Recap: Five highlights from the Summer Budget 2015

In a week that took us back to May’s general election and the failure of polling (we didn’t speak to enough Conservatives… I think that much was obvious) I thought we could start these posts with a look at the impact the election had from a tax perspective.   If you’d taken a poll on the possible tax changes post election we might not have been too far out even though we were generally working on the basis of a change in government.

We were expecting new, more restrictive, tax policies in relation to non-doms and pension reliefs from a Labour coalition government but instead we got the same policies from a Conservative majority government – so at least our expectations were right.  That wasn’t the end of the surprises though, with George Osbourne announcing an increase in tax on dividends and restrictions to reliefs on buy-to-let property both of which will affect our clients.

Below is our report from that time picking out five highlights of the Summer Budget.

Five highlights from the Summer Budget (From July 2015)

The chancellor gave his Summer Budget last week which somewhat unfortunately coincided with our firm away week – not to worry though because we knew more or less what to expect, didn’t we?  No such luck.  This was a budget with some sweeping changes to personal taxation which at least we had plenty of time to consider and contributed to discussion between us.

Since then, no doubt many of you will have already seen the headlines but we wanted to write to our clients to give you our five personal tax highlights.  We would imagine that all of our clients will be affected by these changes to some extent but those who are non-doms claiming the remittance basis, buy-to-let landlords, investors with large portfolios, owners of their own company and higher earners making personal or employer pension contributions are particularly affected by tax increases.

Please contact us if you wish to discuss any of the points highlighted below or other aspects of the budget.  Some of these changes may prompt an overall review of your tax affairs and structures which we would be happy to work on with you.

More detail will come out with the draft legislation and guidance in the coming weeks and months so these are only initial thoughts provided for general guidance.

  1. Changes affecting non-doms – end of non-dom status for long term residents

The ability for an individual with non-UK domicile (a ‘non-dom’) to claim the remittance basis of taxation is to be eliminated from April 2017 for those who have been resident 15 out of the previous 20 tax years.  It is also intended that the deemed UK domicile provision for inheritance tax will be amended to also apply to those  resident in the UK 15 out of 20 years, effectively creating a unified deemed domicile provision applicable to all taxes.

These changes will bring forward some non-dom individual’s inheritance tax planning and the need to ensure their affairs are set up efficiently before paying UK tax on a worldwide basis by April 2017 – particularly as it relates to trusts.

As an additional point there will be changes made that will impact those born in the UK to UK domicile parents who now claim to have a domicile of choice elsewhere.  From April 2017, they will no longer be able to claim the benefits of non-dom status if they are UK resident.

  1. Buy-to-let property – restricted tax relief for mortgage interest

Restrictions are to be introduced on the amount of tax relief available for loans used to purchase let property from April 2017 – notably this will include the mortgage interest ordinarily deducted as an expense.  The restriction will be brought in gradually over four tax years and will ultimately limit the benefit of any deduction to the basic rate of tax (20%).  So far, it appears this will apply to both UK let property and foreign let property.

Additionally, from April 2016 the 10% wear and tear deduction available to landlords of furnished lets will be scrapped and replaced with a new regime accounting for actual expenses.

As well as potentially changing the economics of your buy-to-let, for Americans this will further the disparity in the taxation of let property with the US allowing mortgage interest and depreciation deductions.

  1. Pension Relief – reduced contribution annual allowance for high earners

For those who are high earners, as expected, tax relief on pension contributions is to be restricted by a tapering of the annual amount you can contribute (currently £40,000) to your pension and get tax relief.  The taper occurs between £150,000 and £210,000 of income to a minimum amount of £10,000.  It should be noted however that when considering your income for purposes of the taper it will include any employer contributions as well as personal contributions.  As such it is possible for the provisions to apply to those with income as you might understand the term (such as salary and bonus) of £110,000.

The change will come in 6 April 2016 and there are some complex transitional rules for the 2015/16 tax year to cope with aligning different pension input periods.

  1. Dividend tax reform – tax on dividends increased

From April 2016 the taxation of dividends is to be reformed and it is proposed that this will result in an initial £5,000 dividend allowance followed by tax on dividends at 7.5%, 32.5% and 38.1% rates – roughly a 7% increase for each rate band.  These would be higher than the current effective rates due to the scrapping of the dividend tax credit and thus may impact decisions about using a company to run a business or hold investments and also profit extraction for owner managed businesses.  It is worth noting that there will be further reduction in corporation tax to 19% in 2017 and then 18% by 2020 so it is important to consider both aspects.

  1. Inheritance Tax – allowances increased

There is to be an increase in inheritance tax allowances for home owners from April 2017 with the increased allowance gradually withdrawn from larger estates.

The headline figure is a £1m inheritance allowance for married couples and civil partners which will apply from 2020/21.  Broadly this is made up from a £175k allowance for an individual’s family home plus their nil rate band of £325,000 both of which are to be transferable to a spouse, thus making up the £1m.

The allowance on the family home is to start at £100k from April 2017 and increase to the proposed £175k by April 2020 However, if the individual’s net estate is more than £2m, this extra £175,000 will be tapered away to zero on an estate of £2.35m.

Additionally, changes are to be made such that UK residential property, including let property, held through an offshore structure will no longer be protected from UK inheritance tax.  Previously this was common inheritance planning among non-doms and non-residents.

David Holmes

David is a Chartered Tax Adviser and specialises in the interaction of UK and US taxes and the taxation of those who are not domiciled in the UK. He is particularly involved in the complex tax calculations that we handle relating to remittances, voluntary disclosures, US PFIC rules, Controlled Foreign Corporations and both UK and US trusts as well as completing UK and US tax returns and providing tax advice. David is a Cambridge graduate and previously worked at PwC.