George Osborne took us by surprise in his first Budget since the election with a number of radical tax and spending changes, some of which will be welcomed and others less so. Here is our selection of the “top ten” tax changes that may impact on you.
1. Corporation tax rates
The Chancellor announced future cuts in the corporation tax rates that should ensure that UK PLC remains amongst the most competitive of the G20 countries.
The corporation tax rate will reduce from 20% to 19% from 1 April 2017 and will remain at this rate through 2018 and 2019.- The rate will reduce further to 18% from 1 April 2020.
- The objective is to create a more competitive corporate tax system to provide the right conditions for business investment and growth.
2. Taxation of dividends
The Chancellor announced a reform of the taxation of dividends, abolishing the notional 10% tax credit and replacing it with a new set of rates.
- From April 2016, the 10% dividend notional tax credit is abolished.
- Investors receiving dividends of up to £5,000 will not pay any tax, as this will be covered by a new annual “Tax Free Dividend” allowance.
- New tax rates will be applied to dividends over £5,000 that are not covered by personal allowances, as follows:
7.5% for basic rate taxpayers
32.5% for higher rate taxpayers
38.1% for additional rate taxpayers.
- The tax treatments to dividend income in ISAs and pensions will remain.
- We await further guidance on the effect on trusts. We anticipate that the 7.5% rate will be applied to dividends received for beneficiaries with a right to the income (ie life tenants of interest in possession trusts) and that the additional rate tax of 38.1% will apply to discretionary trusts.
3. Annual Investment Allowance for plant and machinery
In a welcome announcement for businesses, the Chancellor provided some certainty regarding tax relief for purchases of plant and machinery going forward.
- The Annual Investment Allowance (AIA) gives 100% capital allowances on expenditure on plant and machinery within specified limits.
- The current limit of £500,000 per year is due to expire on 31 December 2015.
- The new rate from 1 January 2016 will be £200,000 per year and will remain at this level indefinitely.
4. Inheritance tax – main residence nil rate band
In a much expected change, the Chancellor announced inheritance tax reliefs to help ensure that the family home can be passed on to the next generation.
- An additional nil rate band (NRB) will be available for relevant transfers on death, on or after the 6 April 2017, for individuals who have an estate with total assets above the inheritance tax (IHT) threshold of £325,000. The estate must include a main residence which is passed directly to the deceased’s children and/or grandchildren or remoter issue.
- The main residence NRB will be £100,000 in 2017/2018, £125,000 in 2018/2019, £150,000 in 2019/2020 and £175,000 in 2020/2021.
- Any unused main residence NRB will be available to transfer to a surviving spouse / civil partner where the second death occurs on or after the 6 April 2017, irrespective of when the first of the couple died.
- The relief will remain available when a person downsizes or no longer owns a home on or after 8 July 2015, provided that assets of an equivalent value (up to the value of the main residence NRB) are passed directly to descendants on death.
- There will be a tapered withdrawal of the additional NRB for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.
- It will only be relevant for transfers on death and will not apply to reduce the tax payable on lifetime transfers that are chargeable as a result of death.
- The current NRB will continue to be £325,000 from 2018/2019 until the end of 2020/2021.
5. Tax relief on interest for “buy to let” investors
An unwelcome change for “buy to let” investors was the announcement of restrictions in tax relief for interest payments.
- From 6 April 2017 individual landlords of residential property (excluding Furnished Holiday Lettings) will no longer be able to fully deduct mortgage interest and other finance costs from their property profits.
- Instead they will receive a basic rate tax reduction from their income tax liability.
- The changes will be tapered in as follows:
2017/18 – The deduction against property income reduces to 75% of allowable financing costs. The remaining 25% will be available as a basic rate tax reduction.
2018/19 – 50% as a deduction, 50% as a basic rate tax reduction.
2019/20 – 25% deduction, 75% basic rate tax reduction.
2020/21 onwards – all finance costs given as a basic rate tax reduction.
- The basic rate tax reduction will be calculated as 20% of the lower of:
The finance costs (or the amount that is not deducted from income during the taper period).
Profits of the property business.
Total income (excluding savings income and dividends) that exceeds the personal allowance.
- Any excess finance costs can be carried forward if the reduction has been limited to 20% of the property business profit in the year.
- In a related change, from 6 April 2016 the 10% wear and tear allowance for landlords of fully furnished residential property will be abolished. Instead, landlords will only deduct the costs they actually incur.
6. Personal tax allowance
The personal tax allowance has been increased to £11,000 for 2016/17 and to £11,200 in 2017/18. This is a step toward the Government’s objective to raise the personal allowance to £12,500 by 2020.
The Government has an objective to raise the personal allowance to £12,500 and the higher rate threshold to £50,000 by the end of this Parliament.
As steps towards this, the following revised allowances and thresholds were announced for 2016/17 and 2017/18:
- 2016/17 – personal allowance £11,000, basic rate band £32,000 so higher rate threshold £43,000
- 2017/18 – personal allowance £11,200, basic rate band £32,400 so higher rate threshold £43,600.
The current levels are:
- 2015/16 – Personal Allowance £10,600, basic rate band £31,785 so higher rate threshold £42,385.
The NIC Upper Earnings / Profit Limit will remain aligned to the higher rate threshold. For employed earners, this will reduce the saving achieved by extending the tax threshold, as more earnings will be subject to the 12% NIC rate.
Once the personal allowance has reached £12,500, the level that would cover the pay of an individual aged over 21, working 30 hours a week, on the National Minimum Wage (NMW), will automatically increase each year in line with the NMW. Up until that point, the Chancellor will be under a legal duty each year to consider the level of NMW when setting the personal allowance level.
7. National Insurance contributions
The Employer National Insurance contributions allowance available for offset against Class 1 NICs will be increased from £2,000 to £3,000 from April 2016.
- The employer National Insurance contributions allowance will be increased from £2,000 to £3,000 from April 2016 for offset against their Class 1 NIC bill.
- However, companies where the director is the sole employee will be unable to claim the allowance from that date.
8. Goodwill amortisation
In a surprise change for companies, corporation tax relief will no longer be available for the amortisation of purchased goodwill acquired on or after 8 July 2015. Goodwill acquired before 8 July will not be affected by this change.
- At present, companies are able to claim corporation tax relief for the amortisation of purchased goodwill and customer related intangible assets (“intangibles”).
- From the purchaser’s viewpoint, this can make it more attractive to structure acquisitions as “trade and asset” purchases rather than as share purchases.
- With immediate effect, corporation tax relief will no longer be available for the amortisation of intangibles acquired on or after 8 July 2015.
- If the intangibles are subsequently sold at a loss, then corporation tax relief will be allowed for the loss in the year of sale as a non-trading debit. Non-trading debits can be offset against other current year profits (including trading profits) or can be group relieved, but cannot be offset against future years’ trading profits.
- The change does not affect intangibles acquired before 8 July, and relief for the amortisation of such assets continues to be available as at present.
9. Abolishment of non-domicile status for long domicile residents
Major reforms have been announced affecting the taxation of foreign domiciled persons. From April 2017, individuals who have been resident in the UK for more than 15 out of the past 20 tax years will be deemed UK domicile for all tax purposes (income tax, capital gains tax and inheritance tax).
- A number of reforms have been announced to the taxation of foreign domiciled persons. A detailed consultation will be published shortly on the best way to deliver these reforms with further consultations on the draft legislation expected to be included in the 2016 Finance Bill.
- The intention with these reforms is that long term UK resident non doms should pay UK tax on their personal worldwide income and gains, regardless of whether the amounts are received in the UK or overseas. Also, individuals with a UK domicile of origin (born in the UK) who have lost that UK domicile by moving abroad and have a strong connection with the UK on return should not be able to access the remittance basis regime.
- This is a very detailed and complex area and each case will need reviewing in its own right.
10. Pensions
From April 2016, pension tax relief for those with incomes above £150,000 will be restricted. The Chancellor also announced a Green Paper looking at a potentially wide ranging reform of pensions.
- From April 2016 the pension tax relief for those with incomes, including pension contributions, above £150,000 will be restricted by tapering away the £40,000 Annual Allowance down to a minimum of £10,000.
- The Chancellor also announced a Green Paper looking at a potentially wide ranging reform of pensions – possibly stretching as far as changing the rules so that contributions are paid out of taxed income but then the pension itself is tax free when drawn, with the Government topping up in between.
- As previously announced, from 6 April 2016 the pensions Lifetime Allowance will reduce from £1.25 million to £1 million. From 6 April 2018 it will be indexed in line with inflation using the CPI. Transitional protection for pension rights already over £1 million at 6 April 2016 will be introduced.
This is just a brief summary of some of the main changes. If you would like to discuss how the Budget will affect you, please either get in touch with your BHP contact, call us on 0333 123 7171 or contact us via our website www.bhp.co.uk
