The latest budget announcement by the Chancellor included a number of initiatives and proposals that could affect your savings, pension and estate planning.

We have put together a summary of the key points and expert analysis in order to help you understand how you might be affected.

The Chancellor announced a series of significant new measures in his Budget speech, including:

  • Reduction in capital gains tax from 18% to 10% for Basic Rate tax payers and 28% to 20% for Higher Rate tax payers from 6 April 2016
  • Introduction of a Lifetime ISA from 6 April 2017
  • Increase in the ISA limit to £20,000 from 6 April 2017
  • Individuals falling under the new domicile rules for Income and Capital Gains tax will be able to rebase their non-UK assets for capital gains tax at market value as at 6 April 2017.

What does the Budget mean for savers?

The government announced that it would increase the ISA allowance to £20,000 and introduce a new Lifetime ISA from 6 April 2017.

Under the proposals for the new Lifetime ISA:

  • Adults under the age of 40 will be able to open a Lifetime ISA, and for every £4 contributed the government will top this up with an additional £1
  • The government will limit their contribution to a maximum of £1,000 per annum, meaning a government bonus will be paid on contributions up to £4,000
  • Individuals will be eligible for this top up every year from age 18 until 50
  • Any contributions to a Lifetime ISA will sit within the overall £20,000 ISA contribution limit
  • Individuals will be able to transfer from other ISAs as a way of funding the Lifetime ISA
  • Any contributions to a Lifetime ISA will sit within the overall £20,000 ISA contribution limit
  • Individuals will be able to transfer from other ISAs as a way of funding the Lifetime ISA
  • The savings and bonus payments could be used to buy a first home located in the UK with a purchase value of up to £450,000 at any time, or could be accessed tax-free and penalty-free for retirement after the age of 60
  • However, if savers want to withdraw cash from their Lifetime ISA to pay for something other than their first home or retirement, they will have to pay a 5% fee and hand back the government bonus on the contributions that are being withdrawn, plus any interest earned on the top-up. The government is considering relaxing these restrictions in future, making Lifetime ISAs more flexible.

“Savers received good news in the Budget,” said Anthony Ward a pensions expert and Wealth Planner at Barclays Wealth and Investment Management. “The announcement that the annual ISA allowance will rise to £20,000 from 6 April 2017 and the introduction of the new Lifetime ISA in April next year makes the case that individuals are being given greater incentives to save for their futures in a tax-efficient way.”

What does the Budget mean for investors?

There were a number of measures in the Budget that may affect investors and those saving into a pension.

  • There were no further changes to existing pension rules, following media reports that George Osborne decided to shelve plans to reform pension tax relief rules. However, a number of other pension changes that have been previously announced will still take place from 6 April
  • The lifetime allowance (LTA) on pensions, the total amount that can be drawn from pension schemes without incurring an extra tax charge, will fall from £1.25m to £1m
  • From 6 April 2016 those individuals with a total taxable income (called threshold income) in excess of £110,000 and who have adjusted income (defined as total taxable income plus the value of any pension contributions) of over £150,000 will be subject to a reduced or “tapered” annual allowance
  • This means that for every £2 of income in excess of £150,000 the Annual Allowance will be reduced by £1. The reduction is capped at £30,000, so those with an adjusted income of £210,000 or above will have an Annual Allowance of £10,000. However individuals will still be able to mop up previous year’s unused Annual Allowances (up to 3 tax years back) subject to conditions
  • The Chancellor announced that capital gains tax (CGT) rates will be reduced from 6 April this year, providing a boost for investors holding assets outside ISAs and pensions
  • The CGT rate for higher and top-rate taxpayers will fall from 28% to 20%, while the rate for basic-rate taxpayers will be reduced from 18% to 10%. But the rate cuts will not apply to any property that does not qualify for private residence relief or carried interest, so buy-to-let investors won’t benefit
  • The Chancellor previously announced that provisions would be introduced from 2017/18 to deem long-term UK resident non-domiciliaries as deemed UK domiciled for income tax and capital gains tax purposes, with the rules applying after the individual had been UK resident for 15 out of the previous 20 years. Those who become deemed domiciled in April 2017 will be able to rebase their non-UK assets for capital gains tax at market value as at 6 April 2017
  • The government confirmed that buy-to-let investors with larger portfolios of more than 15 properties will be covered by the new additional stamp duty land tax rates, which are coming into effect on 1 April this year. These will be 3% higher than standard stamp duty rates. Find out more about the new buy-to-let rules

Lucian Cook, UK head of residential research at Savills, the property company, says: “Keeping the old rates of CGT on residential property will make it more difficult for existing buy-to-let investors (who already face a cut in income tax relief on mortgage interest payments) to reorganise their portfolios towards better performing property.”

There was a mixed reaction in the UK stock market to the Budget announcement. Shares in oil companies such as Cairn Energy and Premier Oil jumped after the government announced tax cuts for North Sea oil producers. However, shares in British soft drinks companies fell following the announcement of a new “sugar tax”, with Britvic, the largest British manufacturer, initially falling by 4%.

The Chancellor also announced a series of major changes affecting small businesses. Watch our video about these changes