Q. I noticed that the Summer Budget announced last week there is going to be a fundamental review of tax relief for pension schemes. Could tax relief for pension contributions disappear altogether?
A. You are right, the Government has already kicked off a fundamental review of the pension tax framework to ensure it remains fit for purpose, and sustainable. A consultation paper was launched on the day of the budget speech and HM Treasury is seeking views on a range of issues around what changes could lead to; reduced complexity, making best use of available tax reliefs and increasing engagement to aid retirement planning.
Back in April 2006, a raft of legislation purporting to be “Pensions Simplification” was introduced, which did anything but simplify things. This new consultation raises the prospect of welcome radical reform to restore the vision of “simplification’ for our retirement saving framework. The consultation closes on 30 September 2015.
Whilst it is impossible to forecast the outcome, if I was a guessing man it would be a rather counter intuitive move to remove tax relief altogether, however we are perhaps more likely to see tax relief on pension contributions limited further which is likely to affect higher earners most. Last weeks budget has already started chipping away at higher earner tax relief for those with earnings over £150,000 and this may well be extended further. It has already been suggested that some form of merging ISA and pension allowances may be considered.
Q. The headlines I have read suggest that the threshold for inheritance tax is going up to £1m. That seems generous, so is there a sting in the tail?
A. As always headlines can be misleading, however the threshold for Inheritance Tax (i.e. the point at which it becomes payable) is increasing for some, but not all, and it doesn’t happen overnight! The Government will introduce a new IHT nil rate band of up to £175,000 where the family home is passed to children or grandchildren. This is in addition to the current nil rate band of £325,000 which has been frozen since 2009 and will remain frozen for the next 5 tax years.
The extra £175,000 nil rate band will be available for those who pass the family home to their children or grandchildren and have an estate below £2M.
However, the full £175,000 won’t be available until 2020/21. The allowance will first become available in 2017/18 at £100,000 and increase to £125,000 in 2018/19, £150,000 in 2019/20 and £175,000 in 2020/21.
Like the existing nil rate band the new property nil rate band can be transferred between spouses or civil partners. This means a married couple could pass £1M in 2020/21 to their children tax free on death provided the family home is worth at least £350,000, saving £140,000 in IHT.
But not everyone will benefit from the additional IHT free allowance. Anyone with a net estate over £2M will begin to see their property nil rate band reduced until it is completely lost once the estate is over £2.2m (2017/18) £2.25m (2018/19), £2.3m (2019/20) or £2.35m (2020/21). It will only apply to transfers to children and grandchildren, meaning those without children will miss out.
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