George Osborne has just delivered his first post-election Budget, and the first Tory Budget in nearly 20 years. Some of the measures announced have been widely trailed such as the increase in the IHT threshold to £1m for a couple with a family home and the reduction in tax relief for pension contributions for the wealthy. Others, however, such as the reforms of non-dom and dividend taxation come as a surprise. As usual we shall be releasing more information as we digest the press releases, but here’s a brief selection of the matters we think are most likely to you.
Owner-managed companies have for some time used a combination of salary and dividends to remunerate the proprietors. At the lower end of the profit spectrum this has meant that profits can be extracted with no National Insurance Contributions and with no additional tax beyond the 20% paid by the company. For the highest profit extractions the personal tax rate is 30.6%. The government now proposes to reform dividend taxation so that:
- The dividend tax credit (which reduces the amount of income tax payable on income from shares) will be replaced by a new £5,000 tax-free dividend allowance for all taxpayers from April 2016.
- 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.
These are fundamental changes to the taxation of dividends and are likely to alter the optimal income extraction structures for proprietors of smaller companies. The government's statement says that only those with significant dividend income will pay more tax; the reality is that anyone currently using dividends to extract profits from their company will pay more.
Yet again the government has raided pension contribution relief to balance the books. This time, as expected, the tax relief allowance of £40,000 will be reduced for individuals earning £150,000 or more. This is to be done by tapering the relief to £10,000 for those earning over £210k.
As expected, but included here for completeness, the lifetime allowance for pension contributions will be reduced from the present £1.25m to £1m.
Both of the above take effect from April 2016.
As expected, the government will introduce an additional nil-rate band when a residence is passed on death to direct descendants. This will be:
- £100,000 in 2017-18
- £125,000 in 2018-19
- £150,000 in 2019-20
- £175,000 in 2020-21
It will then increase in line with CPI from 2021-22 onwards. Any unused nil-rate band will be transferred to a surviving spouse or civil partner. The new nil rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.
There will be a tapered withdrawal of the additional nil-rate band 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, so a joint estate of £2.35m or more will not benefit.
Otherwise the freeze on the IHT nil rate band is to be extended to April 2021.
The government is continuing to clamp down on the use of non-domicile status to gain tax advantages. Three measures have been announced, taking effect 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 all tax purposes
- 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
- inheritance tax will be 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.
Following from this, the recently introduced £90k remittance basis charge for long term non-doms will be redundant, but the £30k and £60k charges, for those resident in the UK for 7 of the last 9 and 12 of the last 14 years respectively, stand.
The government's stated aim is to get all those who are long-term UK residents and those with a strong connection to the UK from birth and parentage to pay UK tax on their personal worldwide income and to be liable to inheritance tax. Those born with a UK domicile will revert to having a UK domicile for tax purposes whenever they are UK resident.
These measures change the landscape for non-domiciles who are long-term resident in the UK and may have thought that a Conservative victory in May would secure their tax position. The measures to look through offshore companies to the underlying residential property for inheritance tax are likely to mean that many current structures need to be re-examined.
Corporation tax is to be reduced to 19% in 2017 and 18% in 2020, giving the UK some of the lowest business tax rates in the developed world.
The Annual Investment Allowance, which provided tax relief on qualifying plant and machinery expenditure, will rise from £25k to £200k for expenditure after 1 January 2016. The government pushed the allowance up temporarily to boost investment in 2013, so that the current limit of £500K was due to revert to the original £25k from 1 January 2016. The fixing of the allowance at a permanent £200k is therefore welcome.
Businesses will have their employer National Insurance bill cut by £1,000 from April 2016, as the Employment Allowance rises from £2,000 to £3,000. The Employment Allowance gives businesses and charities a reduction in the employer's National Insurance Contributions that they pay. However, this will no longer be available for single person companies.
Relief for mortgage interest for the growing number of buy-to-let landlords is to be restricted to the basic rate of income tax for individuals. The measure will be phased in over 4 years so that it takes full effect by April 2020.
Landlords of furnished lettings are currently entitled to a 'wear and tear' allowance, broadly equivalent to 10% of the rental income. This is to be replaced by a new relief for the actual cost of replacing furnishings. A consultation process is expected shortly.
The ‘Rent a room’ exemption for letting out a room in your home will increase to £7,500 from April 2016.
Our full Budget report can be downloaded here.
If you would like to discuss any of the issues raised in the Budget with one of our tax partners, please contact Clare Munro or Phil Moss.
This Budget update is for guidance only and professional advice should be obtained before acting on any information contained herein.