The Chancellor of the Exchequer has delivered his first Budget of the new Conservative Government and what a budget!
The big message, lower welfare costs, lower tax (“let the people keep the money they earn”) with the aim of improving productivity.
Although the growth forecast was down from 2.5% to 2.4% for 2015, all other stats were positive, with growth predicted for 2016 at 2.3%. Chancellor George Osborne confirmed the government is to legislate for a ‘tax lock’, setting a ceiling for the main rates of income tax, the standard and reduced rates of VAT, and employer and employee (Class 1) NICs rates, ensuring that they cannot rise above their current (2015-16) levels.
Standing for over an hour, announcing some of the measures we expected such as the pension changes re tax relief on pension contributions for additional rate taxpayers, the life time allowance being reduced to £1 million which were part of the Conservative election manifesto. Other measures announced over the weekend, such as the headline grabbing additional inheritance tax allowance for passing down the family home, then some real headline hitters:
The introduction of a national living wage of £7.20 for the over 25’s from April 2016 ( “The pay rise Britain’s deserve”), increasing over the next five years to £9.00 by 2020. This being put in place to offset the huge tax credit cuts.
Further cuts to corporation tax, 18% by 2020. The UK already has one of the lowest rates of corporation tax, further cuts will hopefully make it more attractive for businesses to relocate to, together with generous tax relief such as research & development. “Britain is open for business’
Restrictions to landlords off-setting finance costs, interest charges, against rental income to minimise tax charges. We predicted this in our June newsletter with the intention of slow down the housing market, as people release pension funds under the new pension freedom rules!
Personal Allowance – Increasing the personal allowance in 2017 to £11,000 and to £11,200 in 2018. (Legislation will also be introduced so that the Chancellor has to consider the level of the national minimum wage in setting the personal allowance each year until it reaches £12,500);
Higher Rate Threshold - the rate at which you start to pay 40%, currently £31,786, is to increase to £43,000 for 2017 tax year and to £43,600 in 2018, a significant increase from previous announcements;
Dividend Taxation – The 10% dividend tax credit will be abolished from 6 April 2016 and replaced with a new dividend tax allowance of £5,000 per year. This means that any dividend income received above £5,000 will be taxable. The new rates of tax will be 7.5% for basic rate taxpayers (previously no tax), 32.5% for higher rate taxpayers and 38.1% for additional rate tax payers;
This reduces the tax efficiency for the owners of limited companies which reward themselves in the main via dividends, as the benefit of the 10% tax credit has been lost. Those who have previously found taking a dividend a more tax efficient alternative to a salary/bonus, will find the difference between the effective tax rates on dividends and earnings narrowed.
Non UK Domiciles
Two measures announced, which take effect from April 2017, following further consultation:-
Abolishing non-domicile status for anyone who has been resident in the UK for more than 15 years of the past 20 years. These individuals will be treated as deemed UK domicile for UK tax purposes and subject to tax on their worldwide income and gains. To break the deemed domicile test, it is proposed you leave the UK for five complete tax years;
From April 2017, individuals who are born in the UK to parents who are domiciled here, will not be able to claim non-domicile status whilst they are resident in the UK. Highlighted to the Treasury, following the position of the HSBC Chief Executive, who was domiciled in Hong-Kong, but was born and resident in the UK, following the HSBC Swiss bank issues last year;
The £90,000 remittance basis charge announced in Autumn 2014, for those resident in the UK in 17 out of the last 20 tax years will become redundant. No changes to the £30,000 and £60,000 remittance basis charges were announced, it was confirmed that the plan to make an individual elect for the remittance basis for three years has been dropped
We will provide a more detailed paper on these changes to those clients impacted, as the consultation to be released later this summer develops.
Lifetime Allowance – As expected, the Government will reduce the Lifetime Allowance for pension contributions from £1.25 million to £1 million from April 2016. Transitional protection measures will be introduced for those pensions currently worth more than £1 million. You should speak with your financial advisors regarding making the election;
Reduced Annual Allowance – Again another known, the Government will restrict the pension’s tax relief for those with income including pension contributions of £150,000, by tapering away their annual allowance to a minimum of £10,000. Broadly speaking, for every £2 of income an individual has over £150,000 there will be a £1 reduction in the annual allowance, down to a minimum of £10,000 for those earning £210,000 or above;
The policy will take affect from April 2016, so again speak to your financial advisor about maximising your contributions prior to the change.
Pensions Tax Relief – The Government will consult on whether and how to undertake wider reforms of pensions tax relief. The Government is looking at whether the way in which pensions are taxed and contributions and investment returns receive tax relief remains the most appropriate way of doing things.
As many will be aware, income tax relief is available for your personal pension contributions and before every budget “noise” is made that this will be stopped. Although nothing to indicate the relief will be stopped, it is under review!
Restricting Finance Costs Tax Relief – As we trailed in our June newsletter, the Government will restrict the relief on finance costs that individual landlords of residential property can get to the basic rate of tax. The restriction will be phased in over 4 years from April 2017 as follows:
2017-2018 – the deduction will be restricted to 75% of the loan interest & cost, with the remaining 25% being at basic rate;
2018-2019 – 50% of finance costs given as a deduction and 50% given as a basic rate deduction;
2019-2020 – 25% finance costs deduction and 75% given as a basic rate tax reduction;
2020-2021 all financing costs incurred will be given as a basic rate tax reduction.
Reform of the Wear & Tear Allowance – The 10% wear & tear allowance will be replaced in April 2016 with a new relief that allows 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 is to be released this summer on the subject);
Rent a Room Relief – The amount of income you can earn before paying tax on renting a room at your home, will be increased from £4,250 to £7,500 from April 2016. (The rate has not been increased for 18 years);
Enterprise Investment Scheme (EIS) & Venture Capital Trusts (VCT) – Following the consultation announced in July 2014 and pressure from the EU, the following changes will take place:-
An individual who already holds shares in a company, which have not been acquired under venture capital scheme , like SEIS or EIS and subscribes for new shares, the new shares will not be able to qualify for any reliefs under any scheme (except for founder shares);
A new requirement will be implemented for monies introduced under EIS & SEIS to be used for the growth and development of the company. This will exclude the use of funds to be used to acquire a business;
Companies must raise their first investment under a venture capital scheme (EIS, VCT) within 7 years of making their first commercial sale or 10 years if the company is what is termed a knowledge-intensive company. (There is an exception to rule if a company meets the specific conditions);
A new cap will be introduced on the total amount of investments a company may raise under EIS, SEIS & VCT of £12 million or £20 million for a knowledge intensive company;
The rule regarding 70% of SEIS funds to be used before raising funds under EIS or VCT is be repealed;
A change will be made to the legislation to make in clear that farming is not an eligible activity.
A company has to meet one of three tests to be a knowledge intensive company.
We will send further details regarding the changes to those clients and intermediaries, who we know are interested in this area.
Capital Gains Tax
No changes, other than the measures for non-domiciles mentioned above.
Nil Rate Band – Currently frozen at £325,000 until April 2018, this freeze continues until April 2021;
Main Residence Nil Rate Band – An additional nil rate band to the above will be introduced when the main residence is passed on death to a direct descendent. The relief will be phased in over the next five years and there will be a tapered withdrawal for estates with a net value of £2 million. This withdrawal will be £1 for every £2 over this threshold. When fully introduced in 2020, this will mean a total nil rate band for a married couple/civil partnership of £1million;
Trusts – Measures will be introduced to simplify charges on trusts and rules to target avoidance through the use of multiple trusts;
Non UK Doms & UK Residential Property – Legislation will be introduced from April 2017 to ensure that inheritance tax is payable on all UK residential property owned by non-UK domiciles, regardless of their residency status, including property held indirectly through an offshore structure;
In addition, the deemed domicile rules for inheritance tax (currently 17 out of 20 years), will be brought in line with the new 15 out 20 years rule mentioned above.
Consultation on these measures will form part of the deemed domiciles rules mention above.
Annual Investment Allowance (“AIA”) – The AIA allows companies to claim 100% tax relief on most plant and machinery expenditure in the year it is incurred up to the annual limit. The annual limit has changed regularly since its introduction and was due to reduce to £25,000 in January 2016 from its current level of £500,000. This significantly reduced level was seen as a disincentive to investment and therefore growth, so the level from 1 January 2016 for all qualifying investment will be £200,000 and this is now permanent;
Corporation Tax Rates – With the flat rate of corporation tax of 20% effect recently, further reductions were announced in the budget. For 2017 the rate will reduce to 19% and in 2020 to 18%. On reaching 18% this will be below the current European average of 22%;
National Insurance Employer Allowance Increase – This allowance currently £2,000, will be increased to £3,000 from April 2016;
Restriction of Corporation Tax Relief for Business Goodwill – As of the date of the budget, corporation tax relief will be restricted on the cost of goodwill that a company acquires from another business. Currently a company can write down goodwill acquired as part of a trade and asset sale from a third party (known as amortisation), where a company acquiring the shares has no tax relief. The change is to create a level playing field;
Business Tax Roadmap – A business tax “roadmap” will be published in April 2016, setting out plans for the business taxes over the rest of the Parliament, to give business comfort and be able to plan;
Banks – The bank levy will be reduced over the next 6 years, to be replaced by corporation tax surcharge of 8% from 1 January 2016. In addition and as expected, measures will be introduced to prevent banks claiming tax relief for compensation payments and associated costs in relation to misconduct issues.
Criminal Investigations – We have reported in our main newsletter the increase in HMRC criminal prosecutions. As part of the budget, HMRC will receive £60 million of funding to step up criminal investigations into serious and complex tax crime, particularly focusing on wealthy individuals and corporates, with aim of raising £600m by end of Parliament;
Hidden Economy – HMRC will have extended powers to acquire data from online intermediaries (E-Bay etc.) and electronic payment providers to track those operating businesses but paying no tax. Further to this newly appointed investigators will exploit the data. Digital disclosure channel to make it easier for taxpayers to disclose unpaid tax liabilities will be set up;
Recovery of Tax Debts – The controversial measure of HMRC recovering taxpayers debtors direct from banks and building societies will be introduced and take effect from the date the Finance Act is passed later this year. Individuals and business who have debts over £1,000, will risk HMRC (subject to some safeguards) securing payment of the debt from the debtors accounts that have a minimum aggregate credit of £5,000 ;
Compliance – £300m will be invested over 5 years to tackle non-compliance by small and medium sized businesses and affluent individuals. This is likely to mean more enquiries and compliance checks/visits. In addition more resource will be put in to the Large Business Tax Unit to tackle the evasion, avoidance and aggressive tax planning by large businesses. Further resource will also be in to the specialist personal tax team to tackle the perceived evasion and aggressive tax planning by trusts, pension’s schemes and non-domiciled individuals. Basically a lot of investment to collect more tax by checking returns and challenging planning!
Professionals Notifying Clients of HMRC’s Measures Re Offshore Accounts – Legislation will be introduced so that financial institutions, tax advisors and other professionals that have given advice to a client or may be aware of an offshore account to advise them that:-
HMRC will receive in 2017 information on offshore accounts and share information with other countries;
A time limited disclosure will be opened in 2016 to allow non-compliant taxpayers to correct their affairs, before the information is received;
If non-compliant taxpayers continue to conceal their tax affairs, HMRC will enforce tough penalties, including a new simple criminal offence for failing to declare.
The Liechtenstein Disclosure Facility and the Crown Dependency Facilities will close at the end of 2015. A new Common Reporting Standard disclosure facility will be opened in 2016 and run through to mid-2017. This facility will give no immunity from criminal prosecution and a higher 30% penalty will apply. The Government is encouraging those with undeclared tax liabilities to disclose and bring their affairs up to date before HMRC begins to automatically receive information about UK residents’ overseas interests in 2017.
Immediate Anti-Avoidance Measures – Two measures were introduced with immediate effect. Firstly one measure is remove the ability for companies to use UK losses and reliefs against a controlled foreign company charge. The second is to tax the full amount of carried forward interest which arise to investment fund managers.
No increase in fuel, alcohol, beer, wine or tobacco duties.
New rates and bands will be introduced from 1 April 2017 for new cars first registered after this date for vehicle exercise duty.
From 2017, families with 3 and 4 year old children to receive 30 hours of free childcare.
Maintenance grants for students to be replaced by loans repaid after salary hits £20,000.
Nearly £13bn in benefit cuts, including four-year working-age benefit freeze and limiting tax credits.
Draft legislation released reference benefits in kind, in particular the abolition of the £8,500 threshold for benefits in kind; allowing employers to voluntarily report and deduct tax on benefits in kind in real time (known as 'pay-rolling'); introducing an exemption for qualifying business expenses. This should make the benefit in kind process simpler.
Consultation announced regarding proposals to remove home-to-work travel and subsistence tax relief where a worker is employed through an employment intermediary.
Consultation on whether peer to peer lending and crowdfunding equity investment should be a qualifying investment for ISAs.
If you wish to discuss any of the Budget Statement announcements or any other tax matter, please do not hesitate to contact us. We will be providing more detail in due course regarding some of the measures being introduced as the consultations are announced and develop.
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9 JULY 2015
Harbour Key Limited
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