In the first ‘full strength’ Conservative Budget for 19 years, George Osborne has delivered one of the most radical shake-ups of welfare and taxation for years. Here is a brief summary of the main announcements:
Personal tax allowance and rates
The personal allowance will increase from £10,600 to £11,000 in 2016/17 and to £11,200 for 2017/18. The 40% tax rate threshold will also increase from £42,385 to £43,000 in 2016/17 which will mean that everyone will be a little better off as a result of the Budget.
An unwelcome measure for those with higher earnings was the introduction of a taper of the tax relief on the current £40,000 annual allowance for pension contributions. The allowance is reduced by £1 for every £2 of income in excess of £150,000, including the value of the pension contributions. This means that for taxpayers earning over £210,000 the annual pension contributions on which they can obtain tax relief will be reduced to £10,000. Transitional rules are being introduced to cover the remainder of this tax year and we need to digest the details on these when the Finance Bill is published.
The 10% deduction from rental profits for wear and tear of furnished property will be abolished from April 2016. This will be replaced with a new relief allowing residential landlords to deduct the actual costs of replacing furnishings. Capital allowances will continue to apply on furnished holiday lets.
Controversially, there will be a restriction of tax relief on finance costs (such as mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans) on residential property to only the basic rate of tax. This is to be phased in over four years, from April 2017, giving landlords time to reorganise their affairs.
The ’Rent-a-Room’ allowance is set to increase from £4,250 (frozen since 1997) to £7,500 from April 2016. This applies where a room (or rooms) in a taxpayer’s only or main residential property is rented out and amounts received up to that allowance are tax-free. This is a long overdue increase but unfortunately it may not go far enough to cover rooms rented out in the capital.
Inheritance Tax – Main residence nil-rate band
This measure was widely published and is very welcome. For transfers on deaths on or after 6 April 2017 an additional nil-rate band will apply when a residence is passed to a direct descendant (child or grandchild but also including a step-child, adopted child or a foster child). The allowance will start at £100,000 and increase to £175,000 by 2020-21.
An individual will eventually have an effective £500,000 nil-rate band, and the existing transfer of nil-rate band to surviving spouse or civil partner continues. The allowance is to be limited to one property but the personal representatives will be able to nominate which property should qualify if there is more than one in the estate. The relief will be tapered if the net value of the estate exceeds £2m.
The Chancellor has announced that the Annual Investment Allowance (AIA) available for acquisitions of fixed assets to be used by a business is to be permanently set at £200,000 per annum from January 2016. It is currently set at £500,000 and, prior to the Budget, was to fall to £25,000 in January 2016. The stability for this allowance will be very welcome to small business who have to plan ahead to make large capital purchases.
The corporation tax rate, currently 20%, is to be reduced to 19% in 2017 and 18% in 2020 for all companies. The intention is that this should help (limited company) employers meet the extra costs of the new ‘living’ wage.
The employer allowance available against employer’s NIC is to rise from £2,000 to £3,000 from April 2016. However, from that date the allowance will not be available to companies where the only employee is the director.
In addition, the national minimum wage is to become a ‘living’ wage rising to £6.70 in October 2015 and £7.20 in April 2016, with the intention that this will rise to £9 per hour by 2020. Employees who are also ‘family members’ are generally exempt from these rates.
From April 2016 the first £5,000 of dividend income will be tax free. However, in a surprise announcement, the dividend tax credit is to be abolished and dividends will be taxed at an extra 7.5% above current levels. For basic rate taxpayers dividends above £5,000 will be taxed at 7.5%, higher rate taxpayers will pay 32.5% and additional rate taxpayers at a new rate of 38.1%.
A number of fundamental changes have been proposed to the current regime, including the abolition of ’permanent’ non-domiciled status. Under these proposals taxpayers will be deemed to be UK domiciled for all tax purposes if they have been resident for 15 out of 20 years. Changes to the rules are also proposed for individuals originally born in the UK who return to the UK, having acquired a new domicile of choice while they were abroad and those who leave the UK and become non-resident after acquiring deemed domicile under the 15 year rule.
In a bid to close tax ‘loop holes’ used by private equity fund managers, ‘carried interest’ arising to private equity or other investment fund managers will be charged at the full rate of capital gains tax with effect from 8 July 2015 with limited permitted deductions. A wider consultation is also announced regarding the circumstances in which performance returns should be taxed as capital gains.
We will await with interest the publication of the new Finance Bill 2015. In the meantime if you have any questions about how the Budget will affect you, please feel free to contact us.
RMT Ref: 115/07.15/SL