Draft Finance Bill 2016 – any tidings of comfort and joy?
On 9 December 2015, the Government published draft clauses for the Finance Bill 2016 (“the Bill”) for consultation, with a view to introducing a number of provisions that were announced by the Chancellor in the Summer Budget 2015 and the Autumn Statement.
In this Alert:
The draft clauses of the Bill cover:
- the reduction of the LTA with effect from 6 April 2016, from £1.25 million to £1 million, and the introduction of transitional protections for those with pension rights already at or around the £1 million mark
- simplification of the test that takes place when a dependants’ scheme pension is payable
- ensuring that a charge to inheritance tax will not arise when a pension scheme member designates funds for drawdown but does not draw all of the funds before death
- aligning the pensions tax rules on bridging pensions with DWP legislation
Reducing the LTA
As first announced in the March Budget 2015, and confirmed in the Summer Budget 2015, the draft Bill provides for the reduction in the standard LTA to £1 million from the 2016/17 tax year onwards, and for its annual increase in line with CPI from April 2018.
The Bill also covers the introduction of transitional protections, “fixed protection 2016” (FP16) and “individual protection 2016” (IP16), to ensure that the reduction in the LTA is not retrospective. Subject to certain conditions being met, individuals will be able to apply for both FP16 and IP16, with FP16 taking precedence.
Individuals wanting to rely on the new protections must apply to HMRC online before taking any benefits on or after 6 April 2016.
FP16 will be relevant to anyone whose pension savings already exceed £1 million, as well as to those who believe that their pensions savings will exceed that amount by the time they come into payment. Operating in a similar way to its predecessors (FP12 and FP14), FP16 will allow an individual to maintain an LTA of the greater of £1.25 million and the standard LTA.
But FP16 will be lost in a number of circumstances, including:
- in a DC arrangement, if contributions are paid to the scheme by the member or someone else on their behalf, or employer contributions are paid
- in a DB arrangement, if the member’s pension and lump sum rights increase by more than a set inflationary amount (known as the “relevant percentage”) in any given tax year.
In a similar vein to its forerunner (IP14), individuals with IP16 will have a personal LTA equal to the value of their pension savings on 5 April 2016, subject to an overall limit of £1.25 million. For example, an individual with pension savings of £1.1 million on 5 April 2016 who applies for IP16 will have an LTA of £1.1 million. But, if an individual’s pension savings exceed £1.25 million on 5 April 2016, their LTA will be capped at £1.25 million.
In contrast to FP16, individuals with IP16 will be able to carry on saving into a registered pension scheme. However, depending on the level of the standard LTA when the individual ultimately takes their benefits and any increase in their pension savings above their personalised LTA, a tax charge on any excess may apply.
In the recent Autumn Statement, the Chancellor announced further changes to be included in the Bill.
Some DB schemes pay members who retire before SPA a higher pension at the outset, which is then reduced at SPA to take account of State Pension coming into payment. The aim is to allow the member to receive a similar overall level of income in retirement, regardless of when State Pension actually starts.
The draft Bill contains consequential changes designed to ensure that, following the introduction of the new single tier State Pension from 6 April 2016, the tax rules on bridging pensions continue to be aligned with DWP legislation (namely, the Pensions Act 2014). This will allow the payment of bridging pensions to continue as at present.
Dependants’ scheme pensions
An anti-avoidance measure currently prevents the amount set aside to pay dependants’ pensions from a registered pension scheme from being excessive when compared with the value of the member’s pension, thereby avoiding an LTA charge. This anti-avoidance measure applies where the member dies aged 75 or over and requires a test to be carried out during the first year in which any dependant is entitled to receive a scheme pension, as well as each subsequent year.
In future, trustees in certain circumstances will not have to carry out the above test. For example, where the total value of such benefits is not more than 25% of the standard LTA at the earlier of member’s death (if the member did not have an actual right to a scheme pension at death) or the date the member became entitled to the pension.
These changes will take effect from 6 April 2016.
Inheritance tax and undrawn pension funds
Finally, the draft legislation will ensure that a charge to inheritance tax will not arise when a pension scheme member designates funds for drawdown but does not draw all of his/her funds before death. This change will be backdated to apply to deaths on or after 6 April 2011, the date from which the requirement to purchase an annuity at age 75 was removed and the option to enter drawdown instead was introduced (see our Alert for details).
The supporting documentation issued with the draft Bill also:
- confirms that the outcome of the consultation into the future of pensions tax relief (announced in the Summer Budget 2015) will be published as part of next year’s Budget, on 16 March 2016
- confirms that measures to introduce the secondary market for annuities, removing the current pensions tax restrictions on individuals seeking to sell their right to future annuity income, will be contained in the Finance Bill 2017. Further details will be included in the Government’s response to its consultation (issued alongside the March 2015 Budget), due to be published in December 2015
- repeats that the Government remains concerned about the growth of salary sacrifice arrangements and that it is considering what action, if any, may be needed (a similar statement was made in the Summer Budget 2015 and Autumn Statement)
- reiterates the statement made in the Autumn Statement in relation to disguised remuneration, that the Government “intends to take action against those who have used or continue to use disguised remuneration schemes and who have not yet paid their fair share of tax”. The Government will consider legislating in a future Finance Bill on this issue, with any amendments potentially backdated to 25 November 2015 (the date of the Autumn Statement).
The closing date for comments on the draft legislation is 3 February 2016, but we can clearly expect more pronouncements from the Chancellor in the March 2016 Budget.