Inheritance Tax: main residence nil-rate band

Inheritance Tax: main residence nil-rate band

A quick recap thanks to HMRC…

Who is likely to be affected

Individuals with direct descendants who have an estate (including a main residence) with total assets above the Inheritance Tax (IHT) threshold (or nil-rate band) of £325,000 and personal representatives of deceased persons.

General description of the measure

This measure introduces an additional nil-rate band when a residence is passed on death to a direct descendant.

This will be:

  • £100,000 in 2017 to 2018
  • £125,000 in 2018 to 2019
  • £150,000 in 2019 to 2020
  • £175,000 in 2020 to 2021

It will then increase in line with Consumer Prices Index (CPI) from 2021 to 2022 onwards. Any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner.

The additional nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.

There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.

The existing nil-rate band will remain at £325,000 from 2018 to 2019 until the end of 2020 to 2021.

The Budget March 2015 – The Overview

The Budget March 2015 – The Overview

Proposed pension measures

The Lifetime Allowance reduces from £1.25m to £1m on 6th April 2016, but will increase annually by CPI from 6th April 2018. Transitional protection will protect existing pension rights.

On a positive note, the Annual Allowance is unchanged at £40,000 and higher and additional rate tax relief remains available for individual pension contributions.

In addition to the 6th April 2015 ‘Freedom and Choice in Pensions’ reforms, people already receiving annuity income will, from April 2016, be able to have their annuity income assigned to a third party in exchange for a lump sum or an alternative retirement product.

Increases to Income Tax bands and allowances

Proposed rises to the personal allowance and basic rate limit will result in the higher rate threshold, above which individuals pay income tax at 40%, increasing from £42,385 in 2015/2016 to £42,700 and £43,300 for 2016/2017 and 2017/2018. A large percentage of the population will still be higher rate tax payers who can benefit from tax-relieved pension saving at 40%.

Proposed ISA changes from Autumn 2015

Individuals will be able to withdraw and replace money from their cash ISA in the same tax year without it counting towards their annual ISA subscription limit.

A new Help to Buy ISA will be introduced. For every £200 a first time buyer saves, the Government will provide a £50 bonus up to a maximum of £3,000 on £12,000 of savings, at the point they use their savings to purchase their first home.

A new Personal Savings Allowance from 6 April 2016

Intended to remove tax on up to £1,000 of savings income for basic rate taxpayers and up to £500 for higher rate taxpayers. Additional rate taxpayers will not receive an allowance.

It’s interaction with the £5,000 0% band for savings income may cause confusion, however low earners will potentially be able to benefit from both and pay no tax on their savings where total taxable income is less than £16,800 in 2016/2017.

Understand the New NISA Rules

On 1 July 2014 ISAs changed. The New ISA, or “NISA” (New Individual Savings Account) changes allow ISAs to be used as a home for even more money by increasing the yearly contribution limit, and improve flexibility by allowing money to be transferred from stocks and shares ISAs into cash ISAs.

NISA qualification

Different NISAs have varying degrees of qualification. You must be:

  • Aged 16 or over to open a cash NISA
  • Aged 18 or over to open a stocks and shares NISA
  • There are separate NISAs for children under the age of 16 – these are called junior NISAs

NISA allowance

The allowance is the amount the government permits you to invest in your NISA accounts during each tax year. At the start of each new tax year (6 April) you’ll receive a new allowance. If you don’t use it, you lose it – the allowance can’t be rolled over to the next tax year. By using your NISA allowance each year it’s possible to accumulate a significant amount of tax-efficient savings.

In the 2014-15 tax year, individuals can invest up to £15,000 a year in cash NISA accounts, stocks and shares NISAs, or any mixture of the two – you can save the entire £15,000 in cash if you so wish. In the 2015-16 tax year this limit will increase to £15,240.

Remember that you’re only able to open a maximum of one cash NISA and one stocks and shares NISA each year. Once open you can transfer money between these different types of NISAs freely, subject to your provider’s terms.

This differs to the old Individual Savings Account (Isa) rule where you could transfer money from cash ISAs to stocks and shares ISAs, but not vice versa.

Transferring NISAs

You can easily switch your NISA provider without losing your tax-free allowance, but it’s vital that you transfer the NISA rather than withdrawing the money to open a new account.

Under the old Isa rules, cash ISAs could be transferred into stocks and shares ISAs, but not vice versa. NISAs allow transfers either way – from stocks and shares to cash and vice versa.

As with ISAs, it is also still possible to transfer each type of NISA to another product of the same type. You can, for example, transfer one cash NISA to another, something you may want to consider to obtain a better interest rate.

Within a tax year you’re only able to transfer the whole of your annual NISA to a new provider. Amounts from previous years may be transferred as a whole or in parts as you wish, but you should be aware that not all NISA providers will allow part transfers.

Enterprise Investment Schemes

Enterprise Investment Schemes

Enterprise Investment Schemes (EISs)

These schemes were launched with the idea of helping smaller companies who carry higher risks to enhance their growth. The main objective was to attempt to inject more finance into these companies to try and further their development.

In order to raise this finance, EISs offers tax advantages to investors when purchasing new shares within these smaller companies. These schemes offer more tax relief than other investment opportunities as they often hold a considerable amount of risk due to investing within one specific company, rather than spreading the risk over several smaller companies such as within a VCT Scheme.

These schemes are usually aimed at individuals who can afford to tie up their money for a longer period of time and individuals who would feel the benefit a considerable amount of tax relief.

Main Benefits

  • Individuals can claim up to 30% relief for income tax amounting to a maximum investment of £1,000,000 (up to £300,000 relief).

This tax relief can only be claimed if you have held the shares usually for at least 3 years (from the date of issue) and if you are not connected to the company.

  • Exemption from Capital Gains Tax

This scheme enables you to have relief on the gains you make from your investment and may even enable you to defer your capital gains tax depending on your circumstances.

  • Relief of 100% can be claimed from inheritance tax

This relief applies as long as you have held these shares for at least 2 years and still own them at death.

  • Loss relief of up to 45% can be claimed

If shares are sold at a loss, this amount, less any relief from income tax allowable, can be set against income of the year in which they were disposed of, or any income of the previous year, instead of being set off against any capital gains.

The information provided should be treated solely as a guide and you should seek professional advice regarding your own personal circumstances and objectives.  

Venture Capital Trusts VCT

Venture Capital Trusts VCT

Venture Capital Trusts were introduced in order to encourage individuals to invest in a variety of smaller companies with added risk, which are not listed on the Stock Exchange.  The aim was to help these smaller companies with further development.

How They Work

VCTs pool together your investments, along with other individuals’ investments with the objective of spreading the risk over a range of small companies. Individuals can invest by purchasing shares from investors from an established trust or you can also subscribe to new shares. The tax relief obtained from these investments often play a big role in encouraging individuals to invest within these smaller companies.

Tax Relief

  • There is a 30% Income Tax relief on new ordinary shares each tax year on investments up to £200,000.
  • There is no Income Tax to be paid on dividends received from ordinary shares.
  • There is no Capital Gains Tax (CGT) to be paid from the gains of your investment.

In order to feel the benefit from income tax relief, you will have to of held shares in a Venture Capital trust for at least 5 years. As long as the VCT preserves its status, there is not a minimum period where you need to hold shares to obtain the relief from CGT.

Risk & Charges

It is important to be aware that your investment could go up or down in value. Although these smaller companies could offer higher returns, the investment could result in you getting back less than you put in due to the risk involved. Charges can often also be higher for VCTs compared to alternative investments.

The information provided should be treated solely as a guide and you should seek professional advice regarding your own personal circumstances and objectives.