Summer Budget 2015 – Key Tax Changes

Here are some of the key changes proposed in the 2015 summer budget:

• Personal allowance: the income tax personal allowance will be increased from £10,600 in 2015-16 to £11,000 in 2016-17, and to £11,200 from 2017-18.

• Higher rate threshold will be increased from £42,385 in 2015-16 to £43,000 in 2016-17 and to £43,600 in 2017-18. The NICs Upper Earnings Limit will also be increased to remain aligned with the higher rate threshold.

• Dividend taxation – in a major policy shift the government will abolish the Dividend Tax Credit from April 2016 and will introduce a new Dividend Tax Allowance of £5,000 a year. The new rates of tax on dividend income above the allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

• Wear and Tear Allowance will be replaced from April 2016 with a new relief that will allow all residential landlords to deduct the actual costs of replacing furnishings. Capital allowances will continue to apply for landlords of furnished holiday lets. A technical consultation to follow before the summer.

• Tax relief on finance costs that individual landlords of residential property can get will be restricted to the basic rate of tax. The restriction will be phased in over 4 years, starting from April 2017. Deductions from property income will be restricted to:

– 75% for 2017-18
– 50% for 2018-19
– 25% for 2019-20
– 0% for 2020-21 and beyond

Individuals will be able to claim a basic rate tax reduction from their income tax liability on the portion of finance costs not deducted in calculating the profit. In practice this tax reduction will be calculated as 20% of the lower of:

– the finance costs not deducted from income in the tax year (25% for 2017-18, 50% for 2018-19, 75% for 2019-20 and 100% thereafter),
– the profits of the property business in the tax year, or,
– the total income (excluding savings income and dividend income) that exceeds the personal allowance and blind person’s allowance in the tax year. Any excess finance costs may be carried forward to following years if the tax reduction has been limited to 20% of the profits of the property business in the tax year.

• Rent-a-Room relief will be increased from £4,250 to £7,500 from April 2016.

• Employment Allowance will be increased from the current annual level of £2,000 to £3,000 from April 2016.

• Non-domicile status: new legislation will be introduced so that from April 2017 anybody who has been resident in the UK for more than 15 of the past 20 tax years will be deemed to be domiciled in the UK for tax purposes. Further from April 2017, individuals who are born in the UK to parents who are domiciled here will no longer be able to claim non-domicile status whilst they are resident in the UK.

• Non-domiciled inheritance tax: From April 2017, inheritance tax is payable on all UK residential property owned by non-domiciles, regardless of their residence status for tax purposes, including property held indirectly through an offshore structure.

Legislation will be introduced in Summer Finance Bill 2015 to provide for an additional main residence nil-rate band for an estate if the deceased’s interest in a residential property, which has been their residence at some point and is included in their estate, is left to one or more direct descendants on death.

The value of the main residence nil-rate band for an estate will be the lower of the net value of the interest in the residential property (after deducting any liabilities such a mortgage) or the maximum amount of the band. The maximum amount will be will be phased in so that it is £100,000 for 2017-18, £125,000 for 2018-19, £150,000 for 2019-20, and £175,000 for 2020-21. It will then increase in line with CPI for subsequent years.

The qualifying residential interest will be limited to one residential property but personal representatives will be able to nominate which residential property should qualify if there is more than one in the estate. A property which was never a residence of the deceased, such as a buy-to-let property, will not qualify.

A direct descendant will be a child (including a step-child, adopted child or foster child) of the deceased and their lineal descendants.

A claim will have to be made on the death of a person’s surviving spouse or civil partner to transfer any unused proportion of the additional nil-rate band unused by the person on their death, in the same way that the existing nil-rate band can be transferred.

If the net value of the estate (after deducting any liabilities but before reliefs and exemptions) is above £2 million, the additional nil-rate band will be tapered away by £1 for every £2 that the net value exceeds that amount. The taper threshold at which the additional nil-rate band is gradually withdrawn will rise in line with CPI from 2021-22 onwards.

The legislation will also extend the current freeze of the existing nil-rate band at £325,000 until the end of 2020-21
• Lifetime Allowance for pension contributions will be reduced from the current £1.25 million to £1 million from 6 April 2016. Annual Allowance for top earners with incomes, including pension contributions, above £150,000 will be reduced by tapering away their Annual Allowance to a minimum of £10,000. This policy will come into effect from April 2016.

The ‘adjusted income’ definition adds-back any pension contributions, to prevent individuals from avoiding the restriction by exchanging salary for employer contributions. For those in defined benefit or cash balance arrangements, the value of the employer contribution will be calculated using the annual allowance methodology. That is the employer contribution will be the pension input amount for the arrangement, less the amount of any contributions made by or on behalf the individual during the tax year.

To provide certainty for individuals with lower salaries who may have one off spikes in their employer pension contributions, a net income threshold of £110,000 will apply. If the individual’s net income is no more than £110,000 they will not normally be subject to the tapered annual allowance. However, anti-avoidance rules will apply so that any salary sacrifice set up on or after 9 July 2015 will be included in the threshold definition.

The rate of reduction in the annual allowance is by £1 for every £2 that the adjusted income exceeds £150,000, up to a maximum reduction of £30,000. Where an individual is subject to the money purchase annual allowance, the alternative annual allowance will be reduced by £1 for every £2 by which their income exceeds £150,000, subject to a maximum reduction of £30,000. The carry forward of unused annual allowance will continue to be available, but the amount available will be based on the unused tapered annual allowance. All pension input periods open on 8 July 2015 are closed on that date, with the next pension input period running from 9 July 2015 to 5 April 2016. All subsequent pension input periods will be concurrent with the tax year from 2016-17 onwards.

To prevent retrospective taxation, individuals will have an £80,000 annual allowance for 2015-16, but subject to a £40,000 allowance for savings from 9 July 2015 to 5 April 2016. To achieve this, the 2015-16 tax year will be split into two notional periods, 6 April 2015 to 8 July 2015, the ‘pre-alignment tax year’ and 9 July 2015 to 5 April 2016, the ‘post-alignment tax year’. All individuals will have an annual allowance of £80,000 for the ‘pre-alignment tax year’. Where this amount has not been used in the ‘pre-alignment tax year’, it will be carried forward to the post-alignment tax year, subject to a maximum of £40,000. In addition, any unused annual allowance from the previous three years can be added to these amounts in the normal way

• Corporation tax rates will be reduced from 20% to 19% in 2017 and to 18% in 2020. Corporation tax payment dates for companies with annual taxable profits of £20 million or more (if member of a group, the £20 million threshold will be divided by the number of companies in the group) will be required to pay corporation tax in quarterly instalments in the third, sixth, ninth and twelfth months of their accounting period starting on or after 1 April 2017.

• Capital allowances: Annual Investment Allowance will be increased to £200,000 for all qualifying investment in plant and machinery made on or after 1 January 2016 on a permanent basis.

• Corporation tax relief on all goodwill and customer related intangible asset acquisitions will be withdrawn. Goodwill means the reputation and customer relationships associated with a business. This will affect all acquisitions and disposals on or after 8 July 2015.

• Insurance premium tax will be increased by 3.5 percentage points to 9.5% from 01 November 2015. From this date all premiums received by insurers using the IPT cash accounting scheme will be charged at 9.5%. For insurers using the special accounting scheme, there will be a 4 month concessionary period that will begin on 1 November 2015 and end on 29 February 2016, during which premiums received that relate to policies entered into before 1 November 2015 will continue to be liable to IPT at 6%. From 1 March 2016 all premiums received by insurers will be taxed at the new rate of 9.5%, regardless of when the policy was entered into.

• Controlled Foreign Companies (CFC): Companies won’t be able to use UK losses and reliefs against a CFC charge from 8 July 2015.

• Taxation of carried interest: Legislation will be introduced effective from 8 July 2015, whereby sums which arise to investment fund managers by way of carried interest will be charged to the full rate of capital gains tax, with only limited deductions being permitted. Where an individual performs investment management services for a collective investment scheme through an arrangement involving one or more partnerships, then any sums received in respect of carried interest under that arrangement will constitute a chargeable gain and be subject to capital gains tax.

Tax Partners