Chancellor George Osborne delivered his post-election Budget statement to Parliament on 8 July 2015. Some of the main changes affecting individuals are outlined below, including changes to:
- Non-UK domicile tax status;
- Inheritance tax and residential property;
- The remittance basis charge;
- Pension relief;
- Personal taxation;
- Dividend income;
- Corporation tax; and
- Tax evasion and avoidance.
Clients who may be affected by any of the changes outlined should take tax advice as soon as possible.
Changes to non-UK domicile tax status
There have been a number of changes to domicile status in the UK, all of which will apply from 6 April 2017:
- Individuals who have been resident in the UK for 15 out of the last 20 years will be deemed UK domiciled for income tax and capital gains tax purposes. If deemed UK domiciled, s/he no longer be able to claim the remittance basis with respect to non-UK income and gains but will be subject to income tax and capital gains tax on their worldwide income and gains as they arise;
- The point at which an individual becomes deemed domiciled in the UK for inheritance tax purposes will be brought forward from 17 out of 20 tax years to 15 out of 20 years, aligning it with the point at which they become deemed domiciled for income tax and capital gains tax purposes. Once they are deemed domiciled in the UK, their worldwide estate (rather than just their UK estate) would be within the inheritance tax net;
- Individuals who are born in the UK to parents who are UK domiciled, will no longer be able to claim non-UK domicile status whilst they are resident in the UK. This change appears to be targeted at those who have a UK domicile of origin and are living in the UK but asserting a non-UK domicile of choice; and
- It will now be more difficult to break deemed UK domicile status; an individual will have to leave the UK for more than 5 tax years before regaining their non-UK domicile status in the UK.
Inheritance tax and residential property
There will also be new rules introduced with the aim of ensuring that from 6 April 2017, everyone who owns a residential property in the UK and who would otherwise pay inheritance tax on that property cannot avoid doing so by holding it in an offshore structure.
The initial proposal by HMRC in their technical briefing suggests that the inheritance tax charge on indirectly held UK property will be based on the Annual Tax on Enveloped Dwellings (“ATED”) rules, though these proposals will go further than ATED. The scope of the inheritance tax charge will have no minimum threshold and the various ATED reliefs will not be applicable here.
HMRC has stated that this will require a change in legislation to provide that shares of offshore companies or similar structures are not excluded property to the extent that they derive their value directly or indirectly from UK residential property or to the extent that the value of those shares is otherwise attributable to UK residential property.
Unsurprisingly, the inheritance tax changes which formed part of the Conservatives’ election manifesto have been announced. From April 2017, there will be a new main residence allowance for inheritance tax purposes on homes left to children or grandchildren. The allowance will be phased in, starting at £100,000 in 2017/2018 and reaching a peak of £175,000 in 2020/2021. The allowance will be on top of the current tax free threshold of £325,000. Consequently, by 2020/2021 a couple could pass £1 million to their children tax free. Married couples can still pass any unused allowance to one another. The allowance will be gradually withdrawn for estates worth over £2million with an expected limit of £2.35million.
The existing nil-rate band has been frozen at £325,000 until the end of the 2020/2021 tax year.
The remittance basis charge
In the autumn 2014 statement, the previous government had announced their intention to consult on making the election to pay the remittance basis charge apply for a minimum of 3 years. Following this consultation, the government will now not be introducing a minimum claim period for the remittance basis charge.
Currently, buy to let landlords can deduct their costs such as mortgage interest payments from their rental income before they pay income tax. The tax relief available to landlords for mortgage interest payments will be restricted to the basic rate of income tax (20%) by April 2020. The wear and tear allowance will be replaced by a new system which will only allow landlords to get tax relief when they actually replace furnishings. The government will increase the Rent-a-Room relief from £4,250 to £7,500 a year from April 2016.
Cut in pension relief
The annual allowance is a limit on the amount that an individual can contribute to their pension each year, while still receiving tax relief. It is based on an individual’s earnings for the year and is currently capped at £40,000. From 6 April 2016, there will be a restriction on pensions tax relief by the introduction of a tapered reduction in the amount of the annual allowance for individuals with income (including the value of any pension contributions) of over £150,000. Those earning more than £150,000 will no longer qualify for an annual allowance of £40,000. Instead, they will see their allowance curbed gradually from £40,000 to £10,000. For every £1 of earnings over £150,000, the annual allowance will reduce by 50p so that those earning £210,000 and above would have an allowance of £10,000.
As promised in the election, the Chancellor announced that legislation will be introduced to set 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 (2015/2016) levels for the duration of Parliament.
The government will increase the income tax personal allowance from £10,600 in 2015/2016 to £11,000 in 2016/2017. It will increase to £11,200 from 2017/2018. The amount individuals will have to earn before they pay tax at 40% will increase to £42,385 in 2015/2016, £43,000 in 2016/2017 and £43,600 in 2017/2018. This is expected to lift 130,000 people out of the higher rate tax.
From April 2016, the notional dividend tax credit will be abolished and a new £5,000 tax free allowance per year on dividend income introduced. Dividend income above the £5,000 allowance will be taxed at 7.5% for basic rate taxpayers, 37.5% for higher rate taxpayers and 38.5% for additional rate taxpayers.
Currently, income tax on dividend income is charged at 10% for basic rate taxpayers (in practice this means no extra tax because the tax liability is the same as the tax credit), 32.5% for higher rate tax payers and 42.5% for additional rate taxpayers.
The corporation tax rate (currently 20%) will be cut to 19% in 2017 and 18% in 2020.
Tax evasion, avoidance and planning
The Chancellor announced that the government intends to further clamp down on tax avoidance, planning and evasion. Some of the key points include:
- Higher penalties and no immunity from prosecution for those who admit tax evasion from April 2016;
- Additional investment of £800 million over the course of the Parliament in HMRC’s work on non compliance and tax evasion covering a range of areas;
- A consultation to consider the detail of introducing a General Anti-Abuse Rule (“GAAR”) penalty as well as considering new measures to strengthen the GAAR further; and
- Legislation to require financial intermediaries (including tax advisers) to notify their customers about the Common Reporting Standard, the penalties for evasion and the opportunities to disclose.