When enacted, the following items announced in the recent Summer 2015 Budget will, we believe, have most effect on the clients of Sampson West:-
Rental properties - Restriction of Tax Relief for Finance Costs
Individual landlords will cease to get full tax relief for finance costs at their marginal tax rate from 6 April 2017. The amount of relief will be tapered over a three year transitional period. The effective rate of income tax relief will be:
- 2017/18 full relief for 75% of finance costs and basic rate relief on the rest
- 2018/19 full relief for 50% of finance costs and basic rate relief on the rest
- 2019/20 full relief for 25% of finance costs and basic rate relief on the rest
- Thereafter, relief for finance costs will only be at the basic rate of tax.
This change will only affect landlords who are individuals but not in respect of property that qualifies as a furnished holiday letting.
Wear and Tear Allowance to be withdrawn
After 6 April 2016, the 10% wear and tear allowance given in calculating the income from residential furnished lettings will be replaced by deductions for the actual costs of replacing relevant items.
Rent a room relief
The amount of income which may be received tax free from renting out a room or rooms in an individual’s only or main residential property will increase from £4,250 to £7,500 per year with effect from 6 April 2016. This increase will also apply if an individual rents out rooms in a guest house, bed and breakfast or similar establishment, providing that the property is their main residence.
Taxation of Dividends
Notional credits on dividends are to be abolished and dividends paid will for all tax purposes be treated as the gross amount of the income from 6 April 2016. An allowance of £5,000 for dividend income will be introduced so that no income tax will be due by individuals whose total dividend income is no more than £5,000. For 2016/17 and subsequent years dividend income in excess of £5,000 will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. This will result in an increase in tax payable on dividends in excess of £5,000 of 7.5% for all taxpayers compared to the current position.
Dividends - effect of changes on owner-managed businesses
This measure is going to reduce the tax saving of extracting company profits by drawing dividends in preference to paying bonuses or salaries. However, looking at overall tax and National Insurance of both the company and the members, it is likely that for most clients in this situation there will still be an advantage to paying dividends.
National Insurance
The £2,000 Employment Allowance (which allows certain businesses and charities to keep the first £2,000pa. of the employer’s part of their N.I. contributions) will rise to £3,000 from 6 April 2016. However from 6 April 2016, a company where the director is the sole employee will cease to be entitled to the Employment Allowance.
Annual Investment Allowance
The Annual Investment Allowance (AIA) which applies to most expenditure on plant and machinery (the main exclusion being cars), will increase to £200,000 for expenditure after 1 January 2016.
Inheritance Tax
There is to be a further Nil Rate band for those leaving their residence (or the proceeds of a former residence) to their children or grandchildren. This new residence Nil Rate Band will be £100,000 for 2017/18, £125,000 for 2018/19, £150,000 for 2019/20 and £175,000 for 2020/21 and thereafter indexed by RPI. The residence Nil Rate band will be reduced by £1 for every £2 by which the deceased person’s estate exceeds £2,000,000 and so there will be no residence Nil Rate bank for those with estates in excess of £2,350,000 by 2020/21.
Non-UK Domiciled Persons
Non-UK domiciled persons who have been UK resident for 15 of the past 20 years on or after 6 April 2017 will be liable to UK tax on their worldwide income and gains and will no longer be able to pay UK tax only on their income and gains remitted to the UK. They will also be liable to Inheritance Tax (IHT) on their worldwide assets. Gifting or settling non-UK assets before 6 April 2017 would avoid future UK income tax and IHT.
Non-UK domiciled persons who were born in the UK will be treated as UK domiciled persons (liable to UK tax on their worldwide income and gains) for any tax year from 2017/18 in which they are or become UK resident.
Corporation Tax Rates
The single rate of corporation tax will reduce from 20% to 19% from 1 April 2017. It will be reduced further to 18% from 1 April 2020.
Amortisation of Goodwill
Corporation tax relief for the cost of goodwill and other customer-related intangible assets acquired after 7 July 2015 (other than under an unconditional contract entered into before that date) will be withdrawn. Instead the cost will be deductible only when the asset is sold.
Capital Gains Tax - Carried interests of investment managers
New legislation will provide that, where an individual performs investment management services for a collective investment scheme through an arrangement involving one or more partnerships, then any sums received in respect of carried interest under that arrangement will constitute a chargeable gain and be subject to capital gains tax. This will cover the entire sum received by an individual, regardless of the items notionally applied to satisfy the carried interest at the level of the partnership or other entity in the fund structure. Only specified sums will be allowable as a deduction against the sum received when calculating the chargeable gain to ensure that individuals are charged to tax on their true economic profit. In particular, a deduction will only be allowed for consideration actually given by the individual (if any) in return for the carried interest rather than for the amount that would be allowed under Statement of Practice D12. Provision will be made to ensure that credit is given for employment income tax charges where relevant. This measure will have effect on all carried interest arising on or after 8 July 2015, whenever the arrangements were entered into. The intention is that if the fund is investing the carried interest should be a capital gain, but if the fund is trading, the carried interest should be taxed on the investment manager as income.