The big freeze for IHT
Unfortunately the Chancellor also extended another freeze for a further three years. The inheritance tax nil rate band will now remain at £325,000 until April 2021. But there will be a new transferable main residence nil rate band, initially £100,000 in 2017/18, rising by £25,000 a year to £175,000 in 2020/21. The net effect of this will be that from April 2020 a couple with an estate of up to £2m will be entitled to nil rate bands totalling £1m ( 2 X £325,0000 + 2 X £175,000), provided that they have (or, in most cases, have had) property worth at least £350,000 which is passed to direct descendants. Above £2m, the new band will be subject to a 50% taper.
Pensions
The new IHT allowance is being funded by yet another cut of pension allowances: from 2016/17 the annual allowance will be reduced if your total income exceeds £110,000 and your total income plus all pension contributions exceeds £150,000. Once again a 50% taper applies, but this time with a minimum – a £10,000 annual allowance once income plus contributions reach £210,000. The lifetime allowance – the maximum tax- efficient value of pension benefits – will also be cut by 20% to £1m from 6 April 2016 and a fourth set of transitional reliefs will be introduced. Longer term the whole issue of pension tax relief could disappear, as the Treasury issued a consultation paper alongside the Budget on “strengthening the incentive to save”. Among other ideas in the paper was the replacement of tax relief on contributions with a government top-up.
Future tax strategies will need careful review well before the end of the tax year. MAS are here to help.