Pensions investments and capital taxes

ISA limit increases

Confirmation that the ISA limit increases from £15,240 to £20,000 on 6 April 2017.

As announced in the 2016 Budget, the overall ISA subscription limit will increase form £15,240 to £20,000 for all investors form 6 April 2017. 

A welcome increase and reaffirms the widely held belief that the ISA is the Government’s preferred savings vehicle.

 

Subscription limits for Junior ISA and Child Trust Funds increased

The Junior ISA and Child Trust Fund subscription limits are to be increased from £4,080 (2016/17) to £4,128 (2017/18), in line with the consumer prices index (CPI).

Albeit small, the increase in the subscription limit for these tax-free savings accounts for children is welcome. 

 

Money purchase annual allowance to be reduced

The money purchase annual allowance for those in pension fund drawdown is reduced from £10,000 to £4,000 from April 2017.

The MPAA was introduced in April 2015 and is aimed at those over the age of 55 who are drawing down flexibly from their pension funds, while continuing to save into them.

The MPAA was intended to prevent pension savers from drawing from their pension funds and then effectively re-investing the amount and benefitting from a second round of tax relief.

The contribution limit was originally capped at £10,000 to limit the scope for double relief on recycled pension savings; this is being reduced to £4,000 from April 2017. The Government plans to consult on the detail.

The £4,000 limit seems to be an arbitrary figure and will affect those who need to access their pension funds flexibly through the pensions freedom rules, though who at a later stage are able to rebuild them through future contributions, often due to a change in circumstances. 

 

Changes to the taxation of foreign pensions

The Government has announced that the taxation of foreign pension income and lump sums will be brought into line with the rules for UK pensions and extend UK taxing rights over recently emigrated non-UK residents' lump sum payments from funds that have had UK tax relief. In addition a specific pension plan for non-UK resident workers will be closed to new saving and that certain other technical changes will be made to the rules for offshore pension schemes.

The Government has announced some potentially wide-ranging changes to the tax treatment of non-UK pensions.

The tax treatment of non-UK pensions will be “more closely aligned with the UK’s domestic pension tax regime”. Currently, UK residents who receive non-UK pension income are subject to tax on only 90% of the income received, provided the income is not subject to the remittance basis. It is presumed that this provision will be removed, bringing the treatment into line with domestic pension income.

In addition, the Government has announced an extension to the taxation rights over lump sum payments for recipients of UK-tax relieved schemes who emigrate from five to ten years and that specialist pensions for those employed abroad will be closed to new saving. These pensions, known as ‘section 615’ schemes, allow those earning pension entitlements while working wholly abroad to receive these tax-free on retirement.

Finally, changes will be made to transfers between registered pension schemes and the eligibility criteria for foreign schemes to qualify as overseas pension schemes for UK tax purposes will be updated.

The first element of these changes is potentially quite broad in its application, as the 90% rule applies to all non-UK pensions received by UK residents. Presumably, there will be no change to the application of the remittance basis to such pensions, but we will not know for certain until full details emerge.

The other changes will be less far-reaching, although it will be interesting to see whether changes in the treatment of pension transfers and an amendment to those schemes qualifying as ‘overseas pensions’ for UK purposes are an attempt to restrict planning through the use of schemes such as qualifying overseas pension schemes (QROPS), which have been increasingly marketed in some quarters.

 

Changes to the deductibility of performance fees for offshore funds

The Government will legislate to ensure that performance fees charged to offshore reporting funds are not deductible against reportable income from April 2017 and instead reduce any tax payable on disposal gains.

For UK tax purposes, offshore funds can broadly be divided into two categories: ‘reporting funds’ and non-reporting funds. UK taxpayers who invest in reporting funds are taxed on the reportable income of the fund, regardless of whether this income is distributed, but on the sale of the fund, any gain is subject to CGT. For funds that do not fall into this category, gains on disposal are subject to income tax.

The Government has now announced that from April 2017 performance fees charged by the operators of reporting funds, which are calculated by reference to the increase in the fund’s value, will be deductible only against any gain on sale, rather than against the fund’s reportable income.

The stated aim of this change is to bring the treatment of performance fees in line with those for UK funds, but the full impact of the change will not be known until the proposed legislation containing complete details is published. With the change coming into effect from April 2017, they will apply alongside the reforms to the taxation of non-UK domiciled individuals, which may impact upon the attractiveness of these funds for those caught under the reforms. 

 

Changes to taxation of life insurance products

As announced in the 2016 Budget, the Government intends to introduce legislation in Finance Bill 2017 changing the way part surrenders and part assignments of insurance policies are taxed.

In certain circumstances, the partial surrender or assignment of a life insurance policy by an individual could lead to disproportionate tax charges. This was highlighted in a recent case (Lobler v HMRC [2015] UKUT 0152), in which a tax payer was imposed with a 700% tax liability based on the application of the law.

The Government held a consultation on various options earlier this year; however, we are yet to hear the detailed outcome of this consultation.

The Government will legislate in Finance Bill 2017 regarding disproportionate tax charges that can arise in certain circumstances from life insurance part-surrenders and part-assignments. This will allow applications to be made to HMRC from April 2017 to have the charge calculated on a just and reasonable basis.

The prospect of a reduction in potentially excessive tax charges is welcome; however, we will have to wait for a consultation response from HMRC and draft legislation to see the finer detail.

 

Life insurance policies: personal portfolio bonds anti-avoidance

Following recent consultation the Government will legislate in the Finance Bill 2017 the power to amend the list of assets that life insurance policy holders can invest in without triggering tax anti-avoidance rules.

Policy holders should take the opportunity now to review the assets currently held within their portfolio bonds. 

 

Extension of IHT relief on donations to political parties

IHT relief for donations to political parties will be extended to cover parties with representatives in the devolved legislatures and those whose representatives have acquired seats through by-elections.

These changes represent some minor amendments which ensure consistency in the availability of this relief

 

Rates for the annual tax on enveloped dwellings (ATED)

ATED rates for UK residential properties held in companies will rise in line with consumer prices index (CPI) inflation for the 2017/18 chargeable period.

 

Read our full commentary here.

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