Summer Budget 2015 - July
In the first Budget of the new Parliament, the Chancellor’s focus in fixing the public finances by dealing with the deficit, tackling tax avoidance and controlling government expenditure remained constant from his Budget speeches delivered under the coalition government. And while certain coalition policies continued, such as further increases to the personal allowance, many of the specific policies announced in the Budget reflected the Conservatives’ election manifesto, such as increasing the inheritance tax threshold. Significant reforms to the tax system were also announced which will affect taxpayers; especially on the tax treatment of dividends and for buy-to-let investors. Here are some of the headlines:
- Rates and Allowances
- Landlords/Buy-to-let Investors
- Tax Efficient Investments
- Inheritance Tax
- Other Measures
The March 2015 Budget had already announced the personal allowance would increase to £10,800 in 2016/17 and £11,000 in 2017/18. The Government has now pledged to raise the allowance to £12,500 by the end of this Parliament. The first step towards this is to increase the allowance to £11,000 in 2016/17.
The Government will also legislate to ensure that once the personal allowance reaches £12,500 it will be uprated in line with the National Minimum Wage (NMW), ensuring that anyone on the NMW working 30 hours per week or less, does not pay income tax.
When the introduction of the Personal Savings Allowance is combined with this increase in the personal allowance, from April 2016 individuals will be able to receive up to £17,000 of income per annum tax free. However, it should be noted that this will not be available to all as it will depend on the exact nature of the individual’s income.
The Government has also pledged to raise the higher-rate threshold to £50,000 by the end of this Parliament. The first step towards this is to increase the threshold to £43,000 in 2016/17.
The Government has committed to introduce into legislation a “tax lock” to rule out increases in the main rates of income tax, VAT or National Insurance over the course of this Parliament ensuring that they cannot rise above their current (2015-16) levels. The “tax lock” will also ensure that the NICs Upper Earnings Limit cannot rise above the income tax higher rate threshold.
The Government has announced that with effect from 2016/17 it will remove the tax credit that attaches to dividends and replace it with a new tax-free Dividend Allowance of £5,000 for all taxpayers. On dividends in excess of the Dividend Allowance, the dividend tax rates will change to 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
While the allowance will benefit those taxpayers with small portfolios, the new dividend tax rates are likely to mean an increased tax liability for the majority of taxpayers with dividend income in excess of £5,000. A basic rate taxpayer will never be any better off and will be worse off as soon as they have more than £5,000 of dividend income. A higher rate taxpayer will benefit if their dividend income is less than £21,667 but thereafter they will be worse off. An additional rate taxpayer will benefit if their dividend income is less than £25,250 but thereafter they will be worse off.
These changes will have an impact on owner-managed companies where historically they have been able to withdraw dividends within the basic rate band without incurring any personal income tax liability. The 7.5% tax charge on dividends will in future apply on dividends received in excess of £5,000.
Landlords currently are able to obtain full income tax relief on the interest paid on any loan used to acquire rental property. However, over the fours year starting in April 2017 the Government will phase in a restriction until relief is only available at the basic rate of tax. This will increase the tax liability for landlords who are liable at the higher and additional rates of tax.
Landlords who let their property furnished are currently allowed a “wear and tear allowance” of 10% of the rents received whether or not they actually incur expenditure. From April 2016, the Government will replace this allowance with a new relief that allows all residential landlords to deduct the actual costs of replacing furnishings.
Rent a Room relief is available to an individual who lets a room in their own home and exempts up to £4,250 of such income. The value of this relief has remained at the same level since 1997 but the government has now announced that it will increase to £7,500 with effect from April 2016.
The Government has announced various changes to the Venture Capital Tax rules which will also impact on Enterprise Investment Schemes. These changes will, subject to EU state aid approval, take effect from Royal Assent to the Summer Finance Bill 2015, and:
- Require that all investments are made with the intention to grow and develop a business
- Require that all investors are ‘independent’ from the company at the time of the first share issue
- Introduce new qualifying criteria to limit relief to investment in companies that meet certain conditions demonstrating that they are ‘knowledge intensive’ companies within 10 years of their first commercial sale, and other qualifying companies within seven years of their first commercial sale; this will not apply where the investment represents more than 50% of turnover averaged over the preceding five years
- Introduce a cap on the total investment a company may receive through the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) of £20 million for knowledge intensive companies, and £12 million for other qualifying companies
- Increase the employee limit for knowledge intensive companies to 500 employees
- Introduce new rules to prevent EIS and VCT funds being used to acquire existing businesses, including extending the prohibition on management buyouts and share acquisitions to VCT non-qualifying holdings and VCT funds raised pre-2012, and preventing money raised through EIS and VCT from being used to make acquisitions of existing business regardless of whether it is through share purchase or asset purchase.
As expected, the Chancellor has announced changes to inheritance tax with a new “main residence nil rate band”, transferable between spouses and civil partners, to come in over and above the existing nil rate band. This will be available from 6th April 2017 and, therefore, at least one of the deaths will need to be on or after that date. The amount of this main residence nil rate band is ultimately to be £175,000 per person, and therefore when combined with the nil rate band the total inheritance tax-free amount could reach £1 million for a couple. The new main residence nil rate band is to be phased in over four years, starting at £100,000 in 2017-18 and increasing by £25,000 each year before reaching £175,000 for 2020-21. The nil rate band itself is to remain frozen at £325,000 until the end of 2020-21.
In terms of detail, the relief is to apply where the interest in the property is left to a direct descendant, and the main residence relief will taper away where the net value of an estate exceeds £2 million.
A particular concern raised in advance was whether this relief might disadvantage those who downsize or sell their main residences and indeed the impact that this could have on the housing market more widely. Provisions are to be included to at least in part address this to protect the value of the smaller residence or assets of equivalent value.
The detail on all of this is awaited and indeed certain points are to be consulted upon before the new rules take effect in April 2017. In addition to the points raised above, there will be specific issues to address in connection with how this will be administered, the record keeping required and any additional burden in respect of compliance when dealing with deceased persons’ estates.
Having introduced major reform to allow people entering retirement greater choice over how the access their pension funds, the Government wants to allow people who have already purchased an annuity to enjoy similar flexibility. From April 2016 tax rules will allow annuitants to sell their annuity income to a third party, subject to agreement by the annuity provider. The sale proceeds, whether taken in full or drawn down over a number of years, and which may be used as the individual sees fit, would be taxed at the seller’s marginal income tax rate, in the same way as those drawing pension income for the first time from April 2015. In conjunction with the Financial Conduct Authority (FCA) the Government will consult on how best to protect the interests of those who will want to access the value of their annuity in this way.
Despite the wish to improve flexibility, the Government wants to ensure the pension tax system is fair and sustainable. To protect against the growing cost of tax relief for pension savings the lifetime allowance for tax relieved contributions will be reduced from April 2016 from £1.25m to £1m, although from April 2018 the allowance will be increased in line with the Consumer Price Index.
In the 2014 Budget, the Government announced that from April 2015 taxpayers with taxable income below £15,600 will not have to pay tax on interest income. As a further step, a Personal Savings Allowance was announced today meaning that from April 2016 no tax will be payable on the first £1,000 (or £500 for higher rate taxpayers) of savings interest. As many people will no longer pay tax on their savings, the automatic deduction of tax by banks and building societies will no longer be necessary.
Subject to consultation, from Autumn 2015 the Government will provide two new incentives to save via an Individual Savings Account (ISA). First time home buyers will be able to save up to £200 a month through a “Help to Buy” ISA with the Government paying a bonus of 25% of the amount saved up to a maximum of £3,000. The bonus will be paid when the individual buys their first home costing up to £450,000 in London and up to £250,000 elsewhere. Also, in a move to improve flexibility, ISA savers will be able to withdraw and replace funds in their cash ISA provided the replacement is made in the same tax year as the withdrawal.
The tax treatment of non-UK domiciliaries resident in the UK became a political issue during the election campaign. It is a long established principle of the tax rules that individuals who have not settled permanently in the UK, but who are resident in the UK, can choose to be taxed on the “remittance basis” and only pay tax on their foreign income and gains which they bring into the UK. For non-UK domiciliaries who have been UK resident for seven out of the previous nine tax years a flat rate charge of £30,000 applies for those tax years in which they are taxed on the remittance basis. In changes made in the last Parliament the remittance basis charge increased to £60,000 where the non-dom had been UK resident for 12 out of the previous 14 years and a £90,000 charge applied from 6th April 2015 where they had been UK resident for 17 out of the previous 20 years. The £90,000 charge was only announced in the December 2014 Autumn Statement and introduced this tax year.
Following the Summer 2015 Budget, the rules will change again from April 2017. Anybody who has been UK resident for more than 15 out of the previous 20 tax years would be deemed UK-domiciled for tax purposes and would pay UK tax on their worldwide income and gains. The £90,000 remittance basis charge will therefore only be relevant for this tax year and next tax year.
In further changes to the rules on non-UK domiciliaries, it will no longer be possible to claim non-UK domicile status if you become resident in the UK and were in fact born in the UK to parents who were UK domiciled.
Non-UK domiciliaries are only liable to UK inheritance tax on their UK situated assets. An existing rule already provides for a non-dom to be treated as UK domiciled for inheritance tax purposes where they have been UK resident for 17 out of the previous 20 tax years, at which point their worldwide assets would potentially be within the scope of UK inheritance tax. These rules encouraged the holding of UK assets, particularly residential property, through offshore structures. From April 2017 the Government will introduce new rules so that inheritance tax cannot be avoided on UK residential property by holding it through offshore structures.
The UK’s rate of Corporation Tax was already one of the lowest worldwide and the Chancellor surprisingly announced that the rate would be cut further in future years. The current rate of 20% will be reduced first to 19% for the 2017 financial year and then to 18% in 2020.
The level of the Annual Investment Allowance (AIA) has undergone many changes over recent years. This allowance is aimed at encouraging businesses to invest in plant and machinery, giving a full deduction against profits in the year of the purchase. Although the current level is a generous £500,000, this was a temporary rate with the level due to fall to £25,000 at the start of next year. The AIA will now be set at £200,000 from 1st January 2016 on a permanent basis, which is very welcome, particularly for small- and medium-sized businesses.
The National Insurance Employment Allowance has been increased so that employers shall not be due to pay the first £3,000 of contributions from April 2016 (rather than £2,000), which will mean that many small employers will no longer need to pay any National Insurance. New restrictions will remove the allowance for companies where the only employee is the owner.
Another less business friendly measure coming into effect on Budget day is a restriction on the ability for companies to receive deductions in respect of goodwill amortisation (i.e. the amount it pays to acquire a business’ reputation and customer relationships.) This comes after measures in the last Autumn Statement to prevent relief for amortisation of internally-generated goodwill and to deny Capital Gains Tax Entrepreneurs’ Relief in respect of Goodwill on incorporation.
For banks there was mixed news, with phased reductions in the bank levy being countered by an 8% profit surcharge. Large companies with profits of at least £20m will be subject to earlier Corporation Tax payment dates. There are immediate changes to restrict the ability to claim loss relief available against Controlled Foreign Company charges.
The tax position for the carry interests held by investment managers will be considerably tightened, with measures to prevent “base cost shifting” and ensure that the full gain is liable to Capital Gains Tax at 28%.
The Climate Change Levy exemption for renewably sourced electricity will be removed from 1st August 2015.
The Chancellor also announced substantial measures to tackle tax avoidance, evasion and aggressive tax planning. The measures include £800 million of further funds being provided to HM Revenue and Customs over the term of the parliament, which will allow them to triple the number of criminal investigations they carry out, amongst other measures intended to improve the UK tax take. Some of this funding will be allocated to tackle serious non-compliance by trusts, pension schemes and non-domiciled individuals.
Specific proposals announced in the Budget included the following:
- The General Anti Abuse Rule (GAAR) will be strengthened, with a specific penalty regime introduced.
- The rules relating to personal service companies (IR35) will be reviewed in an attempt to ensure that more taxpayers operating through limited companies are aligned to the tax and national insurance position that would apply to them as employees.
- High-net-worth individuals and trusts may in future be required to provide enhanced information, as part of as yet undetailed measures intended to give a HM Revenue and Customs a “in-depth understanding” of their affairs.
- “Serial offenders” – those that persistently use failed tax avoidance schemes – will be target by way of surcharges, as well as public “naming and shaming”.
- Salary sacrifice arrangements are to be monitored, following concerns that they are being commonly used to reduce tax and national insurance liabilities.
Avoidance using unfunded employer financed retirement benefit schemes (EFRBS) will be reviewed.
The National Living Wage of £7.20 per hour will apply for all employees over 25 years old from April 2016. There were substantial changes to the levels of many benefits and the tax credit system.
There will be a major change to the Vehicle Excise Duty, with the proceeds of the duty being allocated to a Roads Fund for investing in the network, making the duty more in line with its more commonly used name of the road tax. The numerous bands applying at present depending on CO2 emissions will be cut to three: zero-emission (£0 per annum), standard (£140 p.a.) and premium (£450 p.a.) The new system will only apply to cars registered after 1st April 2017, with a different scheme of rates applying for the first year.
There were no changes to most other duties – in particular, alcohol, tobacco and fuel will remain at current levels.
Insurance Premium Tax will be increased from 6% to 9.5% from 1st November 2015.