Summer Budget 2015

Summer Budget 2015 - Our summary of the key elements that affect your wealth:

INCOME TAX

Personal Allowances (the amount of income you can have before tax)

• 06/04/2016 = £11,000
• 06/04/2017 = £11,200

The Chancellor also confirmed that when the personal allowance reaches £12,500 it will then increase each year in line with inflation.

Tax thresholds

• 06/04/2016 the basic rate tax band will increase to £32,000 meaning the higher rate tax threshold starts at £43,000
• 06/04/2017 the basic rate tax band will increase to £32,400 meaning the higher rate tax threshold starts at £43,600

The Chancellor also confirmed that the government will legislate i.e. it will be made law that the basic income tax rates of 20%, the higher rate of 40% and the additional rate of 45% cannot be changed within this Parliament i.e. for the next five years.

Dividends tax

The taxation of dividends will change dramatically with the tax credit being replaced entirely. Currently, if you receive a dividend and when added to your income you are still within the basic rate tax band there is no further tax to pay. Many small company directors receive their remuneration usually as a mix of lower salary (because most small businesses need to manage their cash flow) and then declare a dividend at the end of the year once profits are known.

As a result many small company directors pay income tax and National Insurance on their lower PAYE salary with the balance paid in dividend with no further tax payable up to the higher rate tax threshold. With effect from April 2016 this tax credit will be replaced by a £5000 tax-free dividend allowance and the balance of dividends will be taxed at 7.5% if within the basic rate tax threshold, 32.5% if the dividend sits in the higher rate tax threshold and 38.1% if the dividend, when added to your income, is in the additional rate tax band. We believe this is a significant increase in taxation for most small, limited company owners.

PENSIONS

Tax Relief

The Chancellor suggested in his speech that there is to be a consultation to review pension tax relief and he alluded to harmonising pensions with ISAs. What do we make of this? We suggest there is a possibility of removing tax relief entirely for pensions but then making the income from pensions tax-free when you draw pension benefits in retirement. We do not think this is likely as it would decimate the pensions saving market although given that pensions of virtually compulsory now with automatic enrolment, workplace pensions it is a distinct possibility. We suggest the likely move would be to reduce tax relief on pensions to basic rate tax only.

Pensions on Death

In the budget report, in the small print, it was confirmed that the taxation rate for pension funds in drawdown on death will be reduced to the recipient’s income tax rate from April 2016. Currently, for those using flexible pensions drawdown, if you pass away prematurely i.e. before age 75 your pension fund can pass to loved ones totally tax-free however, if you pass away after a 75 there is currently a 45% tax charge but this will now be changed to the tax rate of the person receiving the money on your death, which clearly is a fairer solution.

Annuities

Earlier this year the Chancellor confirmed that people who have pension annuities would be allowed to sell their annuity back to the pension company or indeed to another financial services institution. The so-called secondary annuity market. The budget report said that the consultation for the secondary annuity market is in progress however any changes or flexibility to be able to sell your annuity will be delayed until 2017. We believe this is a simple matter of the finance industry not being able to cope with this new market and indeed there are many concerns for people not when they sell their annuity.

Lifetime allowance

The budget report also confirmed previous announcements that the lifetime allowance will be reduced to £1 million from April 2016 (this is the maximum amount you can accrue through your lifetime within pension funds). In addition, the lifetime allowance will then increase each year by inflation (CPI).

CORPORATION TAX

With effect from 1^st April 2017 the corporation tax rate will fall from 20% to 19%.

In addition, the corporation tax rate will fall to 18% with effect from 1^st April 2020.

The government are also to restrict the offsetting of overseas subsidiary limited company losses under the controlled foreign companies rules.

INHERITANCE TAX

Non-UK Domicile

Non-UK domicile are dramatically affected by the summer budget 2015. Non-Doms resident in the United Kingdom only pay inheritance tax in the UK on their UK assets. This is a tax loophole that is used by many wealthy foreign nationals who live in the UK.

You acquire your domicile at birth. Usually, your domicile is dictated by where you were born and also the nationality of your father. This is your domicile of origin. If a foreign national has lived in the UK for 17 of the last 20 years they are then deemed to be domicile in the UK. This is called a domicile of choice.

The Chancellor confirmed that from April 2017 if a non-Dom has lived in the UK for 15 of the last 20 years they will be considered UK domicile and be liable to inheritance tax on worldwide assets. In addition, if you were born in the UK and your parents become domiciled here you will automatically be deemed UK domicile whilst your parents are in the UK too. Again, this will prevent people who were born in the UK, have UK passports yet claim non-UK domicile because their parents are foreign nationals but currently living in the UK.

Avoid IHT inside corporate structures

The Chancellor confirmed that where people own residential property in the United Kingdom but inside an offshore trust or offshore company they will no longer be able to avoid inheritance tax. Yet again, we believe this is to do with discouraging people from owning property that they do not live in to encourage landlords to sell and thus make more property available for sale given the current housing shortage crisis in the UK.

New Main Residence

The Chancellor confirmed that in addition to the main inheritance tax allowance of £325,000 (£650,000 for a legally married couple or civil partnership), there will be a new ‘main residence rate band’ introduced from April 2017.

The Chancellor tried to make headlines by suggesting that this means a £1 million inheritance tax allowance. When you look at the numbers this will not be the case for another five years. The main residence no rate band will be gradually introduced as follows:

• £100,000 in April 2017 (£200,000 for couples)
• £125,000 in April 2018 (£250,000 for couples)
• £150,000 in April 2019 (£300,000 for couples)
• £175,000 in April 2020 (£350,000 for couples)

The main inheritance tax allowance of £325,000 each remains frozen until at least 2020. This means that for a couple leaving assets to each other and then on second death passing those assets to loved ones will not have the full £1 million combined nil rate band and main residence nil rate band for another five years. The £1 million threshold is achieved with the £650,000 combined nil rate band for a couple plus the £350,000 main residence nil rate band.

Finally, the main residence nil rate band is only effective if you leave your main residence to your children or grandchildren.

In addition, if your main home is worth less than £325,000 for a single person all less than £650,000 for a couple, you will derive no benefit whatsoever from the main residence nil rate band because your property value would be within the normal nil rate band. This is a con.

More inheritance tax cons:

We believe the Chancellor has headlined this increased inheritance tax allowance to try and people into not taking professional estate planning advice as you believe your property to be safe from inheritance tax up to £1 million. What nobody will tell you is that by taking no action and when you die leaving your share of your property to your surviving spouse, if they ever need residential care then the whole value of the property can be means tested to pay for your care. As far as we are concerned nothing has changed despite the new main residence nil rate band. To protect your wealth including your property you need to take professional advice.

PROPERTY TAX

Buy to let residential property

It is usual when you own a buy to let property to offset your expenses against the rental income received and you then pay income tax on the balance i.e. rental profit. The Chancellor confirmed that with effect from April 2017 he will restrict the expenses relief that landlords receive.

Expenses relief will be restricted to basic rate income tax at 20%. What this means is if you are a buy to let landlord but you are also already a higher rate taxpayer or an additional rate taxpayer you will no longer be allowed to offset your expenses at your top tax band of 40% or 45% but you will only be able to claim this against your 20% band. For basic rate taxpayers the position remains unchanged, as you are a basic rate taxpayer you already receive relief at 20% and this position has not changed.

In addition, the ability to claim a deduction for ‘wear and tear’ on furnishings will be replaced. With effect from April 2016, landlords will only be able to claim expenses against rental profits when they replace furnishings.

Rent a room relief

You are allowed to rent a room in your main residence and receive a rent up to £4250 per year tax-free. To encourage greater accommodation availability the Chancellor confirmed that the rent a room relief allowance of £4250 will be increased to £7500 per annum with effect from April 2016.