Tony Wickenden: Budget implications for financial planning (part II)


Last week I began to look at the five summer Budget proposals I believe hold the greatest importance for financial planners.

I started with dividend taxation reform and the pensions tax relief consultation: both big subjects offering big opportunities for advisers to have constructive conversations with affected clients.

The alterations to dividend tax are fundamentally important for investors and SME owners, while the pensions changes will be of relevance to an even wider community.

That we are still waiting for some important detail on how the dividend changes will operate (especially for trustees and life assurance companies) is not helpful to decision making. The detailed and relatively complex provisions in relation to the alignment of pensions input periods and the consequences for this tax year take a good deal of thinking about.

They may throw up some interesting contribution possibilities between now and the end of this tax year.

Here, I will look at the final three key topics of conversation.

Number three: IHT nil-rate band increase

This was no surprise, seeing as it was in the Conservative manifesto and (economically) linked to the tapering of the annual allowance. However, it will not start until tax year 2017/18 and will then be phased in over three years: starting at £100,000 in 2017/18 and increasing by £25,000 a year for the next three, ending up at £175,000 for 2020/21. Seems a long way off, doesn’t it?

Clever that, as the annual allowance taper (stated to be what will pay for this main residence nil-rate band) starts on 6 April 2016.

I will look at this in more detail in later articles and there is a bit to be consulted on in relation to the ring fencing of the allowance for those who downsize. For the time being, though, you have to know as much as you possibly can about this change. It relates to what is, for many, the most important asset class, economically and emotionally speaking. No IHT planning can be seriously discussed without at least considering the main residence.

Number four: IHT trust simplification rules

Set to be introduced from next year, this means the vastly watered down (from the original) proposals will be legislated for. Basically, multiple trusts continue in principle along with resulting multiple nil-rate bands: the only exception is same-day additions.

This limitation is broadly accepted as being targeted at pilot trusts being “seeded” by amounts flowing from the will of a deceased.

Advisers need to factor this removal of a relatively popular IHT strategy into their planning psyche.

However, the majority of financial services-founded plans remain valid and unaffected, which means most of the strategies founded on separate trusts set up on different days in relation to large life assurance protection plans, loan trusts and discounted gift trusts can still work. While that is not to say care and effort is not required to get all the steps right, in principle, they are very much still with us, so to speak.

Number five: Abolishment of permanent non-dom tax status

This is the provision applying deemed “UK domiciled” tax status to anyone resident in the UK for 15 out of the last 20 years from 6 April 2017. There is a load of relatively technical and complex supporting provisions but that is the nub.

It seems that offshore bonds (to avoid “arising income” for the investor) will continue to work. In addition, excluded property trusts established while an individual is non-domiciled and which hold non-UK situs assets will continue to work as well.

However, this is subject to any anti-avoidance rules that are introduced to apply in cases where the settlor is originally UK domiciled and establishes the trust after establishing non-UK domicile status. We have not yet seen the legislation but there are important conversations to be had with current non-domiciled clients.

So there are my top five talking points. There are a lot of other things to watch out for as well such as the revised annual investment allowance, future corporation tax reductions and continued action to combat aggressive tax avoidance.

It is also interesting as well to see that HM Revenue & Customs is to look at toughening up the IR35 provisions and is keeping an eye on salary sacrifice.

Tony Wickenden is joint managing director at Technical Connection