Summer Budget Statement 2015

The first conservative budget for 19 years seems to have been broadly welcomed. 

In his speech the chancellor said ‘This is a Budget that puts security first, and recognises the hard-working British people.  It sets out a plan for Britain for the next five years to keep moving us from a low wage, high tax, high welfare economy; to the higher wage, lower tax, lower welfare country we intend to create’

Welfare cuts and rises to the minimum wage have made the headlines, but for owner managed and entrepreneurial business there were many changes lurking. 

Below we give our detailed summary of the measures most likely to affect our clients.

Personal Tax Rates

The chancellor announced the following changes in the personal allowance, the basic rate limit and the higher rate limit as follows; 

 

 

2015/16

2016/17

2017/18

Personal allowance

 

£10,600

£11,000

£11,200

Basic rate threshold

 

£31,785

£32,000

£32,400

Higher rate threshold

 

£42,385

£43,000

£43,600

The government wants to increase the personal allowance to £12,500 by the end of the current Parliament, and to ensure that individuals working 30 hours at the national minimum wage will not pay income tax. They have therefore committed to keep the personal allowance above this level.

National Living Wage/Employment Allowance

A new National Living Wage is to be brought in.  Starting at £7.20 from April 2016 it will rise to £9 by 2020. 

Smaller firms will also benefit from the increase in the Employment Allowance to £3,000 from April 2016.

Tax relief on pension contributions further

Tax relief on pension contributions is to be restricted.  From April 2016 the £40,000 annual exemption is to be reduced by £1 for every £2 by which your income exceeds £150,000 until (at income of £210,000 or above) the exemption has been restricted to £10,000. 

Changes are also made to align the pension input periods ‘PIPs’ with the tax year and remove scope for doubling up of annual allowances by selection of PIP dates.

Tax on dividends

Currently the most tax efficient method of extracting funds from a company is through dividends. There is no additional tax to pay if you are a basic rate taxpayer.  This has made incorporation an obvious choice for many small businesses, and led to what the HMRC call ‘tax motivated incorporation’.

Mr Osborne announced new dividend tax levels which comes into effect from 6 April 2016.

The first £5,000 of dividend income is tax free. Dividends above this amount will be taxed at either 7.5%, 32.5% or 38.1% depending upon whether you are a basic rate, higher rate or additional rate taxpayer.

The table below shows the effective marginal tax rates under this new regime compared to the current tax year. These rates reflect the combined corporate tax and dividend tax rates.

 

 

Currently

 

2016/17

 Basic rate taxpayer

20.0%

25.1%

 

 Higher rate taxpayer

40.0%

45.3%

 

Additional rate taxpayer

44.4%

49.9%

 

Many business people who has been living off dividends from their company will pay substantially more tax under this new regime going forward.

Given the increased costs of running a limited company, incorporation will no longer be the default choice, as through tax rates are broadly comparable with income tax rates for sole traders and partnerships. Business structures may need to be re-examined and it will probably make sense to accelerate dividend payments in the current year.

Corporation Tax reduction

Corporation tax will reduce by 1% on 1 April 2017, reducing the rate to 19% for Financial Years 2017, 2018 and 2019.

The rate will drop again, by a further 1% on 1 April 2020, reducing the corporation tax rate to 18% for the Financial Year 2020.

Annual investment allowances

Annual Investment Allowance give a 100% First Year Allowance for businesses in respect of capital expenditure on qualifying plant and machinery, fixtures and fittings.

The current annual limit is £500,000, this will drop to £200,000 from 1 January 2016.

The further 2% reduction in Corporation Tax rates sends a clear message that the UK Government is keen to attract overseas businesses to the UK. 

The new AIA limit is welcome news (given that the government had previously said that the limit would drop to £25,000.

Given the drop from £500,000 to £200,000 businesses planning large capex may wish to accelerate expenditure to before 31 December 2015.

Increasing tax for buy-to-let landlords

There was very bad news for buy-to-let landlords. Currently finance costs (e.g. mortgages) are fully tax deductible from rental profits but in the future this is going to be severely limited. Between 2017/2018 and 2020/2021 higher rate tax relief for financing costs will be phased out.

The upshot of this is that by 2020/2021 a landlord could be running a break-even rental business and still paying tax.

This change will not apply to ‘furnished holiday lettings’, which operate under different rules and require a number of short lets during the year.

This is a major blow for buy to let landlords, especially if/when mortgage rates rise. Highly geared landlords will have particular issues.  This may favour the incorporation of property businesses as the rules appear frames to capture only income tax relief.

Non UK domiciled individuals

Up until now individuals who are UK resident but not UK domiciled have had access to a privileged tax treatment - the remittance basis.  Latterly this has become less attractive by means of the imposition of a charge of up to £90,000 per annum to access most of these tax benefits (there are some benefits that can still be accessed without charge, generally for the lower amounts of unremitted income, or for people who have not been resident in the UK for too long).

From 6 April 2017 any individual who has spent 15 out of the last 20 years as a UK resident will automatically be treated as UK domiciled for all tax purposes, meaning that they will be subject to UK tax on worldwide income irrespective of whether it is remitted to the UK or not.

This 15 out of 20 rule will also apply to Inheritance Tax (IHT), so an individual will always be fully within the scope of UK IHT on worldwide assets after 15 years of residence (and will not be able to escape the IHT net until 6 years of non-residence).

UK residential property held in non-resident companies

The recent ATED (Annual Tax on Enveloped Dwellings) has already imposed an annual tax on expensive properties held in companies.

Carrying on with this theme, UK properties held in foreign companies will no longer be outside the UK IHT net for non-domiciled individuals.

Tax relief on depreciation of goodwill abolished

Following on from changes in the treatment of ‘related’ goodwill a wider change now means that acquisitions of all goodwill from 8 July 2015 will no longer receive tax relief. Previously, of a company purchased goodwill this could be amortised with the amortisation charge being tax deductible for the purposes of corporation tax.

Tax relief for goodwill purchased before 8 July 2015 will continue to be available.

This will tend to encourage share sales rather than asset sales.

Inheritance tax – new nil rate band for main residence

In a move that will please many traditional Conservative voters living mainly in the South of England, the Inheritance Tax (IHT) threshold will  be increased to £500,000 each (i.e. £1 million per married couple) only as regards the main family home 

This is being phased in for deaths after 6 April 2017 starting at £100,000 and increasing to £175,000 for deaths after 6 April 2020.

The mechanism for this is very complicated; it only applies on the second death where the house passes to a descendant, and is transferred to the survivor on death of the first spouse. The relief is tapered away at £1 for every £2 for estates over £2 million.

Multiple trusts 

Long expected changes have been announced to prevent use of multiple trusts where property is added to a number of existing trusts on the same day ( usually on death ), when assets are added to a number of ‘pilot’ trusts previously created. This was a widespread piece of tax planning for pension pots for wealthy individuals. The new rules will apply to trusts created after 10 December 2014 and also where additions are made on the same day to trusts created before. 

The upshot is that trusts which are affected will be aggregated together and treated as one for the purpose of calculating the 10-year inheritance tax charge.

Offshore tax evasion – a new disclosure facility

As well as an announcement of increased funding for HMRC to tackle tax evasion and fraud, a new disclosure facility was also announced.

This will be similar to the Liechtenstein Disclosure Facility, but less generous.  

From 2017 HMRC will automatically receive information from more other countries about offshore accounts owned by UK residents.

The Chancellor also announced extra investment for HMRC to help them tackle tax fraud and full investigations into offshore trusts which they hope will recover £7.2 billion in extra revenue.