Linzi Perriman, an Associate Solicitor in Weightmans’ family law team, talks about the impact the recent Budget will have on families.
Millions of Britons were expecting tax increases when the Spring 2021 budget was announced, but Chancellor Rishi Sunak opted for a more measured approach. Many families believe they’re unaffected, but is that the case?
Income tax allowance
The personal allowance has been frozen at £12,570 and the higher rate tax threshold at £50,270 for the next five years. An income allowance tax freeze effectively works as a pay cut when inflation is taken into account and so although the personal allowance stays the same, it means less money for families in real terms in the future and increased numbers of lower earners being pushed into paying income tax.
Child benefit
More people will be pushed into the higher rate income tax-payer status which can have knock-on effects in other areas such as child benefit. Families stop receiving the full child benefit when one of their parents’ salaries reaches £50,000 and they lose all of it when their pay reaches £60,000, bands which were set by Chancellor George Osbourne in 2013. It is thought that one in four families could lose all of some of the benefit within the next four years as a result of Mr Sunak not increasing the salary at which people stop receiving the full amount.
Universal credit
Many low-income households will welcome the continuation of the £20 a week Universal Credit uplift for another six months. Those in receipt of Working Tax Credits will receive equivalent support with a one-off payment of £500.
Inheritance tax
There was a reported 75% increase in Will enquiries since the start of the Coronavirus outbreak in the UK but a large proportion of the population still do not have a Will.
Currently an individual can pass on £325,000 of their wealth tax free to their beneficiaries in addition to a £175,000 allowance for the main home, providing an allowance of £500,000 in total with families paying 40% inheritance tax on anything above this sum. The current rate is frozen for the next five years which means more households are likely to be hit by inheritance tax as property prices rise. Families should engage in estate planning to try and reduce any future tax burden.
Pensions lifetime allowance
The current pensions lifetime allowance of £1,073,100 and the annual allowance of £40,000 have been frozen for the next five years, again with the result that more people will creep towards the limits and possible tax penalties
A pension sharing order, whereby a pension pot is shared with a spouse on divorce, could bring some families below the lifetime allowance threshold, avoid incurring tax penalties and save money for the family, but it is vital to take specialist advice to consider the best options.
Capital gains tax
CGT rates have not increased despite speculation, although the current threshold of £12,300 for individuals and personal representatives with tax being paid on any gains above that figure has been frozen. Again, more people are likely to be hit as a result of the freeze on the threshold.
In a divorce situation, it is important to take advantage of transfers in the tax year of separation because they can be made at no gain/no loss.
If the transfer takes place on or after the 6 April of the tax year of separation but before the Decree Absolute/Final order is made then any transfer is deemed to take place at ‘market value’, whatever price, if any, is actually paid, and if the asset has risen in value then CGT will be paid by the transferring party subject to any annual exemption, relief or losses. Transfers after Decree Absolute/Final Order will be for ‘actual consideration’ rather than market value unless the transfer is not at arms-length, which would include any gift.
The exemption for the family home (Principal Private Residence Relief) was significantly curtailed during 2020 and it is important to be aware of this when considering the timing of a separation and tax planning.
Stamp duty (SDLT)
SDLT on house purchases has been suspended on the first £500,000 spent since July 2020. This has been extended until June 2021 after which the nil rate band will be set at £250,000 until the end of September 2021. The holiday was introduced to help buyers who might have been adversely affected by Covid-19 and intended on boosting the property market. However, many separating couples who are selling or transferring the family home to one spouse are taking advantage of this holiday extension when purchasing a new home.
Domestic abuse programmes
Mr Sunak announced that £19m has been allocated towards these programmes as domestic abuse is one of the hidden tragedies of the pandemic, with Police recording a sharp increase. Data suggests that experiences of domestic abuse will have intensified during lockdown and victims have faced difficulties in safely seeking support under lockdown conditions. Mr Sunak told MPs the money should reduce the risk of reoffending and pilot a network of respite rooms to provide specialist support for vulnerable homeless women (although many men also suffer domestic abuse within relationships).
A raft of amendments to the Domestic Abuse Bill providing greater protections for victims will also be welcomed by many which include a new offence of non-fatal strangulation, the extension of the controlling and coercive behaviour offence to include abuse where the perpetrator and victim no longer live together and the revenge porn offence will be widened to cover threats to share intimate images.
