Here are a few details from the 2015 Summer Budget, in no particular order, which I hope you will find of interest!
Reduction in pension tax relief for higher earners
From April 2016 the Government will introduce a taper to the Annual Allowance, the limit on the amount of tax relieved pension saving that can be made by an individual or their employer each year, for those with annual incomes over £150,000. It is estimated only 1% of taxpayers exceed this threshold and save into pensions, and even fewer will actually be affected by this measure.
For every £2 of income over £150,000, an individual’s Annual Allowance will be reduced by £1, down to a minimum of £10,000.
This results in an Annual Allowance of £40,000 for those with taxable income of less than £150,000; a reducing Annual Allowance for those earning between £150,000 and £210,000 and an Annual Allowance of £10,000 for those earning over £210,000.
Reduction in Lifetime Allowance
Lifetime Allowance for pension contributions will reduce from £1.25 million to £1 million from April 2016 and will be indexed annually in line with CPI from April 2018. This continues the trend in recent years that has seen the LTA cut from it’s peak of £1.8m in 2011 / 2012.
The Budget documents make clear there is no intention for this change to be retrospective and so new transitional protection will be expected from the HMRC as was the case when previous reductions occurred.
The Chancellor stated that 4% of individuals would be affected by the reduction in LTA to £1m, although the increase in tax revenue from the change is expected to be nearly £600m by 2020.
Transitional provisions for aligning Pension Input Periods (PIPs)
In advance of introducing the tapered annual allowance for higher earners, transitional rules have been introduced from Budget Day to align PIPs with the tax year by April 2016 and to protect any savings already made before the Budget from retrospective tax charges. The main points are as follows:-
All PIPs open on 8th July 2015 will end on 8th July 2015. The next PIP for all pensions will be 9th July 2015 to 5th April 2016.
For people who have made contributions in excess of £40,000 prior to the budget on the expectation that these savings would be tested against the annual allowance for tax years 2015-16 and 2016-17, transitional rules are being introduced to ensure that in these circumstances pre-budget savings of up to £80,000 are protected from an Annual Allowance charge.
New arrangements that have their first PIP starting on or after 9th July 2015 and on or before 5th April 2016, the PIP will start on the normal commencement day and will end on the 5th April.
Although the concept of PIP will remain at present the government will consider if they can at a later stage remove the concept of PIPs altogether. It is no longer possible to vary PIPs
Carry forward of unused relief will still be available from tax year 2012 /2013.
The Main Residence Nil Rate Band
Legislation will be introduced to provide for an additional main residence nil-rate band. This will be available if the deceased’s interest in a residential property, which has been his or her residence, and is included in the estate, is left to one or more direct descendants on death.
The value of the main residence nil-rate band for an estate will be the lower of the net value of the interest in the residential property (after deducting any liabilities such a mortgage) or the maximum amount of the band.
The maximum amount will be will be phased in as follows: –
Maximum Main Residence
Nil Rate Band
2017 / 2018
2018 / 2019
2019 / 2020
2020 / 2021
The “basic” IHT nil rate band will be frozen at £325,000 until the end of 2020 / 2021.
The qualifying residential interest will be limited to one residential property but personal representatives will be able to nominate which residential property should qualify if there is more than one in the estate.
A property which was never a residence of the deceased (such as a buy-to-let property) will not qualify.
A claim could be made on the death of a surviving spouse/civil partner to transfer any unused proportion of the main residence nil rate band unused by the person on their death, in the same way that the existing nil rate band can be transferred. If the net value of the estate is above £2 million, the additional nil-rate band will be tapered away by £1 for every £2 that the net value exceeds that amount.
The main residence nil rate band will enable the Chancellor to claim that a £1 million nil rate band has been achieved and will undoubtedly take some families out of the IHT net.
Reduction in Corporation Tax
Currently Corporation Tax stands at 20% on profits for smaller companies. This rate will be cut to 19% in 2017 and 18% in 2020.
These new cuts will save small and large businesses a further £6.6 billion by 2021, and will benefit 1.1 million businesses. This will give the UK the lowest rate of corporation tax in the G20 and, to quote the Chancellor, shows that “Britain is open for business”.
New Domicile Rules
The Government believes that long term UK resident individuals domiciled elsewhere should pay UK tax on their personal worldwide income and gains, regardless of whether the amounts are received in the UK or overseas.
From April 2017, those who have been resident in the UK for more than 15 out of the past 20 tax years will therefore be treated as deemed UK domiciled for all tax purposes.
Once an individual who could claim to be domiciled outside the UK under general law but has become deemed domiciled under the 15 year rule leaves the UK and spends more than five tax years outside the UK he/she will, at that point, lose their deemed tax domicile. This will become known as “the five year rule”. In practice once the individual ceases to be UK tax resident, deemed tax domicile is likely only to be relevant for inheritance tax purposes. There will therefore be a longer “inheritance tax tail” for those who leave the UK than at present for IHT purposes.
Deduction of interest in determining taxable rental income
Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at property profits. They will instead receive a basic rate reduction from their income tax liability for finance costs.
Landlords will be able to obtain relief as follows:
- 2017 / 2018 – 75% finance costs deduction and 25% given as a basic rate tax reduction.
- 2018 / 2019 – 50% finance costs deduction and 50% given as a basic rate tax reduction.
- 2019 / 2020 – 25% finance costs deduction and 75% given as a basic rate tax reduction.
- 2020 / 2021 – all financing costs incurred by a landlord will be given as a basic rate tax reduction.
Arguably this is a move towards putting investors in “buy to lets” on a par with other investors who generally can’t claim tax relief on interest on loans used to purchase investments. How this change impacts on the housing market remains to be seen.
Increase in Personal Allowance and Higher Rate Tax Threshold
Currently the standard Personal Allowance (the amount an individual can earn before tax is paid) is £10,600 per annum. From the 6th of April 2016 this will be increased to £11,000 for 2016 / 2017 and to £11,200 in 2017 /2018.
Simultaneously the Basic Rate Tax banding (20%) will increase from the current £31,785 to £32,000 for 2016 /2017 and to £32,400 for 2017 / 2018.
Taxation of Dividend Income
The Government has announced new rules for the taxation of dividend income.
The dividend tax credit will be abolished from April 2016 and a new annual dividend tax allowance of £5,000 will be introduced.
The new rates of tax on dividend income above the allowance will be:-
It is believed that the change to the taxation of dividends is part of a drive to reduce the attractiveness of personal service companies and the Government has announced a review of the IR35 legislation.