2015 Summer Budget

The first Conservative Budget for a number of years was widely billed as a Welfare Budget, with a focus on taking certain sections of the population out of the benefits system and back into work. There were measures consistent with this theme as well as “stealth” changes such as the increase in Insurance Premium Tax, which households may not immediately feel the impact of. But the number of important tax changes affecting businesses and their owners was most surprising, affecting how income is extracted and how businesses are structured. Also, as is often the case, there were changes for businesses which could save tax, albeit in the future, but on the other hand there were announcements which will hit profits, and so there will be winners and losers. It would also appear that we are soon to have seven headline rates of income tax to deal with, as well as the marginal rate for certain people earning over £100,000!

After many years of largely unchanged Inheritance Tax legislation, there were a couple of key announcements, although the Conservatives had made no secret of their intentions in this regard.

Please note that the summary below is only based on the limited material currently available and we will be checking the detailed draft legislation as it is released, followed by the second 2015 Finance Bill which will then become law in due course.

BUSINESS AND CORPORATE TAX

Corporation Tax rates

The rate of corporation tax will be reduced to 19% in 2017 and to 18% in 2020.

RS comment

While any reduction in the headline rate of corporation tax is to be welcomed, let’s not forget that the rate will not fall to 18% for nearly 5 years!

Corporation Tax payment dates

Corporation tax payment dates are to be accelerated for large companies

RS comment

Large companies already pay their corporation tax bills in quarterly instalments. This measure goes further but is unlikely to have any impact on our clients as it will only apply to companies (or groups) which have profits in excess of £20 million!

Goodwill tax relief

For goodwill purchased after 8 July 2015, no upfront deduction for amortisation of the goodwill will be available from taxable profits. The taxation treatment for goodwill acquired before 8.7.15 is unchanged. The relief will be given later on when the goodwill is sold.

RS comment

This was a surprise and with immediate effect. For many vendors hoping to sell their businesses, this change addresses one of the biggest obstacles to the sale of shares in the vendor’s company. This is because typically purchasers often try to negotiate an acquisition of the assets (including goodwill) rather than shares, due to the tax deduction benefits. Potentially the availability of Entrepreneurs Relief for share sales means that these changes will help negotiations align the interests of both parties and they are intended to level the playing field between share and asset deals, as well as bring the UK in line with other major economies.

Additional Investment Allowance for capital expenditure

The current limit of £500,000 for this 100% tax deduction for expenditure on plant and machinery, was designed to be a temporary maximum (having been introduced from April 2014) with a planned for return to the previous ceiling of £25,000 after 31 December 2015. The Coalition had announced that after the expiry of the temporary increase period, this allowance would not fall to £25,000 after all. This deduction has moved in different directions in recent years and so the announcement that this will now be fixed at £200,000 for the foreseeable future is welcome news, especially for retail and hospitality businesses, and other businesses that periodically require significant capital expenditure.

RS comment

This is very welcome news for many businesses and has hopefully brought some certainty. It should allow businesses to spread their capital expenditure out more than if they had been faced with a drop to £25,000, avoiding the need to accelerate capital expenditure before 31 December 2015 simply to claim the favourable tax deduction. Even so, for businesses which have typically have a substantial amount of capital expenditure, and an accounting period that straddles 31 December 2015, careful planning is still required to optimise tax relief.

Living Wage

From April 2016 a new National Living Wage of £7.20 per hour for the over 25’s, to rise for £9 per hour by 2020. This is set to replace the National Minimum Wage.

RS Comment

Whilst this may be well intended, incentivising people to work, it may squeeze profit margins for certain businesses, such as those in the hospitality or pub sector, who employ relatively low paid staff. Depending on the scenario, this extra cost could outweigh the apparently helpful reduction in corporation tax rates, which also do not take effect for some time and also require a company to make a profit! This could result in pressure on cash-flow and also hit the bottom line after tax, although businesses may look at other options, such as employing staff under the age of 25.

Employment Allowance

The current National Insurance employment allowance of £2,000 is to be increased to £3,000 from 2016. The Government has said it could allow a business to take on 4 employees on the National Living Wage and pay no National Insurance. We understand also that the allowance generally is to be removed for “one man” companies.

RS Comment

Some businesses will benefit from a further £1,000 reduction in their total Employers National Insurance bill, but only those whose current bill is more than £2,000 per annum (before deducting the current £2,000 allowance). There will be many small businesses for whom this change will have little or no benefit.

PERSONAL TAX

Personal allowances and thresholds

The personal allowance will rise in April 2016 from £10,600 to £11,000 for 2016/17, with the higher-rate threshold increasing from £42,385 to £43,000 in April 2016. We would expect the national insurance upper earnings and upper profits limits to remain aligned with the higher-rate threshold from 6 April 2016.

RS comment

This tweaking of the tax bands seems to reflect the ongoing aim of supporting those on low and middle income, to reduce their income tax bill and increase their disposable income. This will be good news for people in the appropriate income bracket, although come 2017, couples with more than 2 children who have been claiming tax credits could start to feel worse off!

Dividend tax

The dividend tax system has undoubtedly been complex to explain to the layman. The notional 10% tax credit, that all taxpayers have been “deemed” to have already paid upon receiving their dividends, is to be abolished. Instead, a £5,000 tax free allowance will be introduced on dividends for all taxpayers, from April 2016. But then, for any dividends above this allowance the tax rates on dividends will be 7.5%, 32.5%, 38.1% for basic rate, higher rate and additional rate taxpayers respectively.

RS comment

This interacts with corporate tax and the decision whether to incorporate and extract profits as dividends had been rebalanced in that the often clear advantage of incorporation from a tax perspective is removed. From 6.4.2016 it looks as if it will actually be more costly for high earners to take profits out of a company by way of dividend rather than remaining as an unincorporated sole trader or partnership. Due to dividends not attracting National Insurance, high dividend/low salary combinations have been difficult for HMRC to challenge in many people’s view, and it would have been extremely difficult to charge NIC on dividends. So perhaps this might be viewed as a halfway house for the Treasury to bring in higher tax, rather than NIC, on dividends. Also, taking dividends rather than salary out of your company has remained better than salary in most cases, albeit the advantage has reduced in recent years as corporation tax rates have fallen. This new measure is likely to further reduce this advantage for some, and so we would suggest that you need to review how best to extract your profits going forward.

Non-dom status

From April 2017 it has been announced that those people who have been resident in the UK for more than 15 out of the past 20 years will be treated as “deemed UK domicile” for all tax purposes. Furthermore, they will be unable to use the “remittance basis” of taxation for income tax and capital gains tax.

RS Comment

There has been much adverse publicity against non-doms and so some announcement was expected. Domicile status affects all major taxes, although for income tax and capital gains tax in particular, these individuals have broadly only had a liability on amounts brought into the UK. Having said that, longer term residents have in recent years already been subject to the annual “Remittance Basis Charge” of £30,000 or £50,000 and so at first sight, it is difficult to understand what further impact this change will have. Furthermore, some may view that sidelining non-doms is short sighted, as they spend their wealth in the UK and create jobs.

PENSIONS

Tax relief for pension contributions

Prior to the Budget, individuals could broadly pay up to £40,000 per annum into a registered personal pension scheme and obtain tax relief at their marginal tax rate. Individuals with more than £150,000 annual income, including the value of any pension contributions, will be subject to a tapered reduction and this takes effect in April 2016. There may be some welcome simplicity though, as it seems likely that as part of these measures, pension input periods will be aligned with the tax year.

RS Comment

A cut in higher rate tax relief for pension contributions has been rumoured for a while and so perhaps this is not a surprise, although perhaps sooner than many expected. It is apparently supposed to help fund the Inheritance Tax relief on homes mentioned below, although it will be felt before the latter. In our experience, the impact of this on a few high net worth individuals could be significant, but it is unlikely to impact on the majority of our clients.

PROPERTY

Mortgage interest relief and Wear and Tear allowance

With the intention of reducing the advantage of wealthy landlords over general homebuyers, mortgage interest relief for buy to let property businesses is to be restricted to 20% (as opposed to 40% or 45%) by 2020. And to add to this, seemingly as part of a two pronged measure, the long standing wear and tear allowance is to be removed from April 2016.

RS Comment

Whilst the restriction in interest relief will have an impact on higher rate/additional rate taxpayers who let out residential properties, we will need to see the detailed rules because on the face of it, it is debatable how quickly this will achieve the Government’s objective, particularly as the restriction to 20% does not take effect until April 2020. The removal of wear and tear allowance though comes in sooner, and is likely to increase tax bills quite significantly for certain landlords who let their properties out on a furnished basis.

Rent a room relief

From April 2016, Rent-a-room relief, which has not risen significantly over the years, will increase from £4,250 to £7,500 per year.

RS Comment

This is probably long overdue, as the current tax free level of £4,250 has been in place for many years. It should hopefully go some way towards alleviating the administration burden for many people who rent out a room in their own home as well as increasing the tax free amount to a more realistic level which better reflects the level of rents in current times.

INHERITANCE TAX

Main residence nil-rate band

An additional nil rate band to cover only the main residence, is to be added to the existing nil rate band (currently £325,000 per person) upon death. This is intended to address the fact that the main asset for many couples, their home, has increased in value proportionately more than the Inheritance Tax nil rate band in recent years. It is intended to reduce the tax burden on passing this asset to the next generation and will broadly only apply when the main residence passes direct to descendants, typically upon the death of the surviving spouse. However, this will not come in fully until 2017, when the surviving spouse will have a total tax free allowance of £1m, provided that the family home is worth enough to use this amount.

Note though that there is to be a cap on the total net chargeable estate (i.e. all assets less liabilities less available exemptions) that can benefit from the full additional allowance. Broadly speaking, if the combined estate for a couple is worth more than £2m, it appears there will be a reduction in the additional £175,000 allowance per person, on a tapering basis.

Any unused portion of the additional nil rate band can be transferred to the surviving spouse, in a similar way to the existing nil rate band.

RS Comment

This was largely expected, although the delay in the full £1m allowance coming into effect will disappoint many people with valuable homes.

PILOT Trusts

Discretionary trusts are subject to their own Inheritance Tax regime, albeit that the rate of tax at key stages is generally no more than 6%. Two changes were announced affecting discretionary trusts that are typically set up upon death. One of these basically stops multiple trusts being set up by the same person on the same day, whilst each one still benefits from its own nil rate band going forward. The second measure removes the need to include certain “property” from the Inheritance Tax calculations, in the interests of simplification.

RS comment

The measure to stop setting up multiple trusts on the same day whilst each trust still benefits from its own nil rate band going forward was expected. Indeed, it was apparently supposed to be included in the last Finance Bill following the Coalition Budget, but didn’t make it in time!