is no need to pre-publish for consultation.
The £5,000 dividend allowance is only available to individuals and so not to trustees. HMRC has recently confirmed that, while no specific mention is made in the Finance Bill draft clauses, UK dividends received by UK life funds will continue to be untaxed. That this is so will be relevant when comparing the relative merits of dividend-yielding stock and funds held “unwrapped”, or held inside a UK or offshore bond for investments, “beyond” Isa and registered pension wrappers.
Once the investor’s £5,000 dividend allowance has been exhausted, an investment bond may start to look attractive as a tax deferment and planning vehicle. Of course, there are other factors to take into account, including capital gains and charges. The fact the £5,000 dividend allowance is not available to trustees should mean that, all other things being (at least) equal, investment bonds should remain worthy of consideration for trustee investment. Of course, VCT dividends are already tax free.
This change to the taxation of dividends is fundamentally important but has largely slipped under the radar due, understandably, to the relentless concentration on the never ending stream of changes in relation to pensions.
Isas: Qualifying investments
As announced at Autumn Statement, the list of qualifying investments for the new Innovative Finance Isa will be extended in autumn this year to include debt securities issued by companies and offered via crowdfunding platforms. Draft secondary legislation for this change will be published this year. The Government will also continue to explore the case for extending the list of Isa qualifying investments to include equity crowdfunding.
Isas remain hugely tax effective and, if the Centre for Policy Studies has its way, will become the new foundation for retirement planning. More on this later.
Isa and Child Trust Fund new annual subscription limits
As announced at Autumn Statement, the Isa, Junior Isa and CTF subscription limits will be unchanged for 2016/2017. The annual Isa subscription limit will remain at £15,240 and the subscription limit for Junior Isas and CTFs will remain at £4,080.
With the continuing challenge of funding for the cost of higher education and first property purchase, grandparents and parents who can afford it will no doubt give serious consideration to these products as part of a tax-effective savings strategy for an important financial need.
Earnings and benefits
As announced at Autumn Statement, the Government remains concerned about the growth of salary sacrifice arrangements and is considering what action, if any, is necessary. The Government will gather further evidence, including from employers, on salary sacrifice arrangements to inform its approach.
One hopes that any change will only be applied to arrangements entered into after an as yet unstated specified date.
Disguised remuneration schemes
As announced at Autumn Statement, the Government intends to take action against those who have used disguised remuneration schemes and who have not yet paid their fair share of tax. The Government will also consider legislating in a future Finance Bill to close down any further new schemes intended to avoid tax on earned income, where necessary, with effect from 25 November 2015.
I will continue my look at the draft clauses relevant for advisers next week.
Tony Wickenden is joint managing director at Technical Connection