Budget 2021. Inheritance, investments, and pensions

Inheritance Tax, tax efficient investments, pensions and helping the grandchildren

Following on from this month’s Budget, in today’s Insight, we take a look at a number of areas covered by the Budget that may be important as part of your financial planning and strategy.

Inheritance Tax (IHT)

Although there were no significant changes to the regime for IHT, the importance of understanding the tax allowances and reliefs for IHT is to take advantage of:

• the short term opportunity of using your annual allowances (available on a “use it or lose it” basis) to make modest gifts
• the lifetime opportunity of making significant gifts and surviving seven years for the Potentially Exempt Transfers to fall out of your estate for IHT purposes
• the longer term opportunity of leaving legacies in your Will to utilise reliefs such as Business Property Relief or Agricultural Relief so that no IHT is payable on parts of your estate.

IHT nil rate band (NRB) and residence nil rate band (RNRB)

The NRB has been frozen at £325,000 since 2009 and this will now continue up to 5 April 2026. The additional RNRB has been increased in stages and is now £175,000 for deaths in 2020/21 and will be frozen at this level until 5 April 2026. A taper reduces the amount of the RNRB by £1 for every £2 that the “net” value of the estate of the deceased is more than £2 million. Net value is after deducting permitted liabilities but before exemptions and reliefs. This taper will also be maintained at the current level.

Tax Efficient Investments

Green National Savings and Investments (NS&I) product

The government will offer a green retail savings product through NS&I in the summer of 2021. This product will be closely linked to the UK’s sovereign green bond framework and will give all UK savers the opportunity to take part in the collective effort to tackle climate change. The green gilt framework, to be published in June, will detail the types of expenditure that will be financed to meet the government’s green objectives.

Venture Capital Schemes: extension of the Social Investment Tax Relief

The government will continue to support social enterprises that are seeking growth investment by extending the operation of Social Investment Tax Relief to April 2023. This will continue the availability of income tax relief and capital gains tax hold-over relief for investors in qualifying social enterprises.

Pensions

Pensions contributions

There were no changes to the regime for pension contributions.

The pensions annual allowance remains at £40,000 and is the maximum amount that can be paid into your pension scheme and which attracts income tax relief.

However, for those on higher incomes, the annual allowance is reduced by £1 for every £2 that an individual’s “adjusted income” exceeds £240,000, down to a minimum annual allowance of £4,000. Adjusted income is broadly net income before tax with the addition of any pension contributions.

This reduction will only affect individuals with adjusted income over £300,000.

The Lifetime Limit

The lifetime limit sets the maximum figure for tax-relieved pension savings that an individual can build up over their lifetime.

Legislation will be introduced to remove the annual link to the CPI increase for the next five years. This will maintain the standard Lifetime Allowance at £1,073,100 for tax years 2021/22 to 2025/26.

Helping Children and Grandchildren

 Mortgage guarantee scheme

The government will introduce a new mortgage guarantee scheme in April 2021. This scheme will provide a guarantee to lenders across the UK who offer mortgages to people with a deposit of 5% on homes with a value of up to £600,000.

Under the scheme, all buyers will have the opportunity to fix their initial mortgage interest rate for at least five years should they wish to. The scheme, which will be available for new mortgages up to 31 December 2022, is designed to increase the availability of mortgages on new or existing properties for those with small deposits.

The combination of lifetime giving by parents and grandparents with the mortgage guarantee scheme may enable their children and grandchildren to purchase their first home.

Junior ISA and CTF annual subscription limits

The annual subscription limit for Junior ISAs and CTFs will remain unchanged at £9,000 for 2021/22.

Stamp Duty Land Tax (SDLT)

SDLT nil rate band

The government will extend the temporary increase to the SDLT nil rate band to £500,000 for residential property to 30 June 2021. From 1 July 2021 until 30 September 2021, the nil rate band will be reduced to £250,000. The nil rate band will return to the standard amount of £125,000 from 1 October 2021.

SDLT surcharge on non-residents

New SDLT rates are proposed for purchasers of residential property who are not resident in the UK. The new rates will be 2% higher than those that apply to purchases made by UK residents, and will apply to purchases of both freehold and leasehold property as well as increasing SDLT payable on rents on the grant of a new lease.

The surcharge will apply to land transactions with an effective date of 1 April 2021 or later. Transitional rules may apply to some contracts exchanged before 11 March 2020 but completed or are substantially performed on or after 1 April 2021, or some contracts substantially performed on or before 31 March 2021 but not completed until 1 April 2021 or later.

As always, if you have any questions about these provisions that may affect you or would like to discuss the issues raised in this post, please get in touch.