The new tax year is now only a week away. The following are some of the main changes affecting individuals and executors:
Scottish PAYE tax codes
For the first time, the Scottish Parliament has the power to independently set all income tax rates (other than those which apply to savings and dividend income) and bands applying to Scottish taxpayers. It has chosen to keep income tax rates and bands comparable with Westminster with one exception – the band at which taxpayers start paying higher rate tax will remain at £43,000. Westminster has elected to increase it to £45,000 for tax year 2017/18.
ISA allowance to increase
The amount that can be saved into an Individual Savings Account will increase from £15,240 to £20,000. This can be invested entirely into a cash ISA or a stocks and shares ISA or can be split between the two. Given that the recent budget announced that from 6 April 2018 the Dividend Allowance will decrease from £5,000 to £2,000, individuals who expect to have dividends in excess of this sum should now be looking at moving these shareholdings into an ISA before the start of the 2018/19 tax year.
Tax year 2017/18 sees the introduction of the lifetime ISA. This is a hybrid of a pension and the Help to Buy ISA. Savers who are over 18 and under 40 can contribute up to £4,000 a year, which is topped up by a 25% government bonus of up to £1,000. Access to the funds is restricted however and is only allowed penalty free from age 60 or if it is being used for a deposit on a first property.
ISAs became inheritable between spouses or civil partners for deaths after 3 December 2014 but the legislation is not as straightforward as simply transferring the investment to the spouse or civil partner. This means that the ISA loses its tax free status during the administration of the estate and this can cause a significant amount of tax to be paid, especially given the change in dividend tax during this tax year as estates do not receive a dividend allowance. New legislation that is expected to come into force soon is expected to preserve this tax free status during the administration of the estate.
A new residence nil rate band will be introduced on 6 April 2017, providing some individuals with an allowance in addition to the nil rate band of £325,000, starting at £100,000. The details are complex and will be the subject of a separate blog shortly.
Mortgage Interest relief and finance costs for buy to let investors
Legislation announced in 2015 starts being phased into place in 2017/18. Finance costs includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. Currently landlords can deduct all of their finance costs from their property income to calculate their property profits. From 2017/18 this will be phased out and they will instead receive a basic rate reduction from their income tax liability for their finance costs. In 2017/18 relief will be restricted to 75% of finance costs with the remaining 25% being available as a basic rate reduction.
Deemed domicile for non domiciled individuals
Up until 6 April 2017 an individual who is not domiciled in one of the UK jurisdictions has been able to claim the remittance basis indefinitely, although the charge for doing so can be up to £90,000 annually. However for inheritance tax purposes an individual is deemed to be domiciled in the UK for this tax only once they have been tax resident for 17 out of the previous 20 years.
From 6 April 2017 this will change. The concept of deemed domicile from this date will apply for income tax and capital gains tax in addition to inheritance tax and the number of years of tax residency required to acquire a deemed domicile will reduce to 15 out of the previous 20 years. The individual will be deemed domiciled in the UK for tax purposes from the start of their 16th tax year in the UK.
Those who have been claiming the remittance basis and who will be affected by the new deemed domicile rules should consider bringing forward any offshore sales that will realise gains to before 6 April. There will be some limited opportunity for CGT rebasing of offshore assets.
Individuals with a domicile of origin in one of the UK jurisdictions who have acquired a domicile of choice elsewhere will also now be treated as having a deemed domicile for UK tax purposes when they resume UK tax residence.
Another change from 6 April means that residential property in the UK, no matter how it is held, will be taxed for inheritance tax purposes. Currently residential property held through a trust and offshore company structure can escape this tax.