A look at some of the Budget measures dropped from the Finance Bill.
When I write articles for the website I usually go through several versions before I get to the one I’m happy with. The Budget commentary that eventually goes up on the website is saved on my computer as ‘Budget – Final’. I ought to know better – the Finance Bill that eventually emerges from the Budget Statement often contains changes to measures, so it can hardly be called ‘Final’. This year, the early general election means Parliament will be dissolved on 3rd May and there is little time to get all the proposed measures onto the statute book. Have are four measures that will not make it:
1 Reduced Money Purchase Annual Allowance
If you have drawn any income from a money purchase pension using Flexi Access Drawdown or Uncrystallised Funds Pension Lump Sum (though not Capped Drawdown) you can continue to make scheme contributions, but these are capped at £10,000. This is known as the Money Purchase Annual Allowance (MPAA). In the Budget it was proposed that this cap should be reduced to £4,000. This change will not now go ahead and the MPAA will stay at £10,000.
The MPAA was already considered something of a sledgehammer to crack a nut. The argument is that having taken money out of a pension you should not have a second chance to benefit from tax relief. This is fair enough, but the twenty-first century retiree does not suddenly stop work on the Friday before their 65th birthday. For many these days, retirement is a gradual winding down process which might rely on the ability to top up a reducing salary with a pension income. The MPAA makes planning in these circumstances difficult and a reduced MPAA would only have exacerbated that.
2 Deemed Domicile Changes
Briefly, someone who does not have UK domicile can be deemed to be UK domiciled for Inheritance Tax purposes if they have been resident in the UK for 17 of 20 years. This period was due to be reduced to 15 years from April 2017. It was also intended to extend the scope of the ‘deemed domicile’ rules to apply to income tax and capital gains tax.
These changes have been shelved and the old 17 of 20 years rule still applies.
3 Dividend Allowance Cut
I mentioned this measure in my Budget commentary. Currently the first £5,000 of dividend income, such as from shares, is tax free. Tax is then paid at 7.5% (basic rate), 32.5% (higher rate) and 38.1% (additional rate) on dividend income over £5,000. The Budget announced that this allowance would be cut to £2,000 from April 2018. This cut will not now go ahead and the full £5,000 allowance remains…for now.
This is a welcome change, especially for those who structure their income to take proper advantage of all the available allowances.
4 Recalculation of Disproportionate Bond Gains
Oh dear – this is a difficult one to explain. I will be publishing a Technical Note on investment bond taxation sometime later this year, but for now I will just say that through a simple piece of human error, a withdrawal from an investment bond taken in the ‘wrong’ way can result in a disproportionately high tax charge. The proposal in the Budget was that a bondholder should be allowed to have the tax recalculated on a just and reasonable basis. Unfortunately, this change won’t now be implemented and HMRC will continue to take an intransigent stance where a simple error results in too much tax being paid on a bond withdrawal.
Needless to say we always take care to make sure withdrawals are structured properly, but this measure, had it gone through, would have helped people who like to self-manage their investments and highlights the importance of taking proper professional advice.
While these changes no longer form part of the condensed Finance Bill, it is intended that they will be reconsidered once a new Parliament commences and could form part of the new Government’s first Finance Bill. They may be delayed, but are probably not dropped altogether.
And this piece? I’ve saved it on my computer as ‘Finance Bill 2017 – Potentially Final’.
Philip Chandler APFS, CFPTM, Chartered MCSI
Chair of Aspinalls Technical and Investment Committee